Property Ownership Structures - Asset protection versus minimising tax An examination of Mingos v Co
The recent case of Mingos v Commissioner of Taxation illustrates the need to consider all aspects of holding an asset within a trust. Trusts are useful vehicles to provide asset protection for the beneficiaries of the trust. However, electing to hold assets within a trust should be made in consideration of the taxation consequences.
This case considers the sale of a property held within a trust where the trustee distributed the whole of the capital gain made on the sale of property to a beneficiary of the Trust. The beneficiary did not return the distribution as assessable income in his taxation return and the Australian Taxation Office issued a default assessment to him including the capital gain in his assessable income and imposed a penalty. The beneficiary appealed pursuant to Part IVC of the Taxation Administration Act 1953 (Cth) (“TAA”) against the disallowance of his objection to the inclusion of the capital gain in his assessable income.
The court considered the substantive issues to be:
whether the taxpayer had an “ownership interest” in the property at the time it was sold;
if so, whether the taxpayer is entitled to the main residence exemption in Subdivision 118-B of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”); and
if not, whether the amount of the capital gain on which the taxpayer was assessed is excessive.
Subdivision 118-B contains the main residence exemption. Section 118-125 provides:
Section 118-130 states:
The property at 35-37 Regent Street, Mt Waverley (“the property”) was purchased by Unique Planning Pty Ltd (“Unique Planning”) in 1992 on trust for the benefit of Mr John Mingos who resided in the property with his wife and two children.
Unique Planning transferred the property to Mr Mingos on 16 November 2006 who on the same date transferred the property to his wife.
In November 2010, Mr Mingos and his wife entered into a property settlement which resulted in final orders made by consent by the Federal Magistrates’ Court of Australia on 23 December 2010 (“the Orders”). The Orders finally determined the rights and entitlements of the parties and included the following orders:
At Mr Mingos’ direction, his wife transferred the property to Lemnian Investments Pty Ltd (“Lemnian”), as trustee of the Lemnian Investment Trust (“the Trust”) on 27 May 2011.
Mr Mingos did not have the funds needed to comply with the Orders and could not borrow the funds personally. However, the Trust did have capacity to borrow the funds as it had existing properties.
The property sold in May 2014 for $5.1 million and settlement occurred in August 2014.
For the income year ended 30 June 2014 (“2014 income year”), Lemnian as trustee of the Trust, distributed the whole of the capital gain made on the sale of the property to Mr Mingos, a discretionary beneficiary of the Trust. Mr Mingos did not return the distribution as assessable income in his taxation return for the 2014 income year and the Australian Taxation Office issued a default assessment to him including the capital gain in his assessable income and imposed a penalty.
Mr Mingos’s case, in short, was that the property was owned by him beneficially and was not an asset of the Trust .
Mr Mingos claimed that he never intended to give “the benefit of” the property to Lemnian and only transferred the property to Lemnian in accordance with the bank’s requirement.
The Court considered the evidence provided by Mr Mingos in support of his claim that the transfer of the property only occurred on the requirements of the bank and found that:
“Far from confirming his evidence that it was the Bank of Queensland which required the property to be transferred to Lemnian, that email correspondence is contrary to the taxpayer’s evidence and evidences that the Bank was prepared to advance the funds on the basis of the property remaining in the name of the taxpayer with the taxpayer giving a mortgage over the property, and that it was Mr Munro who instructed that the property title and mortgage documents should be in the name of the Trust, not the Bank.”
The Court also pointed to the fact that “no other documentary evidence was adduced which demonstrates that it was a requirement of the Bank that the property be transferred to Lemnian.” and the financial records of the Trust records the property as a asset of the trust.
The Court considered whether Mr Mingos had discharged the onus of proving that he had an ownership interest in the property.
The Court pointed to the large body of evidence against the proposition that Mr Mingos held an ownership interest. This included the circumstances of the transfer of the property following the Orders, the financial records of the trust evidencing the property as an asset of the Trust, the recording of the proceeds of the sale of the property as an asset of the Trust and the distribution of the net capital gain arising from the sale to Mr Mingos.
Accordingly the Court found that Mr Mingos did not discharge the onus on him to prove that he held a beneficial ownership in the property pursuant to a separate trust of which Lemnian was trustee.
The Court also considered whether the Orders vested an equitable interest in the property to Mr Mingos. Mr Mingos cited the cases of Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217;  FCAFC 26 and Jones v Daniel (2004) 141 FCR 148;  FCAFC 278 as authority that a court order under section 79 of the Family Law Act 1975 (Cth) requiring a party to a marriage to transfer that party’s interest in real estate to the other party vests an equitable interest in the property in the transferee pending the transfer of the legal estate or interest.
The Court found that the Orders did not vest an immediate and absolute equitable interest in the property to Mr Mingos. Additionally that Mr Mingos’s entitlement to the conveyance of the property was conditional upon the discharge of the mortgage and the payment of $1.3 million to his former wife. Lastly, and in any case, Mr Mingos directed his former wife to transfer the property to his nominated entity, Limnios.
Further arguments of Mr Mingos including that the transfer of the property was a transfer of the mortgage only, a resulting or constructive trust and that the occupation of the property constituted a licence to occupy and accordingly an ownership interested for the purposes of the main residence exemption were rejected by the Court.
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