Edited version of private advice

Authorisation Number: 1052284509020

Date of advice: 31 July 2024

Ruling

Subject: CGT - trust

Question

Can the Trust apply the main residence exemption to disregard the capital gains or losses upon the sale of the Property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The primary beneficiary of the Trust (the Beneficiary) was employed until a workplace injury some XX years ago prevented him from continuing in his employment role.

Some XX years ago, the Beneficiary was terminated from his employment on medical grounds.

Some XX years ago, the Beneficiary submitted a total and permanent invalidity claim with his former employer.

Some XX years ago, the former employer approved the Beneficiary's total and permanent invalidity claim.

As part of this approval, due to the Beneficiary's deteriorating health, the former employer requested that a trust be setup on behalf of the Beneficiary to assist with his financial matters.

Some XX years ago, the Trust was established with 2 trustees, a solicitor and a relative of the Beneficiary.

The Trust is a discretionary trust in which the trustees have full discretion to make all decisions regarding the assets and income of the Trust, for the benefit of the Beneficiary as single primary beneficiary and for the remainder beneficiaries thereafter.

Some XX years ago, a property (the Property) was purchased for the Beneficiary to live in.

Two thirds of the Property was purchased by the Trust with the remaining third being purchased by the Beneficiary's parent (now deceased).

The Property has been the Beneficiary's main residence since it was purchased, and he has been responsible for all costs to maintain and upkeep the property.

The Beneficiary has no other interest in any other property title.

The Property is being sold to enable the Beneficiary to relocate to a smaller residence as he is unable to sustain the maintenance required of such a large property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 125-60

Reasons for decision

Detailed reasoning

Main residence exemption

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or capital loss made by an individual from a CGT (capital gains tax) event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period. An individual is defined in subsection 995-1(1) of the ITAA 1997 as a natural person.

Asset treated as belonging to absolutely entitled beneficiary

Under section 106-50 of the Income Tax Assessment Act 1997 (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

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 examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'.

The foundation that supports 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 that asset to be transferred to them or to be transferred to someone else at their direction.

A beneficiary of a discretionary trust cannot be absolutely entitled prior to any exercise of the trustee's discretion in their favour as before that point they have no interest in the trust's assets.

Application to your circumstances

The property to be sold is owned by the Trust, a discretionary trust in which the trustees have discretion in allocating income or property of the trust. The trust deed does not provide that any beneficiary can call for an asset to be transferred at their direction.

The relevant CGT event occurs to the Property which is owned by the Trust. As discussed above, unless a beneficiary is absolutely entitled to the trust's interest in the Property, the CGT event A1 disposal event as described in section 104-10 of the ITAA 1997 will happen to the legal owner of the Property which is the Trust .

As the entity disposing of the asset is not an individual, the trust cannot use the main residence exemption to disregard any capital gains or losses from the disposal of the property under section 118-110 of the ITAA 1997.

Furthermore, as the Beneficiary is not absolutely entitled to the Trust's interest in the Property, the Trust cannot apply section 106-50 of the ITAA to treat the Property as Craig's asset for the purposes of the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997 and the main residence exemption will not be available upon the sale of the Property.

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