Edited version of private ruling

Authorisation Number: 1011571509684

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Ruling

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

Is the Trust entitled to disregard any capital gain or loss on the sale of the property if the main residence provisions are satisfied?

Yes.

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.

We previously made a ruling but you have informed us of further details regarding your circumstances and asked for a replacement ruling.

The Unit Trust acquired a property after 1985.

The Unit Trust is owned and controlled 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). The Commissioner reached the opinion that these deductions were not allowable by application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).

Amended notices of assessment were issued for X and Y.

X and Y lodged objections to the audit.

The objections were disallowed in full.

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

The dwelling has never been used to produce assessable income (other than when it was rented to X and Y by the Unit Trust).

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

Income Tax Assessment Act 1936 Section 177F

Does Part IVA apply to this ruling?

Part IVA of the 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 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 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Capital gains tax 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.

Compensating adjustments

Where Part IVA has been applied to an arrangement, subsection 177F(3) of the ITAA 1936 allows the Commissioner to grant a compensating adjustment to a relevant taxpayer, providing it is fair and reasonable to do so in the circumstances.

It may be fair and reasonable to grant a compensating adjustment to a taxpayer involved in a home loan unit trust scheme by excluding from the assessment of the taxpayer any capital gain flowing to them on the disposal of the residence. It will be considered fair and reasonable if it can be accepted that, but for the arrangement, the residence would have been purchased in the name of the individuals involved. This is the 'but for" test.

Applying the 'but for' test requires an examination of the reasons given for entering into the arrangement. If the reason was only to obtain a tax deduction for interest on the money ultimately used to purchase the residence, it can be assumed that, but for seeking that deduction, the individual would have purchased the residence in their own name. Thus, they may have been entitled to the main residence exemption.

Assuming the 'but for' test is satisfied, there may be other reasons why it might not be fair and reasonable to allow the main residence exemption. These reasons include, for example:

· a taxpayer has another property which they concurrently nominated as their main residence, or

· a taxpayer claims a loss on the disposal of their investment in the entity owning the residence.

Application to this case

X and Y obtained a tax benefit in the form of deductions for interest on the money they borrowed which was used by the Unit Trust to acquire the property. The interest deductions were subsequently disallowed under Part IVA of the ITAA 1936.

X and Y have resided in the house from the date it was acquired by the trust. The house is X and Y's main residence.

It is understood that for the period of X and Y's occupation of the property, during the course of the trust's continuing ownership of the property, it has been used solely as X and Y's main residence and it would qualify for the main residence CGT exemption (assuming all other conditions for exemption are met) had it been owned by X and Y instead of by the trust.

Conclusion

Taking these factors into account, it has been decided that it is fair and reasonable that any capital gain should be exempted to the extent that X and Y occupy the dwelling as their main residence and all other conditions of the CGT main residence exemption are met.

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