Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011645317274

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gain on residential property

Question 1

Where a residence is owned by a trust, can the main residence exemption for CGT apply where the residence is lived in by a life tenant under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Should the trustees include any capital gain from the sale of the residence in the net income of the trust in accordance with subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The deceased and his spouse transferred the title of the house to their children to hold in trust.

The trustees held the house on trust subject to the terms of the trust.

The house was purchased after 19 September 1985 and had been the main residence of the couple since it was first purchased up until it was transferred to the trust.

The trust granted the couple, as beneficiaries, life tenancies and the right to reside in the house, or in the event the house was sold, any subsequent house purchased with the sale of proceeds of the house subject to some conditions. Any cash balance arising from the sale and purchase of the house shall become the property of the trustees absolutely and shall not be subject to any trust or other legal or equitable condition or obligation.

The trust may be terminated on these events:

Upon termination of the trust the title of any property held in the trust, is to be distributed amongst the children.

The couple continued to reside at the house and use the premises as their main residence.

After the deceased passed away his spouse continued to reside in the house and has the right to do so pursuant to her life tenancy until she passes away.

In accordance with the trust deed, the surviving life tenant wishes to instruct the trustees to sell the house.

The trustees have found a purchaser interested in the house

The surviving life tenant and the trustees have received legal advice cautioning against varying the terms of the trust. As such the proceeds must remain subject to the terms of the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 960-100(2)

Income Tax Assessment Act 1997 Subsection 960-100(3)

Income Tax Assessment Act 1997 Subsection 960-100(4)

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Subsection 118-110(1)

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

Income Tax Assessment Act 1997 Subsection 118-110(1)(b)

Income Tax Assessment Act 1997 Section 118-105

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-10

Question 1

Summary

Where a residence of a life tenant is held and sold by a trust, the main residence exemption is not available to the trustees of the trust under section 118-110 of the ITAA 1997.

Detailed reasoning

A capital gain or loss is made when a CGT event happens to a CGT asset under section 102-20 of the ITAA 1997. However, if the relevant criteria is satisfied there is a main residence exemption available under subsection 118-110(1) of the ITAA 1997.

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or capital loss made by an individual from a CGT event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period.

A surviving life tenant has an ownership interest in a dwelling under subsection 118-130(1)(b) of the ITAA 1997 as they have a right to occupy it pursuant to their life tenancy until they pass away. However it is not the right to occupy the dwelling that is contemplated in this current sale. It is the sale of the dwelling itself.

The requirement for the main residence exemption that the taxpayer be an individual is specified in paragraph 118-110(1)(a) of the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 defines an individual to mean a natural person.

Because the dwelling in this case was acquired by the individuals in their capacity as trustees and it is not the sale of the ownership interest in the dwelling that is contemplated in this sale but the sale of the property and dwelling held by the individuals in their capacity as trustees, the condition in paragraph 118-110(1)(a) of the ITAA 1997 cannot be satisfied. Therefore, the main residence exemption does not apply. Accordingly, any capital gain or capital loss made from the disposal of the dwelling by the individuals in their trustee capacity will not be disregarded.

Question 2

Summary

The trust should include any net capital gain from the sale of the private residence in the net income of the trust in accordance with subsection 95(1) of the ITAA 1936.

Detailed reasoning

Taxation Ruling TR 2006/14 gives the Commissioners view on the consequences of creating life and remainder interests in property. Paragraph 11 of this ruling state:

"The creation of equitable life and remainder interests involves the creation of a trust over an original asset(s). There are consequences for the original owner of the asset, the trustee and the life interest and remainder owners."

The trustee, as explained at paragraphs 20, 22 and 23 of the ruling may make a capital gain or capital loss on a CGT asset it holds on trust for life interest and remainder owners. Any capital gain or loss the trustee makes is taken into account in working out the trustee's net capital gain or loss, a net capital gain is included in the net income of the trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).