Edited version of your private ruling

Authorisation Number: 1012147008946

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.

Ruling

Subject: Income Tax: Capital Gains Tax: CGT event A1 - disposal of a pre-CGT asset

Question 1

Is the sale of a unit owned by the Trust free from capital gains tax (CGT) in terms of Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) because the premises have been occupied as a primary residence by the business managers since the premises were built?

Answer

No

Question 2

Is the sale of a unit owned by the Trust free from CGT in terms of Division 149 of the ITAA 1997 because the premises have been owned and used by the trust since prior to 1985 when the premises were built?

Answer

Yes

This ruling applies for the following period

1 July 2011 to 30 June 2012

The scheme commenced on

Prior to 1985

Relevant facts

The Trust was set up prior to the accommodation business being established by the trustee company.

The trustee company has been set up for many years and the trust was established prior to the accommodation business being commenced. The Trust owns the land on which the accommodation was built as well as the administration block and common buildings.

The housing units are owned by the Trust and long term leases (199 years) are sold to enable a right to occupy the property. A new long term lease is set up every time a unit is purchased. Leaseholders can sell their leasehold on the open market.

The owners of the unit leases are the beneficiaries of the Trust and are in receipt of distributions which represent non-mutual income (generally interest) derived by the trust. To be a beneficiary of the trust one must hold a lease in a housing unit. The entitlement is directly linked to the unit lease holding. The names of the beneficiaries of the excess trust funds change as the leases of the residential units are bought and sold. The beneficiary of the trust is the current holder of the lease at any given time - irrespective of the name on the lease.

The trust deed states (in relation to funds which may be distributed to beneficiaries):

Surplus

Whenever the trustee is of the opinion that the funds held by it exceed the amount required the trustee may (pursuant to a unanimous resolution by the advisory committee) distribute the surplus to or grant credit for the benefit of the beneficiary in the proportion to the unit entitlement of their respective units.

A unit which has always been owned (and not leased) by the Trust had been continuously occupied by the managers of the accommodation until the retirement of the previous manager. The unit is currently vacant pending sale.

The unit to be sold has always been owned by the Trust and is currently owned by the Trust and no other entity. The Trust has never been resettled or varied.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 149-10

Reasons for decision

Question 1

Summary

For a capital gains tax event to be disregarded under the 'main residence' provisions, the property must be occupied as a main residence by the owner during the ownership period.

Detailed reasoning

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

The requirement that the taxpayer be an individual is specified in paragraph 118-110(1) (a) of the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 defines an individual to mean a natural person.

Because in this case the dwelling (unit) was acquired and used by the trust acting in its capacity as the owner of a business the condition in paragraph 118-110(1) (a) of the ITAA 1997 is not satisfied. Managers using (but not owning) the property as their principal residence does not override this primary principle and the main residence exemption does not apply.

Accordingly, any capital gain or capital loss made from the disposal of the dwelling will not be disregarded in terms of section 118-110 of the ITAA 1997.

Question 2

Summary

The disposal of the capital asset can be disregarded as the asset was acquired before 20 September 1985 and the ultimate owners who then held the majority underlying ownership of the asset continue to be the ultimate owners at the time of the CGT event.

Detailed reasoning

Under section 149-10 of the ITAA 1997, CGT assets last acquired by the trust before 20 September 1985 (which included the unit being disposed of) are pre-CGT assets if, and only if these assets have not stopped being pre-CGT assets of the trust through the operation of Division 149 of the ITAA 1997.

The principal section which discusses when an asset of a non-public entity such as the trust ceases to be a pre-CGT asset is section 149-30 of the ITAA 1997, which reads in part as follows:-

149-30 Effects if asset no longer has same majority underlying ownership

1) The asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time.

2) If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsection (1) applies as if that were in fact the case.'

Section 149-10 of the ITAA 1997 states that the majority underlying ownership in a CGT asset consists of more than 50% of the interest that ultimate owners have (whether directly or indirectly) in the asset and any ordinary income derived by the asset.

Subsection 149-15(3) of the ITAA 1997 defines an ultimate owner as:

· and individual, or

· a not for profit company, or

· the Commonwealth, a State or a Territory, or

· a municipal corporation, or

· a local governing body, or

· the government of a foreign country, or part of a foreign country

A beneficiary in a discretionary trust cannot be said to have a beneficial interest in the income or assets of the trust in the light of cases such as Gartside v. IRC [1968] AC 553 and Re Weir's Settlement MacPherson & anor v. IRC [1970] 1 All ER 29.

Guidance for the application of Division 149 is found in Income Tax Ruling IT 2340 (IT 2340) which discusses what happens in respect of non-fixed discretionary trusts. It indicates that in relation to what are generally referred to as discretionary trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

IT 2340 also indicates that where the trustee continues to administer a trust for the benefit of members of a particular group as appropriate for the trustee to determine within the exercise of his discretion, the Commissioner would find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed.

Providing that there is no change to the beneficiaries of the Trust as per the Trust Deed it is reasonable to assume that the majority underlying interests in the trust assets have not changed and that the assets of the trust which were acquired before 20 September 1985 will remain pre-CGT assets of the trust.

The residential unit leaseholders are beneficiaries of non-mutual income derived by the Trust. The relationship between the unit leasehold and entitlement to the beneficial distribution of non-mutual funds is in accordance with the Trust Deed and has been applied throughout the administration of the trust.

The distribution of funds is granted for the beneficiary in proportion to the unit entitlement of their respective units. The holder of the lease is the beneficiary. The name of the leaseholder can change but the definition of the beneficiary is unchanged. That is, the definition has always been the leaseholders.

In view of the above comments in IT 2340, and provided that there is no change in the category of beneficiaries of the trust as per the trust deed, then it is reasonable to assume that the majority underlying ownership in the trust assets, including the unit that has been occupied by the manager of the premises will maintain its pre- CGT status and the sale of the asset by the trust may be disregarded.