1011582331509 | Legal database

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Edited version of private ruling

Authorisation Number: 1011582331509

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Ruling

Subject: Capital gains tax

Question 1

Can the main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) be applied to any capital gain arising from the disposal of a residential unit, thus allowing the capital gain to be disregarded?

Answer

No.

Relevant facts

A Special Disability Trust was established. You have provided a copy of the trust deed. The sole beneficiary is the disabled child of the trustee.

You purchased a residential unit for your child. Your child took up occupancy and has been paying you concessional rent since then. No other person has occupied the premises nor has any other income been earned from the premises and this has been declared in your income tax returns since then.

A market opinion indicated that a capital gain would arise at the transfer of the residential unit to the trust.

There will be nil consideration on the transfer to you.

The funds for the purchase of the unit came from the sale of your property and none of the funds had to be raised by loan(s), therefore no interest has been claimed by you.

The trust deed states;

The principal beneficiary is XXXX. Clause 2.3 of the trust deed states the following:

With respect to all real property contributed to the Trust Fund by a Donor or acquired by the trustee, in which the Principal Beneficiary lives (``the residence'').

the Principal Beneficiary shall have a personal right of occupation in respect of the residence for as long as they wish for their lifetime; and

the residence may be sold and the proceeds used to acquire a substituted residence to which the provisions of this sub-clause may apply, provided that in exercising their power pursuant to this paragraph, the Trustee shall act to achieve the sole and ancillary purpose of the trust, and have regard to the priority of the Principal Beneficiary as set out in the preceding sub-clauses.

Clause 1.5 of the trust deed concerns the duration of the trust and states the following:

The trust will end on the earlier of:

the date of death of the Principal Beneficiary; or

if the assets are fully expended on the Principal Beneficiary, the date of such full expenditure; or

any earlier date as required by law. (``the end date'')

Schedule B of the trust deed states what happens to the assets of the trust upon its ending. In particular the Donor, will receive 100 % of any remaining contribution balance.

You have provided a number of attachments with you application including recommendations stemming from a Senate Committee report of October 2008.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Paragraph 118-110(1)(a)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

The only kind of CGT exemption that would be applicable to your circumstances would be the main residence exemption.

Ordinarily a trust cannot apply the main residence exemption as paragraph 118-110(1)(a) requires that the entity making the gain must be an individual. However, Taxation Determination (TD) 58 states that where a beneficiary is absolutely entitled as against the trustee to the dwelling and it is the main residence of that beneficiary the main residence exemption would be available. This position stems from section 106-50 that states that any actions done by the trustee are considered to be done by the beneficiary when the beneficiary is absolutely entitled to the CGT asset in question.

If XXXX is absolutely entitled to the dwelling, the main residence exemption would be available.

Is XXXX absolutely entitled to the dwelling?

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. This derives from the rule in Saunders v. Vautier (1841) BEAV 115 applied in the context of the CGT provisions.

For the purposes of determining absolute entitlement any legal disability suffered by the beneficiary is ignored. In other words, if the only thing that prevents a beneficiary from being absolutely entitled under the rule in Saunders v. Vautier is their legal disability, then they will be absolutely entitled for the purposes of the CGT provisions.

The interest a beneficiary has in the trust asset must be vested in possession and indefeasible. A trustee would only be obliged to satisfy such a demand from a beneficiary with such an interest.

To be indefeasible, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event. In your case, upon the vesting (ending) of the trust, the property in question will not go to XXXX estate, but rather to the sole Donor. Hence, XXXX is effectively a life tenant in having the right to occupy the property (or any replacement property) for the duration of that person's life only. XXXX does not have any interest in the capital.

Ignoring XXXX legal disability, XXXX cannot demand that title to the property be transferred to XXXX as a life tenant only. As such, XXXX cannot be said to be absolutely entitled.

As XXXX is not considered to be absolutely entitled, the main residence exemption cannot be applied upon the disposal of the property.

Whilst we have read the recommendations stemming from the Senate Committee Report, a private ruling can only be issued on the law as it stands at the time the private ruling is issued.

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