1 Did CGT event A1 occur when you transferred a X% ownership interest in your property to Person A? Question 2 Can the property transfer be reversed so that the CGT event never occurred? Question 3 Can the CGT event be deferred until a time when the property is sold or transferred as part of the estate? This ruling applies for the following: Income year ended 30 June 20YY The scheme commenced on: 1 July 20YY
Summary A CGT event A1 did occur when you transferred 50% of your legal interest in the property to Person A. The CGT event cannot be reversed. As no CGT rollover provisions apply to your situation, the CGT liability cannot be deferred. Detailed reasoning Legal and equitable ownership The legal owner of the property is recorded on the title deed for the property issued under that State's or Territory's legislation. It is possible for legal ownership of property to differ from equitable ownership (also known as beneficial ownership). An individual can be a legal owner but have no equitable ownership in an asset. Where equitable ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the equitable owner. An equitable owner is defined as a person or entity who is beneficially entitled to the income and proceeds of an asset. To prove that a different equitable interest exists, there must be evidence that a trust has been established such as where one party is taken merely to hold their interest in the property for the benefit of the other party. Evidence ordinarily includes:
• contemporaneous documentation that clearly shows the parties' intentions at the time the property was purchased, and • documentation that clearly shows that the parties treated the property in accordance with those intentions during the ownership period. Gibbs CJ stated in Muschinski v. Dodds [1985] HCA 78 that the relevant principles included there being contemporaneous evidence: Where both transferees have contributed to the purchase money, the intentions of both are material, but where only one has provided the money it is his or her intention alone that has to be ascertained. The evidence admissible to establish the intention of the real purchaser will comprise 'the acts and declarations of the parties before or at the time of the purchase... or so immediately thereafter as to constitute a part of the transaction' ( Charles Marshall Pty Ltd v Grimsley [1956] HCA 28; (1956) 95 CLR 353 at 365) In relation to evidence of a trust arrangement, the following should also be noted:
• contemporaneous evidence includes any documents such as emails, diary entries, bank documents, correspondence with third parties involved in the transaction, etc., that were created at the time of the property's purchase, • where there is little or no contemporaneous evidence of intention and the terms of an arrangement, formal documents prepared many years after a property was purchased will be of little probative value, and • the evidence must be unambiguous. In the absence of clear and compelling evidence to the contrary, the property is considered to be owned by the people registered on the title. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners
(TR 93/32) sets out the principle that equitable interest is presumed to follow the legal interest and the Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same. Where it is contended that the equitable ownership and legal ownership of a property are not the same, there must be evidence to show that the legal owner holds the property in trust for the beneficial owner. There are three kinds of trusts relevant for considering whether the legal and equitable interests in a property are different: express, constructive, or resulting. There are limited circumstances where the legal and equitable interests in an asset are not the same and there is sufficient evidence to establish that the equitable interest is different from the legal title. Resulting or implied trusts On the purchase of real property, a resulting trust may be presumed where the legal title that vests in one or more of the parties does not reflect the respective contributions of the parties to the purchase price.
A resulting trust arises by operation of law and falls into two broad categories. One such category is where someone purchases property in the name of another ( Calverley v Green 56 ALR 483). A trust is presumed in favour of the party providing the purchase money. If an individual purchases and then pays for a property, but legal title is transferred to another person at their direction, the presumption of a resulting trust arises - the property is held in trust for them. The law presumes that the purchaser, as the person providing consideration for the purchase intended to retain the beneficial interest, although the legal interest is in the other's name. Express Trusts An express trust is one intentionally created by the owner of property to confer a benefit upon another. It is created by express declaration, which can be affected by some agreement or common intention held by the parties to the trust.
For an express trust to be created it is necessary that there is certainty of the intention to create a trust, subject matter and the object of the trust. While trusts can be created orally, all State Property Law Acts contain provisions that preclude the creation or transfer of interests in land except if evidenced in writing. Constructive Trusts A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned. It applies whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is dependent upon the order of the court. CGT event A1 - disposal of a CGT asset CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else. Property is a CGT asset under section 108-5 of the ITAA 1997.
CGT event A1 will happen if the transfer of legal ownership of the property occurs, and this is treated as a disposal for CGT purposes. However, CGT event A1 does not occur if there is only a change of legal ownership and not a change of equitable ownership. Application to your circumstances The purchase contract was solely in your name and did not include Person A's name as a buyer. However, you stated that you always considered the property to be owned by both of you as husband and wife. You never had any intention of selling the house. The property was rented for a number of years and your plan was to eventually retire there with Person A. At the time of purchase, you were advised to only have you as the sole owner on the purchase contract. The advice related to salary sacrifice however, nothing ever came of this. Person A has always managed the property, with their income helping to pay off the mortgage on the house. While the deposit for the property was paid from a joint account, of the 5% deposit made, Person A's share would have been 2.5%. There is no resulting trust.
Ordinarily, if Person A had 50% ownership on the property, only 47.5% of the ownership of the property would have been transferred to Person A based upon the initial deposit in 19XX. However, there were no actions or evidence to show Person A had any legal ownership in the property until the title was transferred in XXX 20XX. There are no court orders regarding the ownership of the property and therefore, there is no constructive trust. We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title. You were not able to provide contemporary evidence to show your intention was to hold 50% interest on behalf of Person A and the actions from the purchase were not consistent with the existence of a trust.
On X XXX 19XX, you became the sole registered legal owner of the property when it was registered in your name. From XX XXX 19XX until 20XX you engaged a real estate agent to manage the property, on your behalf, for rental purposes. While Person A was dealing directly with the real estate, managing the property, this is not evidence of an equitable ownership interest. You have advised that the rental income and deductions were included in both the income tax returns for yourself and Person A, split 50/50, for the 20YY to 20YY income years and this was an error on behalf of the accountant. Except for that period, you have declared the rental income and claimed deductions for the expenses in your individual income tax returns. Based on the facts, the Commissioner accepts that in your circumstances, although your intention at the time of purchase was to treat the property as jointly owned with Person A, you were in fact the sole legal and equitable owner of the property from the date you purchased the property in 19XX until you transferred a 50% legal interest to Person A in 20XX.
The title was solely in your name and you were entitled to the rental income and claimed the deductions. Consequently, it can be reasonably concluded that you had a CGT event A1 occurring to you at the time you transferred a 50% ownership interest in the property to Person A. Furthermore, the Commissioner has no discretion available on the application of CGT: certain actions such as disposing of an interest in a property trigger a CGT event, and once a CGT event occurs, it cannot be reversed. A CGT event occurred even though you did not understand the tax implications at the time. There is no ability to delay the CGT as the event has happened. Although there are CGT rollover provisions, no rollover provision applies to your situation. Whilst we understand you both have health conditions, the Commissioner does not have discretion to apply the law any differently.
You and Person A are married DD MM YYYY. In 19YY you purchased a property. A letter from a real estate agent dated DD MM 19YY for the purchase of the property was addressed to You only, with the salutation to you and Person A. On DD MM 19YY, a partial deposit of $X was paid for the purchase of the property. On DD MM 19YY, the remaining deposit of $X was paid. The funds for the deposits, were withdrawn from a joint savings account of Person A and yourself. This joint account was opened some time after your marriage, and it became your main transaction account for depositing both your incomes and paying for your expenses. On DD MM 19YY the bank approved a residential property investment loan of $X to you. Security for the property was a registered second mortgage over another property. A bank receipt dated DD MM 19YY for $X was received from you and Person A for a fee (as required by the bank in the approval letter). A letter from solicitors, dated DD MM 19YY, for the purchase of the property, is addressed to you as well as a receipt dated DD MM 19YY for $X.
A real estate agent's letter of DD MM 19YY addressed, and salutation to you only, for the purchase of the property, acknowledging the trust account receipt for the deposit. On DD MM 19YY, you signed the contract for the purchase the property for $X. The purchase contract was solely in your name and did not include Person A's name as a buyer. From DD MM 19YY, you rented the property out. The tenancy agreement lists the Lessor/s address for notices as Person A c/- the real estate agency, because Person A was dealing directly with the real estate agent. A letter dated DD MM 19YY from the same real estate agent is addressed to you and Person A. Between 19YY and 20YY, rental income and expenses for the property were declared by you consistent with the legal ownership. Except for X years due to an accounting error. During your search for documentation, you discovered an envelope containing tax returns for 20YY to 20YY. For these years an accountant had made an error. They had split the rental income and expenses for the property between yourself and Person A. Only that accountant made this error.
Person A has always managed the property, with their income helping to pay off the mortgage on the house. You lived overseas from 19YY to 20YY. Your very old financial records and chattels were left stored during this time and have either been misplaced or destroyed over time. However, you have managed to find some relevant documents and correspondence from around the time the property was purchased and subsequent tenancies. Some of this documentation is addressed to you as well as Person A. On DD MM 20YY, you and Person A retired to the property. In 20YY, you decided to transfer a X% ownership interest in the property to Person A, so their name would appear on the title. On DD MM 20YY, the transfer of X% of the property to Person A was completed. The value of the transfer to them was $X. You sought a law firm to complete the transfer of title documents from you as sole tenant to joint tenants. You had not received any tax advice for this transfer and were unaware of the capital gains tax implications on a transfer of property.
Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 108-5