Edited version of private advice

Authorisation Number: 1051809389145

Date of advice: 1 March 2021

Ruling

Subject: CGT partial main residence exemption - no trust relationship - surviving joint tenants

Question 1

Can the daughter & son be seen as holding the share of the property as a bare trust for the mother?

Answer

No.

Question 2

Can a CGT partial main residence exemption be applied to the ownership interest acquired by the son and daughter when the mother died?

Answer

Yes. Further information about CGT main residence exemption and deceased estates can be found by searching 'QC 22147' on ato.gov.au

This ruling applies for the following period:

For the year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 19XX your mother acquired an ownership interest in the residential property to be solely occupied and funded financially by her alone.

All ongoing expenses for the property were paid for from your mother's own private funds.

Your mother believed that in order to safeguard the risk of being scammed out of her ownership interest in the property in later life, her daughter and son were also placed on the legal title when the property was acquired in 19XX.

The legal ownership structure of the property was recorded as joint tenants, rather than as tenants in common.

The property was not held on trust with each co-owner holding a 1/3 equal interest as tenants in common.

The solicitor who completed the conveyancing is now deceased.

Other relatives have recently provided written statements signed in late 20XX to explain how the arrangement was intended to work since 19XX when the original ownership of the property was acquired.

On the sale of the unit on your mother's passing, you and your brother are now exposed to a CGT liability as you do not have an entitlement to a full main residence exemption to disregard the entire capital gain or loss on disposal.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 102-20

Income Tax Assessment Act 1997 - Section 104-10

Income Tax Assessment Act 1997 - Section 106-50

Income Tax Assessment Act 1997 - Section 108-7

Income Tax Assessment Act 1997 - Section 108-50

Income Tax Assessment Act 1997 - Section 118-110

Income Tax Assessment Act 1997 - Section 118-197

Income Tax Assessment Act 1997 - Section 118-200

Income Tax Assessment Act 1997 - Section 128-50

Reasons for decision

Capital gains tax provisions

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a CGT even happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997).

CGT event A1 happens if you dispose of a CGT asset as per subsection 104-10(1) of the ITAA 1997.

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.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4) of the ITAA 1997).

Special rules for surviving joint tenants

If two or more people acquire a property together, it can be either as tenants in common or as joint tenants.

For CGT purposes, individuals who own a CGT asset as joint tenants are treated as if each of them held that interest as a tenants in common owning equal interests in the asset (section 108-7 of the ITAA 1997).

Sections 118-197 and 128-50 and of the ITAA 1997 provides special rules for joint tenants. If a joint tenant dies, their interest in the property passes to the surviving joint tenant or tenants. It's not an asset of the deceased estate.

However, if you are a joint tenant and another joint tenant dies, their interest in the asset is taken to pass in equal shares to you and any other surviving joint tenants, as if their interest is an asset of their deceased estate and you are beneficiaries.

If the joint tenant who dies acquired their interest in the asset on or after 20 September 1985, the first element of the cost base of the interest you acquire from them is the cost base of their interest on the day they died, divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly.

Beneficial ownership

When considering the disposal of your interest in the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property.

In the absence of information to the contrary, a property is considered to be legally and beneficially owned by the person/s registered on the title.

It is possible for the legal ownership to differ from the beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

The creation of a trust falls within the jurisdiction of equity.

According to G. Teh and B. Dwyer, Introduction to Property Law, at paragraph 606:

A trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary.

There may be various kinds of trust: express, constructive, resulting or implied and bare.

Express trusts

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, certainty of the subject matter of the trust and certainty as to the object of the trust.

While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. Therefore, express trusts must be evidenced in writing.

Constructive trusts

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, 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, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act. Therefore, for a finding that a constructive trust exists, there must be an existing court order to that effect.

Resulting or implied trusts

A resulting trust, sometimes referred to as an implied trust, is a trust that arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad classifications:

•         cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and

•         cases in which someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money.

Where an individual purchases and pays for a property but legal title is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises, and the property is held in trust for them.

However, where the property is transferred to the taxpayer's immediate family, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (that is, an absolute gift).

The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests unless they can rebut the presumption of advancement.

Bare trusts

A bare trust is one where the trustee has no active duties to perform. Gummow J said in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281:

Today the usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party.

However, it is not the existence of a bare trust that is the crucial concept. It is the establishment of absolute entitlement to the asset by the beneficiary as against the trustee.

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. See section 106-50 of the ITAA 1997 or 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.

Under a bare trust the beneficiary is entitled to possession of the trust assets and the trustees must act in accordance with the direction of the beneficiary. Ultimately the trustees must deal with the property as directed by the beneficiary.

Generally, if there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to be absolutely entitled to it, unless the asset is fungible. Land is not considered to be a fungible asset.

Main residence exemption

Generally, you disregard a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence under section 118-110 of the ITAA 1997.

To get the full exemption from CGT:

•         the dwelling must have been your main residence for the whole period you owned it

•         you must not have used the dwelling to produce assessable income, and

•         any land on which the dwelling is situated must be two hectares or less.

Section 118-197 of the ITAA 1997 provides the separate rules to apply when the deceased's ownership interest in the asset is taken to pass in equal shares to you and any other surviving joint tenants, as if their interest is an asset of their deceased estate and you are beneficiaries.

Where the ownership interest has passed to an individual beneficiary from a deceased estate any capital gain or capital loss made from a CGT event that happens in relation the acquiring interest is disregarded if:

•         the deceased acquired their ownership interest on or after 20 September 1985, and

•         the dwelling was the main residence of the deceased just before their death,

•         the dwelling was not then being used for income producing purposes, and

•         the beneficiary has disposed of the ownership interest within two years of the deceased's death, or within a longer period allowed by the Commissioner.

Application to your circumstances

Having examined the facts of your case we find that there is no bare trust relationship applicable in your situation. It is also clear that there is no express trust evidenced in writing or a constructive trust over the property as there is no existing court order to that effect. A declaration of trust or trust deed was not evidenced in writing at the time the property was acquired in 19XX as joint tenants.

Your mother solely provided the funds used to purchase the property to reside in. Therefore, a resulting or implied trust cannot exist as, the presumption of advancement being upheld is that the daughter and son will hold their equitable interests in the property in the same proportions as their legal interests.

We acknowledge that the children did not pay for any of the property expenses and accept the reasons they were registered on the legal title. The property is however considered to be legally and beneficially owned by the person/s registered on the legal title and it remains that they continued to be co-owners in the property for the entire ownership period.

Your individual family circumstances and intentions are acknowledged however the Commissioner has no discretion to apply the CGT main residence exemption contained in subdivision 118-B of the ITAA 1997 to the 2/3 (66.67%) original ownership interest that you and your brother acquired in 19XX, where you have never resided in the property as your main residence for CGT purposes.

The Commissioner can only consider what actually occurred rather than what was intended to occur. That is, the legislation applies to what in fact happened rather than what may have been the intention in mind of the family at some earlier point in time when the legal ownership structure was determined in 19XX.

However, as surviving joint tenants in the property you each received half (16.67%) of your mothers 1/3 (33.33%) original ownership interest which passed to you on the date of death. That is, both the daughter and son as surviving joint tenants each recently acquired an additional 1/6 interest, and both parties now jointly own the whole of the property together from the date of death.

For CGT purposes you can both apply a partial main residence exemption as per section 118-200 of the ITAA 1997 to the additional 1/6 interest you each acquired because the property was your mother's main residence for the entire ownership period, the property was not used to produce assessable income, any land on which the dwelling is situated must be two hectares or less, and provided the settlement of your contract to sell the dwelling happens within two years of the date of death these provisions will apply.

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