1 Will the transfer of XX% of legal title of the Property from Person A to Person B result in a capital gains tax event under section 104-1 of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No This ruling applies for the following periods : Income tax year ending 30 June 20XX Income tax year ending 30 June 20XX The scheme commenced on: 1 July 20XX
1. Person A and Person B are related. 2. Person B and their spouse Person C owned the Property in the proportions of XX/XX as tenants in common and occupied it as their main residence. 3. In 20XX, Person B and Person C separated and pursuant to Family Law Court Orders, Person C transferred their XX% interest in the Property to Person B. 4. In order to refinance Person B's loan on the Property, the bank required Person A to be registered on the title for XX% ownership interest of the Property. 5. Legal advice was obtained to confirm the arrangement between Person A and Person B and confirmed that under the arrangement Person A did not acquire any beneficial interest in the Property at this time and Person B became the sole beneficial owner of the property when Person B acquired Person C's XX% interest in 20XX. The transfer was effected. 6. At all times Person A and Person B have acted in accordance with their arrangement, being that the Property is seen and treated as Person B's property in its entirety.
7. There no longer exists the bank requirements for Person A to be on the title and Person A and Person B would like to effect the transfer of Person A's XX% legal interest back to Person B. 8. Person A has confirmed that Person A holds no beneficial interest in the Property and requested legal advice that no CGT event arises upon transfer. 9. Person A has not financially contributed to the mortgage or costs arising from, or in relation to, the Property. 10. Person A will not be paying costs in relation to the transfer of the Property. 11. Statutory declarations have been provided.
Section 104-10 of the Income Tax Assessment Act 1997 Section 106-50 of the Income Tax Assessment Act 1997 Section 104-1 of the Income Tax Assessment Act 1997 >
Issue 1 Question 1 Summary Person B is absolutely entitled to the trust asset as against the trustee (Person A) and section 106-50 of the ITAA 1997 will apply to treat the trust asset (CGT asset) as Person B's asset. Any acts done by the trustee (Person A) in relation to the trust asset will be treated as acts done by the absolutely entitled beneficiary (Person B). In this case, the transfer of Person A's XX% ownership interest of the Property to Person B will not result in a CGT event under Part 3-1 to 3-3 of the ITAA 1997. Detailed reasoning Subsection 104-10(1) of the ITAA 1997 states that 'CGT event A1 happens if you dispose of a CGT asset'. Subsection 104-10(2) of the ITAA 1997 provides that 'you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner'.
Subsection 106-50(1) of the ITAA 1997 states that '...from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust)'. Subsection 106-50(2) of the ITAA 1997 treats an act done in relation to the asset by the trustee as an act done by the absolutely entitled beneficiary. An express trust is one intentionally created by the owner of property in order 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. Subsection 23C(1) of the Conveyancing Act 1919 (NSW) states: Subject to the provisions of this Act with respect to the creation of interests in land by parol-
a) No interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by the person's agent thereunto lawfully authorised in writing, or by will, or by operation of law, b) A declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by the person's will, c) A disposition of an equitable interest or trust subsisting at the time of disposition, must be in writing signed by the person disposing of the same or by the person's will, or by the person's agent thereunto lawfully authorised in writing. Subsection 23C(2) of the Conveyancing Act 1919 (NSW) states 'this section does not affect the creation or operation of resulting, implied, or constructive trusts. In Hagan v Waterhouse (1991) 34 NSWLR 308 at 305 Kearney J stated: ...This submission raised the controversial question of the construction of 23c (of the Conveyancing Act (NSW) 1919
) in relation to the interaction of subs (1)(a) and subs (1)(b). I am relieved from discussion this question here by the recent decision of Lee J in Secretary, Department of Social Security v James (1990) 95 ALR 615 which expresses all that I would wish to say on this topic. I not only agree with his Honour's analysis of the question but also would with respect adopt his conclusion (as to s34, subs (1)(a) and subs (1)(b), the corresponding provision in the Property Law Act 1969 of Western Australia...Accordingly, I consider that subs (1)(b) of 23c operates independently of and unaffected by subs (1)(a), so as to be satisfied by evidence in writing of a trust which is valid although unenforceable without the written evidence. In Secretary, Dept of Social Security v James (1990) 20 ALD 5; 95 ALR 615, Lee J stated: In my view, the proper construction of paras 34(1)(a) and 34(1)(b) does not require a declaration of a trust in land to be treated as a special class of equitable interest only capable of being created in writing and further, to be manifested and proved by writing signed by the declarant....The requirements of para 34(1)(b) (of the Property Law Act 1969 (WA)
) may be satisfied by a combination of documents capable of being read together. Any informal writing may stand as evidence of the existence of a trust including correspondence from third parties, a telegram, an affidavit or an answer to interrogatories. The date of created of the writing is not material. It may come into existence at any time after the declaration of the trust. Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words absolutely entitled to a CGT asset as against the trustee of a trust as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) states the following about when a beneficiary is absolutely entitled as against a trustee: 10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction...
74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it. 75. Also, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event... 76. A beneficiary is a sole beneficiary in respect of a trust asset if no other beneficiary has an interest in the asset... 78. Because a sole beneficiary in respect of an asset has the totality of the beneficial interests in the asset, they automatically satisfy the requirement...that their interest in the asset be vested in possession and indefeasible. Therefore, a sole beneficiary in respect of a trust asset will be absolutely entitled to the asset as against the trustee if the beneficiary can (ignoring any legal disability) terminate the trust in respect of the asset by directing the trustee to transfer the asset to them or to transfer it at their direction. Application to your circumstances
Under the arrangement, Person A was registered on the title for XX% ownership interest of the Property in order for Person B to be able to refinance the loan (the remaining XX% ownership interest was held by Person B). It was understood and agreed between Person A and Person B that Person A held their ownership interest on trust for Person B, and that Person B would be entirely responsible for servicing the loan and incurring all other costs relating to the property as proved by the statutory declarations. Both Person A and Person B's subsequent actions have been consistent with this agreement. Under the trust, Person B is the sole beneficiary entitled to the trust asset (Person A's interest in the Property). Person B's interest in the trust asset is vested in possession and indefeasible and they could call on the trustee (Person A) to transfer the trust asset at their direction. There is nothing in the arrangement that would enable the trustee (Person A) to resist the beneficiary's (Person B's) call.
TR 2004/D25 provides that the fact there is a mortgage, encumbrance or other charge over the asset in favour of a third party does not of itself prevent a beneficiary being absolutely entitled to the asset as against the trustee (paragraph 17). The existence of such a charge does not prevent the trustee from stepping aside and, for example, transferring the asset to the beneficiary subject to the charge. The charge does not affect the beneficiary's relationship with the trustee (paragraph 62). In this case, Person A will transfer their interest in the Property and this will contemporaneously involve discharge of the mortgage. Person B is absolutely entitled to the trust asset as against the trustee (Person A) and section 106-50 of the ITAA 1997 will apply to treat the trust asset (CGT asset) as Person B's asset. Any acts done by the trustee (Person A) in relation to the trust asset will be treated as acts done by the absolutely entitled beneficiary (Person B). In this case, the transfer of Person A's XX% ownership interest of the Property to Person B will not result in a CGT event under Part 3-1 to 3-3 of the ITAA 1997.