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Beneficial ownership extends to real property

Posted by Northadvisory on September 22, 2017

A taxpayer has learned that no capital gains tax event would occur on the transfer of real property from themselves to a family member. A recent private binding ruling highlights that a beneficial ownership of an asset doesn’t solely relate to shares in a company or beneficiaries of trusts and can occur to real property owned by individuals. In the private binding ruling the:

• taxpayer purchased a property on behalf of a family member as they were unable to obtain finance at that time
• family member paid the deposit for the property and had made all mortgage repayments
• family member had lived in the property as their main residence since acquisition, and
• taxpayer transferred the legal interest in the property to the family member when they were able to obtain sufficient finance.

The Commissioner of Taxation determined that in this instance the taxpayer who originally purchased the property has not received a financial gain. In this instance, a “trust” was created when a taxpayer purchased a property for a family member until such time that they could obtain finance. The family member lived in the property as their main residence.

Beneficial ownership

A beneficial owner is defined per TD 2017/11 as ‘a person or entity who is entitled to the income and proceeds of an asset’. That is, a person or entity may hold legal title of an asset on account for another person or entity.

Even though TD 2017/11 is written in relation to children’s bank accounts, the ATO applied the same theory when other property is held in trust.

Therefore, a CGT event doesn’t occur when the legal interest in the property is transferred from the taxpayer to the family member (ITAA 1997 s 104-10(2)).

Additional comments

It must be maintained here that a key element in this case was that the family member had used their own resources to hold beneficial ownership. If it could be proven that the taxpayer had used their own money for the deposit or made the mortgage repayments, a CGT event may occur.

Various cases in the past have shown that the transfer of a property for “natural love and affection” has brought about a CGT event that was taxable to the transferor.

That being said, this ruling highlights an opportunity where parents or grandparents can assist family members in getting into the property market. Situations exist where an individual may be in a difficult lending position due to requirements of a financial institution. For example, subletting a second bedroom by a homeowner is not taken into consideration for lending purposes (or from a domestic partner not on the title).

Please note that in these types of transactions have state tax implications such as stamp duty and/or first home owners grants.

If you would like further information surrounding this type of arrangement, please do not hesitate to contact our office. We would be pleased to assist you further.

Martin van der Saag
Director
T: 02 9984 7774
E: martinv@northadvisory.com.au

Norman Ruan
Accountant
T: 02 9984 7774
E: normanr@northadvisory.com.au