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Edited version of private ruling
Authorisation Number: 1011573418493
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Ruling
Subject: Capital gains tax and absolute entitlement
Question and answer:
Are you absolutely entitled to the residential property which is held by a company as trustee on your behalf?
Answer: Yes.
This ruling applies for the following periods:
Year ended 30 June 2010
Year ending 30 June 2011
The scheme commenced on:
1 July 2009
Relevant facts and circumstances
In the year ended 30 June 2010 Company X entered into a contract to purchase a residential property, acting as your nominee.
Company X purchased the property as trustee to be held on your behalf.
Settlement occurred in the year ended 30 June 2011 and at that time the property became your main residence.
Company X now holds the property as trustee of a bare trust in which you are the beneficiary.
You are able to direct Company X how to deal with the property.
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 118-110.
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss.
The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.
Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.
According to section 106-50 of the ITAA 1997, if you are absolutely entitled to a CGT asset, as against the trustee of a trust (disregarding any legal disability), the CGT provisions apply to an act done by the trustee in relation to the asset as if you had done it.
In your case Company X holds the property as trustee of a bare trust in which you are the beneficiary.
If you are absolutely entitled to the property, any act done by Company X in its capacity as trustee will be considered an act by you for the purposes of CGT.
Meaning of absolutely entitled
Draft Taxation Ruling TR 2004/D25 sets out the Commissioner's view on the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as they appear in the CGT provisions of the ITAA 1997.
TR 2004/D25 states:
10. 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…
33. It is considered that the test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled.
In your case, you are the beneficiary under a bare trust and you are able to direct how the property will be dealt with.
Therefore, you are absolutely entitled to the property in question and as such, any act done by the trustee in relation to the property will be treated as being done by you.
This means that if the property is sold, CGT provisions such as those dealing with the main residence exemption, will apply to you as if you were the legal owner of the property.
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