Edited version of private advice

Authorisation Number: 1052266934885

Date of advice: 26 June 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Can the XXXX Unit Trust access the main residence exemption for the sale of the property under subdivision 118-180 of the ITAA 1997?

Answer

No.

Question 2

Does the beneficiary have absolute entitlement to the asset and therefore meet the criteria for the main residence exemption?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June XXXX

Year ended 30 June XXXX

Year ended 30 June XXXX

Year ended 30 June XXXX

Year ending 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

Following financial advice, you and your spouse established a Unit Trust on the XXXX to purchase a house.

The Unit Trust purchased a house at XXXX.

You and your spouse are joint individual trustees of the Unit Trust.

You both individually hold 50 units each of the total 100 Units of the Trust.

The property is the only asset held by the Trust.

The trust deed has the following clause on no entitlement to any part of the fund "a Unit shall not entitle the registered Holder to any particular asset comprised in or any particular part of the Fund but each Unit shall entitle the registered holder equally with all other unit holders to the beneficial interest in the Fund as an entirety".

You and your spouse now wish to divorce and move to sell the property as part of your divorce settlement.

You intend to sell the property to an unrelated third party.

Since the purchase of the property, both trustees have resided in the home as their main residence.

Neither of the trustees have elected any other property as their main residence throughout this period.

The property is less than 2 hectares and is a dwelling for the purposes of section 118-115 of the 1TAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-180

Income Tax Assessment Act 1997 section 118-190

Reasons for decision

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. The dwelling is a CGT asset. The sale of the property is a CGT event A1 under section 104-10 of the ITAA 1997.

Section 118-180 of the ITAA refers to the rollover provision on marriage breakdown. You advised the property will be sold to a third party therefore, the rollover provision does not apply to this case.

Section 118-180 of the ITAA 1997 further explains ownership in a dwelling cannot be treated as your main residence during the Trust ownership period.

Under section 118-110 of the ITAA 1997 you can disregard a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling or your ownership interest in it if all of the following conditions apply:

•         you are an individual

•         the property is less than two hectares.

•         the dwelling was your main residence throughout your ownership period

•         the ownership interest did not pass to you through a trust or a deceased estate.

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

The property is considered to be owned by the person(s)/entity registered on the title.

Ordinarily a trust cannot apply the main residence exemption as the entity making the gain must be an individual.

A trustee who has legal title to a CGT asset is the relevant owner of that CGT asset unless section 106-50 of the ITAA 1997 applies. This section applies where there is a beneficiary who is absolutely entitled to the asset as against the trustee. If there is a beneficiary who is so entitled, then any capital gain or loss from the asset is taken to be made by the beneficiary themselves rather than by the trustee. That is, the gain or loss is not taken into account in working out the trust's net capital gain. However, the ATO takes the view that multiple beneficiaries cannot be absolutely entitled to a single trust asset.

Section 108-5 of the ITAA 1997 specifically identifies units in a unit trust as examples of CGT assets, highlighting the notion that when considering the beneficiary's ownership interest is the units and not the property itself.

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 view on when a beneficiary may become absolutely entitled to an asset.

Paragraph 5 of the ruling when covering the notion of units held versus property owned states:

'The scheme of the ITAA 1997 is to treat a unit as the relevant asset for capital gains purposes rather than any asset of the trust, even if the unit holder has an interest in the trust property at general law (see Taxation Determination TD 2000/32). Therefore, the holder of all the units in a unit trust is not subject to the general treatment that applies to those who are absolutely entitled for CGT purposes to the assets of a trust.'

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. The most straight forward application of this core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.

In your case, the trust owns the property, and the beneficiaries who occupy it are not absolutely entitled to it, so they are not deemed to own it for CGT purposes. Therefore, the general main residence exemption under section 118-110 of the ITAA 1997 does not apply.

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