Edited version of your private ruling

Authorisation Number: 1012129561366

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Subject: Capital gains tax - main residence - discretionary trust - roll-over

Question 1:

Can the capital gain or capital loss made on the transfer of the dwelling from a discretionary trust to a beneficiary be disregarded?

Answer: No.

Question 2:

If the transfer results in a capital gain, are there roll-over provisions available so that the gain can be disregarded?

Answer: No.

This ruling applies for the following period:

1 July 2012 to 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

After 19 September 1985 a dwelling was purchased by a non-trading trustee company acting on behalf of the family trust. A husband and wife are equal shareholders in the company and also beneficiaries of the trust.

When purchased, the husband and wife moved into the property. The property has also been rented for a period.

The husband and wife now live in the property.

The trustee on behalf of the trust now wishes to transfer ownership of the dwelling to the husband and wife in joint names.

Included in the definition of beneficiaries in the Trust Deed are parents, grandparents, brothers, sisters and other relatives of specific beneficiaries and companies associated with related beneficiaries, schools charities and other organisations:

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

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

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

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 122-15

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 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 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 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the capital gains and capital loss provisions commonly known as capital gains tax (CGT). You make a capital gain or capital loss if a CGT event happens. CGT is the tax you pay on capital gains. 

In your case a CGT event will occur when the Trust transfers the property to two beneficiaries. Certain exemptions operate to disregard capital gains or losses. If the asset you disposed of is your home, you may be entitled to a main residence exemption.

Main residence exemption

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

· you are an individual

· 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 occupies it as their main place of residence. The term individual does not apply to companies, trusts or other entities. An individual is defined in subsection 995-1(1) of the ITAA 1997 to mean a natural person.

The issue of the main residence exemption being available to a company or trust is addressed in CGT Determination TD 58. The determination states that a family trust is not a natural person as required by the main residence exemption, therefore the exemption cannot be claimed. However, the addendum to TD 58 also states that where beneficiaries of a trust are absolutely entitled as against the trustee to the dwelling, an exemption may be available to the beneficiaries if the dwelling is the principal place of residence of the beneficiaries. We now need to determine if the beneficiaries have absolute entitlement.

Absolute Entitlement

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 the asset to be transferred to them or to be transferred at their direction.

If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. If the asset was divided, each asset would be different from the original trust asset. This is confirmed in paragraph 125 of Taxation Ruling TR 2004/D25 where it says that if there is a shared interest in the trust assets, this prevents absolute entitlement.

The object of a discretionary trust does not have an interest in the trust's assets and cannot be absolutely entitled to the trust's assets prior to the exercise of the trustee's discretion in their favour. The family trust which owned the dwelling is discretionary, the Trustee has discretion to apply capital and income to pay or apply the same to or for the benefit of any one or more of the beneficiaries in such proportions as the Trustee in their sole and absolute and unfettered discretion shall think fit.

Your Trust Deed provides for more than one beneficiary including; any parent, grandparent, great-grandparent, brother, sister, niece and other broader family members such as nieces, nephews, eligible company or partner or partners in Eligible Partnerships Companies that the Trustee may from time to time appoint. No one beneficiary has a fixed entitlement to the trust's assets; the trustee has the discretion to make a distribution to any of the beneficiaries during their lifetimes. Consequently, no beneficiary is absolutely entitled to the dwelling and the provisions treating an absolutely entitled beneficiary as the relevant taxpayer in respect of the dwelling for the purposes of the CGT provisions do not apply.

Therefore, in your case the main residence exemption will not apply to the trust. Accordingly, any capital gain or capital loss made by the trust from the disposal of the dwelling can not be disregarded. 

CGT event E5 in section 104-75 of the ITAA 1997 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under). If CGT event E5 happens, there may be CGT consequences for both the trustee and the beneficiary.

The property is a CGT asset. As you are a discretionary trust, your beneficiary will become absolutely entitled to the property held by you at the time your trustee exercises its discretion in favour of the beneficiary. CGT event E5 happens at this time.

As a result of CGT event E5 happening, you will make a capital gain if the market value of the property (at the time of the event) is more than its cost base. You will make a capital loss if that market value is less than the reduced cost base of the property.

Any capital gain resulting from CGT event E5 happening will be included in the determination of your net capital gain and assessable income. However, if your beneficiary, who is a resident and is not under a legal disability, becomes presently entitled to all or part of any capital gain resulting from CGT event E5 happening, you will not pay CGT on that part of the net capital gain.

The market value substitution rule in section 116-30 of the ITAA 1997 generally applies where no consideration is received for the transfer of an asset. The transferor is generally taken to have received capital proceeds equal to the market value of the asset.

Roll-over

Section 122-15 of the ITAA 1997 provides that where a trustee disposes of an asset, or all of the assets of a business, to a company the trustee can choose to obtain rollover if certain requirements are met. There are a number of conditions that must be met however, as the trustee is disposing of an asset to individuals this section will not apply.

There are a number of other circumstances in the legislation where a roll-over may be applied however your case is not a situation where one of these circumstances apply.