Edited version of private ruling

Authorisation Number: 1011817930723

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Ruling

Subject: Trust property

Issue 1

Deductions

Question 1

Can you claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or any other provision of the ITAA 1997 for expenses such as council and water rates, insurance, and interest in relation to a property being used as a residence by one of your beneficiaries?

Answer

No.

Question 2

Can you claim a deduction under Division 40 of the ITAA 1997 for the decline in value of any depreciable assets located on the property?

Answer

No.

Question 3

Can you claim a deduction under Division 43 of the ITAA 1997 for expenditure incurred in relation to capital works?

Answer

No.

Issue 2

Capital gains tax

Question 1

Will the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997 apply to you in relation to the property?

Answer

Yes.

Question 2

If the CGT provisions apply to you in relation to the property, will the main residence exemption in Subdivision 118-B of the ITAA 1997 apply?

Answer

No.

Issue 3

Inclusion of property in balance sheet

Question 1

Do you need to include the property which is being used by your beneficiary as a residence in your balance sheet?

Answer

The Commissioner can not provide a private ruling on this question.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You are a discretionary trust.

You own several properties.

You bought one of the properties recently. One of your beneficiaries uses this property as their main residence. This beneficiary does not pay any rent to you for the use of the property.

You will not exercise your discretion in favour of the beneficiary in relation to the property prior to the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 43-140

Income Tax Assessment Act 1997 Subsection 100-20(1)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Subsection 995-1(1)

Taxation Administration Act 1953 Schedule 1 Section 357-55

Taxation Administration Act 1953 Schedule 1 Subsection 359-5(1)

Taxation Administration Act 1953 Schedule 1 Section 359-10

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Issue 1

Question 1

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (except where the outgoings are of a capital, private or domestic nature).

As you are not receiving any rent, that is, assessable income from the beneficiary for the use of your property, any expenses such as council and water rates, insurance, and interest are not incurred in gaining or producing assessable income. The expenses will also be of a private and domestic nature.

You therefore can not claim these expenses as a deduction under section 8-1 of the ITAA 1997. The expenses can not be claimed as a deduction under any other provision of the ITAA 1997.

Question 2

Under Division 40 of the ITAA 1997, you may be entitled to a deduction equal to the decline in value of a depreciating asset that is used during the income year for a taxable purpose (section 40-25 of the ITAA 1997).

A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). Something is done for the purpose of producing assessable income if it is done for the purpose of gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income (subsection 995-1(1) of the ITAA 1997).

As you are not receiving any assessable income for the use of your property, and the other taxable purposes in subsection 40-25(7) of the ITAA 1997 do not apply in this case, the property is not being used for a taxable purpose and you can not claim a deduction under Division 40 of the ITAA 1997 for the decline in value of any depreciable assets located on the property.

Question 3

Division 43 of the ITAA 1997 applies to capital works being a building, or an extension, alteration or improvement to a building begun in Australia after 21 August 1979 or begun outside Australia after 21 August 1990, and to capital works begun after 26 February 1992 that are structural improvements, or extensions, alterations or improvements to structural improvements whether they are in or outside Australia.

In your case, you will only be able to claim a deduction under Division 43 of the ITAA 1997 if the capital works are used for the purpose of producing assessable income (Table 43-140 in section 43-140 of the ITAA 1997). As you are not using the property for this purpose, you will not be able to claim a deduction under Division 43 of the ITAA 1997.

Issue 2

Question 1

You make a capital gain or capital loss only if a CGT event happens (subsection 100-20(1) of the ITAA 1997).

Draft Taxation Ruling TR 2004/D25 explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. Paragraph 71 of TR 2004/D25 states that 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.

This means that as you are a discretionary trust, and you will not exercise your discretion in the beneficiary's favour prior to the sale of the property, the relevant CGT event will be CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset. This event will happen when you sell the property.

The time of the CGT event will be when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. You will make a capital gain if the capital proceeds from the disposal are more than the cost base of the property. You will make a capital loss if those capital proceeds are less than the reduced cost base of the property.

Question 2

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or loss is disregarded when one of the CGT events specified in subsection 118-110(2) of the ITAA 1997 happens to a CGT asset that is a dwelling or an ownership interest in it if:

· the taxpayer is an individual

· the dwelling was the main residence of the taxpayer throughout the ownership period and

· the interest did not pass to the taxpayer as a beneficiary in, and was not acquired as a trustee of, the estate of a deceased person.

As a trust is not a natural person and therefore not an individual, you do not satisfy condition (a) above and the main residence exemption will not apply to you on the sale of the property.

Issue 3

Under section 359-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), you, your agent, or your legal personal representative, may apply to the Commissioner for a private ruling.

Subsection 359-5(1) of Schedule 1 to the TAA 1953 provides that a private ruling is a written statement of the Commissioner's opinion on how a relevant provision applies, or would apply, to a particular entity (that is, you) in relation to a specified scheme.

The relevant provisions of the tax law in relation to which private rulings may be made are listed in section 357-55 of Schedule 1 to the TAA 1953. As the question of whether an asset should be included in a balance sheet is not a question in relation to a tax law, the Commissioner can not provide a private ruling on this question.