ATO Interpretative Decision

ATO ID 2004/731

Income Tax

Issue

For the purposes of subsection 109-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), when did a taxpayer acquire a property if they became entitled to claim title to the property by adverse possession before 20 September 1985 but did not make that claim, and therefore did not become the registered owner of the property, until after 19 September 1985?

Decision

The taxpayer acquired the property for the purposes of subsection 109-5(1) of the ITAA 1997 when they became entitled to claim title to the property before 20 September 1985.

Facts

Before 20 September 1985 the taxpayer entered into possession of a property in Victoria without the consent of the property's registered proprietor. The taxpayer also arranged to be recorded as the ratepayer for the property.

The taxpayer remained in continuous possession of the property and paid the rates on it. At no time did the registered proprietor attempt to reclaim possession of the property. Broadly, under the relevant Victorian legislation, a claim for title to land by adverse possession may be made after 15 years of continuous possession.

The 15 year period expired before 20 September 1985. However, the taxpayer applied to have the property registered in their name after 19 September 1985. The Registrar accepted this application and the taxpayer became the registered proprietor of the property.

After the taxpayer's death in the 2004 income year, the taxpayer's legal personal representatives became the registered proprietors of the property. The legal personal representatives sold the property in the 2004 income year.

The legal personal representatives need to know when the taxpayer acquired the property so they can determine the cost base and reduced cost base of the property which is used in working out their capital gain or loss from its sale.

Reasons for Decision

Division 109 of the ITAA 1997 sets out when you are taken to have acquired an asset for CGT purposes. In general, you acquire a CGT asset when you become its owner: subsection 109-5(1) of the ITAA 1997.

In this case the taxpayer did not become the registered proprietor of the property until after 19 September 1985. However, the law recognises that in special circumstances title to property can be acquired based on a claim of adverse possession.

In order for title to property to be acquired by adverse possession, the person claiming title must establish that the time limit on the right of the registered proprietor to recover possession of the land has expired and that they satisfy the common law requirements of adverse possession.

In this case the property was located in Victoria. In Victoria, the relevant limitation period for bringing actions to recover land is 15 years from the date on which the right of action accrued: section 8 of the Limitation of Actions Act 1958 (Vic). Once the limitation period has expired, the title of the person entitled to bring an action to recover the land is extinguished: section 18 of the Limitation of Actions Act 1958 (Vic).

At common law, to extinguish the registered proprietor's title, the possession must be open, not secret; peaceful, not by force; and adverse, not by the consent of the true owner: Mulcahy v. Curramore Pty Ltd [1974] 2 NSWLR 464 at 475.

In this case, the relevant limitation period expired before 20 September 1985. In addition, the taxpayer satisfied the common law requirements to establish adverse possession. It is therefore considered that the taxpayer obtained possessory title to the property before 20 September 1985.

A person who has acquired title to property by possession may make an application to become the registered proprietor of the land: section 60 of the Transfer of Land Act 1958 (Vic). If the conditions in section 60 are satisfied then the Registrar may register the applicant as the owner of the relevant estate claimed: section 62 of the Transfer of Land Act 1958 (Vic). If the Registrar accepts the application it is considered that formal registration does not confer ownership of the property, it merely converts the possessory title to legal title.

Possessory title is a lesser form of ownership than legal title; however it is a form of ownership that is recognised at law. In the case of Perry v. Clissold (1906) 4 CLR 374 at 377 it was held that:

It cannot be disputed that a person in possession of land in the assumed character of owner and exercising peaceably the ordinary rights of ownership has a perfectly good title against all the world but the rightful owner. And if the rightful owner does not come forward and assert his title by process of law within the limitation period prescribed by the provisions of the Statute of Limitations applicable to the case, his right is forever extinguished, and the possessory owner acquires an absolute title.

In this case, the taxpayer became the owner of the property before 20 September 1985 as they satisfied the common law requirements to establish possessory title and the relevant limitation period expired before this date. Therefore, for the purposes of subsection 109-5(1) of the ITAA 1997 it is considered that the taxpayer acquired the property before 20 September 1985.

The taxpayer's legal personal representative will be taken to have acquired the property on the date of the deceased's death for the market value of the property on the date the deceased died: subsection 128-15(2) and item 4 in the table in subsection 128-15(4) of the ITAA 1997.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   Division 109
   subsection 109-5(1)
   subsection 128-15(2)
   subsection 128-15(4)

Case References:
Mulcahy v. Curramore Pty Ltd
   [1974] 2 NSWLR 464

Keywords
acquisition dates
acquisition of CGT assets
capital gains
CGT assets
CGT deceased estates

Siebel/TDMS Reference Number:  4114117

Business Line:  Small Business/Individual Taxpayers

Date of publication:  3 September 2004

ISSN: 1445-2782