Edited version of your written advice

Authorisation Number: 1012784003901

Ruling

Subject: Transfer of unit trust property to unit holder

Question and Answer:

Will you be entitled to a main residence exemption in relation to any capital gain arising from the transfer of the legal ownership of the stratum unit ('Property') from your unit trust to you?

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Unit Trust hold post-CGT property. You (the individual) have always been the exclusive owner of all 'special units' in the trust, which, according to the relevant trust deed, make you the absolute owner of and gives you exclusive occupancy rights to the relevant Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-130

Income Tax Assessment Act 1997 Section 118-215

Income Tax Assessment Act 1997 Section 118-230

Reasons for decision

Taxation Determination TD 2000/32 states the scheme of the Income Tax Assessment Act 1997 (ITAA 1997) is to treat units in a unit trust as the relevant asset for capital gains purposes rather than any interest a unit holder might have in the underlying property of the unit trust.

This scheme is demonstrated in the provisions about the transfer of trust property to beneficiaries, such as sections 104-75 and 104-85 of the ITAA 1997, where unit trusts are excepted (as follows):

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

Note: Under sections 104-75 and 104-85 of the ITAA 1997, a capital gain or capital loss the beneficiary makes is disregarded if:

(a) the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or

(b) the beneficiary acquired it before 20 September 1985; or

(c) all or part of the capital gain or capital loss the trustee makes from the CGT event is disregarded under Subdivision 118-B (about main residence).

Note 1: For provisions affecting the application of Subdivision 118-B to the trustee, see sections 118-215 to 118-230 [about special disability trusts].

It follows paragraphs 134 and 135 of Draft Taxation Ruling TR 2004/D25 explain about absence of 'absolute entitlement' in respect to units in unit trusts (as follows):

Even though a unit holder in a unit trust may, depending on the terms of the trust, have an interest in the property of the trust…they are not subject to the treatment that otherwise applies to a person who is absolutely entitled to any asset of the trust for CGT purposes….Therefore, the concept of absolute entitlement is not relevant to the holder of a unit in a unit trust in respect of the assets of the trust.

The alternative view is that a unit holder can be absolutely entitled…would be contrary to the general scheme of the CGT provisions as it could result in a beneficiary holding two assets for CGT purposes (the units and the underlying trust asset) which represent the one thing.

The statutory scheme is to treat that interest as being represented by the units on the basis that the units are also assets and, importantly, assets that are traded and that are treated as discrete investment vehicles.

It is noted that section 108-5 of the ITAA 1997 specifically identifies units in a unit trust as examples of CGT assets.

Section 118-110 of the ITAA 1997 can exempt a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it if you are an individual and the dwelling was your main residence throughout your ownership period.

Paragraph 118-130(1)(c) of the ITAA 1997 includes as an ownership interest in land or a dwelling if, for a flat or home unit, you have: (i) a legal or equitable interest in a stratum unit in it; (ii) a licence or right to occupy it; or (iii) a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

However, as stated above, in respect to the main residence exemption, a capital gain or capital loss a trust beneficiary makes is disregarded only if it relates to special disability trusts (within the meaning of the Social Security Act 1991 or the Veterans' Entitlements Act 1986).

In your case, you have a right to occupy the Property due to your special units. However, if your special units did meet the definition of a "right to occupy" in paragraph 118-130(1)(c) of the ITAA 1997, under the principles in TD 2000/32 and TR 2004/D25, only the disposal of such units (rather than the Property) would qualify for the main residence exemption. It follows the transfer/disposal of the Property by the unit trust to you will not qualify for the main residence or qualify for an exception similar to that in section 104-75 (where beneficiary is absolutely entitled to a CGT asset of a trust).

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