Edited version of private ruling

Authorisation Number: 1011537222528

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Ruling

Subject: Capital gains tax (CGT) - home loan unit trust

Is the Trustee entitled to disregard any capital gain or loss on the sale of the property?

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Unit Trust acquired a property after 1985.

The Unit Trust is owned and controlled by X and Y.

X and Y are the only directors and shareholders of the trustee company.

Finance to purchase the property was advanced to the Trust by X and Y.

The Trust rented the property to X and Y for residential purposes as from the date it was acquired and at the same time X and Y sought to claim tax deductions for interest and bank fees and charges on monies borrowed to loan to the trust for purchase of the property.

X and Y were subject to an audit by the Australian Tax Office (ATO). As a result of the audit, the interest and bank charges were disallowed as they were not allowable deductions under sections 8-1 or 25-25 of the Income Tax Assessment Act 1997 (ITAA 1997).

Amended notices of assessment were issued for X and Y.

X and Y lodged objections to the audit.

The objections were disallowed in full.

X and Y were offered a Settlement arrangement regarding the Unit Trust arrangement by the ATO.

This Settlement arrangement offer was not taken up by X or Y.

X and Y wish to treat the property as their main residence until the sale of the property by the trust or until an event which would determine the ceasing of the property to be their principal place of residence.

As the dwelling is owned by a trust it is not eligible for exemption from CGT for the period it constitutes the principle place of residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-25

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

CGT and main residence exemption

Under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997), if a taxpayer is an individual, they can generally disregard a capital gain or a capital loss from a CGT event that happens to a dwelling that they own and live in for the entire period that they own it. On the other hand, a capital gain or a capital loss on the sale of a residence owned by a trust can not be disregarded under the main residence concessions even though it is the main residence of a controlling taxpayer.

Application to this case

The Trust rented the property to X and Y for residential purposes as from the date it was acquired and at the same time X and Y sought to claim tax deductions for interest and bank fees and charges on monies borrowed to loan to the trust for purchase of the property.

X and Y were subject to an audit by the ATO. As a result of the audit, the interest and bank charges were disallowed as they were not allowable deductions under section 8-1 and section 25-25 of the ITAA 1997.

X and Y lodged objections to the audit and the objections were disallowed in full.

X and Y were offered a Settlement arrangement regarding the Unit Trust arrangement by the ATO.

This Settlement arrangement offer was not taken up by X or Y.

It is understood that if X and Y as individuals owned the property and it was used solely as a main residence by X and Y, then it would qualify for the main residence CGT exemption (assuming all other conditions for exemption were met). However, as the property is owned by a unit trust it does not qualify for the main residence exemption.

Conclusion

As the property owned by the Trustee for the Unit Trust it does not qualify for main residence exemption under section 118-110 of the ITAA 1997.

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