Edited version of private advice

Authorisation Number: 1052413494389

Date of advice: 23 June 2025

Ruling

Subject: CGT - main residence exemption

Question 1

Will a CGT Event A1 occur if the Trust sells the property which was the primary residence of Person A?

Answer 1

Yes.

Question 2

Can the Trust apply the main residence exemption under subsection 118-110(1) of the Income Tax Assessment Act 1997 to the property?

Answer 2

No.

Question 3

Can Person A, as a beneficiary of the trust, apply the main residence exemption under subsection 118-110(1) of the Income Tax Assessment Act 1997 to the disposal of the property by the trustee?

Answer 3

No.

This ruling applies for the following periods:

July 20XX to June 20XX

The scheme commenced on:

X January 20XX

Relevant facts and circumstances

From XXXX until XXXX, Person A and Person B were in a de-facto relationship.

In XXXX, the Trust was established, and initial capital was provided by both Person A and Person B to acquire commercial units for investment purposes.

The Trust is a discretionary trust.

The Trust Deed states that Person B is the Trustee and both Person A and Person B are primary beneficiaries and Principals.

The Trust Deed states that children (amongst others) of Person A or Person B are classed as primary beneficiaries.

There are also provisions for secondary and tertiary beneficiaries. The Trust Deed states that the trustee has absolute discretion to pay or apply the whole or part of the trust fund to any of the beneficiaries its thinks fit.

In XXXX, Person A and Person B sold their primary residence on XX and sought to acquire the Property as their principal residence.

The bank refused to loan money to Person A and Person B.

The bank agreed to lend money to the Trust which involved using the equity and income from the commercial unit investments to support the loan.

The Property was purchased under the Trust with the title being registered under the name of the trustee.

The Trust did not claim any expenses in relation to the Property. All expenses for rates, taxes, maintenance and repairs were personally addressed by Person A and Person B.

On February XXXX, Person B passed away. Subsequently, Person A was appointed as trustee of the Trust.

A title search of the Property dated March XXXX showed the Property was still registered under the name of the trustee. The Property remains held under the Trust.

Person A stated that at the time of creating the Trust, it was an utmost concern to protect the assets.

Person B had personal and financial difficulties and therefore, their income could not be relied upon. Person A feared that their assets would dwindle to support Person B habits instead of creating a comfortable retirement.

There were no objections with the Trust being the registered proprietor of the property.

The solicitor who initially handled the purchase of the Property advised that the purchase documentation of the Property including their records were destroyed X years ago.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 108-5

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

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 Division 115

Reasons for decision

Question 1

Will a CGT Event A1 occur if the Trust sells the property which was the primary residence of Person A?

Answer 1:

Yes.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a CGT event happens.

Under subsection 104-10(1) of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset whether because of some act or event or by operation of law, however, subsection 104-10(1) of the ITAA 1997 provides that a disposal of a CGT asset does not occur if there is only a change of legal ownership and no change of beneficial ownership.

Subsection 104-10(3) provides that the timing of a CGT Event A1 is either when you enter into the contract for the disposal of the CGT asset or, if there is no contract, when the change of ownership occurs. A property is a CGT asset under section 108-5 of the ITAA 1997.

In this case, the Property was purchased and registered under the Trust due to the banks unwillingness to lend money to Person A and B. The Property has remained under the Trust since its purchase.

Where the Property is sold, the Property will be disposed in accordance with subsection 104-10(1) of the ITAA 1997 and therefore, a CGT Event A1 will arise upon its disposal.

Question 2

Can the Trust apply the main residence exemption under subsection 118-110(1) of the Income Tax Assessment Act 1997 to the property?

Answer 2:

No.

Detailed reasoning

Subsection 118-110(1) of the ITAA 1997 states that 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, is disregarded 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.

The term 'individual' is defined under section 995-1 of the ITAA 1997 to mean 'a natural person'.

The title search shows that the Property is held under the name of the trustee.

This means the Property is held under the Trust and therefore, it is the Trust which must meet the criteria of the main residence exemption.

As the Trust is not a natural person, it is unable to meet the criteria of the main residence exemption. It is not relevant to consider the subsequent criteria on the basis the Trust is unable to fulfill the first requirement.

Therefore, the Trust cannot apply the main residence exemption.

The Trust however may be eligible to 50% CGT discount under Division 115 of the ITAA 1997.

Question 3

Can Person A, as a beneficiary of the trust, apply the main residence exemption under subsection 118-110(1) of the Income Tax Assessment Act 1997 to the disposal of the property by the trustee?

Answer 3:

No.

Detailed reasoning

As already discussed, the main residence exemption operates to allow an individual to disregard their capital gain or loss from a CGT event that happens in relation to a CGT asset that is a dwelling or that which the individual holds ownership interest in it, provided the relevant criteria is met.

However, for you to be eligible for the main residence exemption, you need to be the one to whom the CGT Event A1 applies.

It was contended that the Property was held on bare trust by the Trust for Person A's benefit and therefore, the main residence exemption should apply to Person A as they retained beneficial ownership of the Property. It was put forward that it was not Person A's intention to dispose of their beneficial ownership in the Property but that the Property was only placed into the Trust to protect it.

Person A stated that the reasons for needing to protect the Property were due to Person B's financial and personal struggles which meant Person Bs income could not be relied upon. Person A feared that the assets would dwindle to support Person B habits instead of creating a comfortable retirement.

We observe there was no option but to place the Property under the Trust as the bank would not lend to Person A and Person B, only lending to the Trust due to the equity and income the Trust obtained from the commercial units. Therefore, without the Trust, Person A and Person B would have been unable to purchase the Property.

Further, we do not consider Person A to be absolutely entitled to the Property as the Trust is a discretionary trust with multiple beneficiaries. This means Person A cannot have a vested and indefeasible interest in the Property as their interest cannot arise unless the trustee exercises their discretion in Person A's favour.

As the Property was held under the Trust, it is the Trust to whom the CGT Event A1 will apply and not Person A.

However, we have considered your contentions which follow. Was the Property held on Bare Trust?

To be a bare trust, the beneficiary must retain immediate ownership and control over the assets. The trustee's role is simply to hold the assets and distribute them to the beneficiary as required or directed.

In this case, a formal trust deed was drawn up which clearly states the Trust to be a discretionary trust. The trust deed does not provide any provision that requires the trustee to accept direction or instruction from a beneficiary.

The trustee retains the absolute discretion to determine whom the benefit is applied to.

The Trust is therefore unable to be a bare trust on the premise there is no requirement in the trust deed to follow Person A's instructions but instead, provides the trustee discretion on how the Property may be managed and distributed.

Does Person A have absolute entitlement to the Property in the Trust?

Section 106-50 of the ITAA 1997 provides that where a beneficiary is absolutely entitled to a CGT asset, any act done in relation to the asset by the trustee is taken as have been done by you instead. Where this applies, any capital gain or loss from the sale of the CGT asset is made by the beneficiary (i.e., you) instead of the trustee.

Paragraphs 70 and 71 of Taxation Ruling 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 (TR 2004/D25) state:

Clearly a trustee would only be obliged to satisfy a demand from a beneficiary with an interest in the trust asset. Therefore, the beneficiary must have an interest in the relevant asset in order to be considered absolutely entitled to it for CGT purposes.

Because an object of a discretionary trust does not have an interest in the trust assets, they cannot be considered absolutely entitled to any of the trust assets prior to the exercise of the trustee's discretion in their favour. (emphasis added)

In having an interest, the beneficiary's interest must be vested and indefeasible. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it (paragraph 74, TR 2004/D25).

Concurrently, a vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A 'condition subsequent' is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

In the current circumstances, Person A does not contain a vested and indefeasible interest as their interest in the Trust property is contingent on trustee exercising their discretion in their favour, this being consistent with the purpose of a discretionary trust enabling the trustee discretion on how assets may be distributed.

Further, the trust deed states that Person A and Person B were to be primary beneficiaries in addition to children, spouses, parents, and de-facto partners amongst others. There are no provisions within the trust deed which specifically provides Person A is entitled to the trust property over other beneficiaries. This means that although as trustee, Person A may distribute the Property to themselves in their capacity as one of the beneficiaries, it does not give them absolute entitlement on the basis there are other beneficiaries who may hold interest in the Property.

Does Person A have beneficial ownership in the Property?

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners (TR 93/32) contains guidance on the issues involved where the equitable interest in a property may not follow the legal title.

As stated in paragraph 41 of TR 93/32, the Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title.

Legal interest in a property is determined by the legal title to the property under the property law legislation in the state or territory in which the property is situated.

A beneficial owner is defined as a person or entity who is beneficially entitled to the asset. An entity or individual can be a legal owner but have no beneficial ownership in an asset.

Where the beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner.

Person A was required to purchase the Property under the Trust as the bank would not loan them money. Although this provided asset protection, we consider this was a secondary consideration as without the Trust, Person A would have been unable to purchase the Property.

In purchasing the Property under the Trust, the Property became an asset of the Trust. This means that although as a primary beneficiary Person A held a right to be considered by the trustee in any distribution of income or assets, they could not hold beneficial ownership as the Property was not held as a bare trust solely for them but for the interests of all beneficiaries.

Further, as already considered, the trust deed does not provide any provision that requires the trustee to accept direction or instruction from a beneficiary, meaning it is the trustee who retains total control over the Property until such time they utilise their discretion to distribute the Property.

Although we understand Person A didn't realise they would not obtain equitable ownership of the property by purchasing it through the Trust, the fact that the Property was placed in the Trust means that we are unable to consider Person A holds beneficial ownership of the Property.

Consequently, it is our view that the Trust holds both legal and beneficial ownership of the Property.

Conclusion

Although we sympathise with Person A's situation and understand they were unable to purchase the Property under their own name, instead, being required to place it under the Trust, we are unable to accept Person A are the beneficial owner of the Property for the purposes of section 104-10 of the ITAA 1997.

Therefore, Person A will be unable to claim the main residence exemption as it is the Trust and not them, who is subject to the CGT Event A1.

We note that in the circumstance Person A somehow became absolutely entitled, we consider a CGT Event E5 under 109-5 of the ITAA 1997 will still trigger at the time of them becoming absolutely entitled. Further, the Property would only be Person A's asset from the time of becoming absolutely entitled. This means Person A could only apply the main residence exemption from the time they became absolutely entitled up until they disposed of the Property, it does not apply retrospectively for the period the Trust held the Property.

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