Edited version of private advice

Authorisation Number: 1052007102703

Date of advice: 16 August 2022

Ruling

Subject: CGT - absolute entitlement - main residence exemption

Question

Will the Trust or Sole Beneficiary be subject to Capital Gains Tax on the sale of the property?

Answer

No

This ruling applies for the following period:

Year ended 30 June YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

XXXX has been the recipient of a Disability Support Pension since DD MM YYYY, for reasons of XXXX, XXXX and XXXX.

The trust was set up with the sole purpose of purchasing a property for XXXX to reside as his principal place of residence and a property was purchased in DD MM YYYY.

XXXX is the sole beneficiary of the trust and has absolute entitlement to all assets held in the trust

The purchase price for the property was $X.

The property was subsequently sold for $X (contract was signed in DD MM YYYY and Settlement occurred in DD MM YYYY) and a new property was purchased in DD MM YYYY. The sale realised a profit of $X.

As the trust is for the sole benefit of XXXX, the profit from the sale of the property is to be used in the following manner:

•                     Renovations to the newly purchased property to bring the residence to a good standard for habitation and lifestyle.

•                     Ongoing support for XXXX's medical needs

At the time of setting up the trust. the only intention of the trustee was to provide a residence for XXXX to provide continued housing stability into the future.

At the time of setting up the trust, the trustee considered that the trust would be able to take out a small mortgage which XXXX would pay with his disability support pension. to assist in the purchase.

The trust deed was amended to allow the trust to borrow money.

Due to an administrative error on the part of the lender, XXXX's parents were required to provide the total cost of the purchase. The clause that allowed the trust to borrow money was never acted on.

Since that time, the trust had sought to be recognised as a Special Disability Trust (SDT) for tax and social security purposes.

Centrelink required the clause that allowed the Trust to borrow money to be removed, which was formally concluded in DD MM YYYY and the Trust is now an SDT.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-218.

Income Tax Assessment Act 1997 Section 104-75.

Reasons for decision

Section 118-218 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee of a trust is entitled to claim the CGT main residence exemption in respect of a dwelling the trustee holds in his, her or its capacity as trustee and:

•                     ...the trust was a Special Disability Trust (SDT) for some or all of the time the trustee held the dwelling, and

•                     ...the principal beneficiary of the SDT used the dwelling as his or her main residence for some or all of the time it was held in the trust.

The trustee is eligible for the main residence exemption in the same way as the principal beneficiary would have been if they had owned the dwelling directly.

In this case, the Trust was only granted SDT status on DD MM YYYY, however the main residence was sold in the YYYY financial year. The Trust was not an SDT for the time the trustee held the dwelling. Therefore, you are not eligible to claim the main residence exemption under the SDT provisions.

Asset treated as belonging to absolutely entitled beneficiary

Under section 106-50 of the ITAA 1997, once a beneficiary of a trust becomes absolutely entitled to an asset as against the trustee, the CGT provisions apply as if the asset were vested in the beneficiary, and as if any acts of the trustee were acts of the beneficiary.

For example, the subsequent actual distribution of the asset to the beneficiary would not have any CGT consequences and a sale of the asset by the trustee to a third party would be treated as a sale by the beneficiary.

Absolute entitlement

Sections 104-75 and 106-50 operate with respect to the concept of absolute entitlement and apply separately to each beneficiary and asset of the trust. They also require absolute entitlement to the whole of a CGT asset of the trust.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997: sets out the Commissioner's preliminary view in relation to the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' and explains the circumstances where the beneficiary is considered to possess such an entitlement.

TR 2004/D25 applies the core principle of absolute entitlement as provided by Saunders v. Vautier (1841) 4 Beav 115; (1841) 49 ER 282 in the application of the CGT rules. Under the rule in Saunders v. Vautier, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it.

Paragraph 10 of TR 2004/D25 applies the rule of Saunders v. Vautier in the context of the CGT provisions. In particular, 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.

Paragraph 19 of TR 2004/D25 provides that the fact that the beneficiary cannot give the trustee a good discharge for any asset transferred to them because they are suffering a legal disability (for example infancy or insanity) will not prevent the beneficiary being absolutely entitled. Absolute entitlement for CGT purposes is determined ignoring any legal disability.

Paragraph 21 and 22 of TR 2004/D25 states that, for the purposes of the CGT provisions, where a single beneficiary has all the interests in a trust asset, that beneficiary is considered to be absolutely entitled to that asset as against the trustee where the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

You have stated that the beneficiary is the sole beneficiary of the Trust, therefore having a vested and indefeasible interest in the entire trust asset.

The beneficiary of this Trust has absolute entitlement to income and capital.

In accordance with paragraph 10 of TR 2004/D25, absolute entitlement in respect of 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.

The CGT provisions ignore legal disability in relation to determining absolute entitlement.

Therefore, it is considered that the sole beneficiary of the Trust is 'absolutely entitled' to the trust's CGT assets as against the trustee for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997 and has been since the commencement of the trust.

Main residence exemption

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence if:

•                     you are an individual, and

•                     the dwelling was your main residence throughout your ownership period, and

•                     the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

In most cases the full exemption will apply where an individual or individuals own a dwelling and occupy it as a main residence.

Ordinarily a trust cannot apply the main residence exemption as the entity making the gain must be an individual. However, 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 is because the CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary where the beneficiary is absolutely entitled to a CGT asset against the trustee

As the beneficiary is absolutely entitled to the dwelling, the main residence exemption is available.

Therefore, the capital gain made on the disposal of the house is disregarded.

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