Edited version of your private ruling

Authorisation Number: 1012447071276

Ruling

Subject: Special disability trust

Question 1

Is the capital gain made by the Trust on the disposal of the property used by the beneficiary as their main residence disregarded because of the special disability trust (SDT) provisions?

Answer

No

Question 2

Is the capital gain made by the Trust on the disposal of the property used by the beneficiary as their main residence disregarded because the beneficiary is absolutely entitled?

Answer

Yes

Question 3

Is the Trust required to lodge income tax returns?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

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.

The Trust was established by the family of the beneficiary.

The beneficiary is an invalid pensioner who is the sole beneficiary of the Trust.

The Trust purchased a house for the sole occupancy of the beneficiary.

The Trust disposed of the house in the relevant income year.

The house was disposed of at a profit and the proceeds of the sale were used to purchase a replacement house for the sole occupancy of the beneficiary.

The beneficiary is currently residing in the replacement house.

The excess funds from the disposal of the first house are being held in the Trust for the exclusive use of the beneficiary.

Centrelink granted SDT status to the Trust during the subsequent financial year.

Centrelink has waived earlier non compliance with a number of provisions of the SDT trust model deed under the authority of Section 129U of the Social Security Act 1991 as a result of the trustees making the prescribed Statutory Declarations.

The 20XX and 20YY Trust income tax returns have been lodged on the basis that the trust is a SDT.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 118-218.

Income Tax Assessment Act 1997 Section 104-75.

Reasons for decision

Summary

The Trust did not hold the main residence when it was granted SDT status. Therefore you are ineligible to use the main residence exemption under the SDT provisions.

The beneficiary is absolutely entitled, as the sole beneficiary, to the Trust's capital gains tax (CGT) assets. Therefore, they are entitled to the main residence exemption.

The Trust is required to lodge returns unless notified.

Detailed reasoning

Special disability trusts and the main residence exemption

Section 118-218 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the trustee of a trust is entitled to claim the CGT main residence exemption in respect of a dwelling the trustee holds in his, her or its capacity as trustee and:

· the trust was a SDT for some or all of the time the trustee held the dwelling, and

· the principal beneficiary of the SDT used the dwelling as his or her main residence for some or all of the time it was held in the trust.

The trustee is eligible for the main residence exemption in the same way as the principal beneficiary would have been if they had owned the dwelling directly.

In this case, the Trust was only granted SDT status in the relevant financial year. The main residence was sold in the 20XX financial year. The Trust was not an SDT for some or all of the time the trustee held the dwelling. Therefore you are not eligible to claim the main residence exemption under the SDT provisions.

Asset treated as belonging to absolutely entitled beneficiary

Under section 106-50 of the 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

Sections 104-75 and 106-50 operate with respect to the concept of absolute entitlement and apply separately to each beneficiary and asset of the trust. They also require absolute entitlement to the whole of a CGT asset of the trust.

Draft Taxation Ruling TR 2004/D25 sets out the Commissioner's preliminary view in relation to the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' and explains the circumstances where the beneficiary is considered to possess such an entitlement.

TR 2004/D25 applies the core principle of absolute entitlement as provided by Saunders v. Vautier (1841) 4 Beav 115; (1841) 49 ER 282 in the application of the CGT rules. Under the rule in Saunders v. Vautier, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it.

Paragraph 10 of TR 2004/D25 applies the rule of Saunders v. Vautier in the context of the CGT provisions. In particular, 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 the asset to be transferred to them or to be transferred at their direction.

Paragraph 19 of TR 2004/D25 provides that the fact that the beneficiary cannot give the trustee a good discharge for any asset transferred to them because they are suffering a legal disability (for example infancy or insanity) will not prevent the beneficiary being absolutely entitled. Absolute entitlement for CGT purposes is determined ignoring any legal disability.

Paragraph 21 and 22 of TR 2004/D25 states that, for the purposes of the CGT provisions, where a single beneficiary has all the interests in a trust asset, that beneficiary is considered to be absolutely entitled to that asset as against the trustee where the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

You have stated that the beneficiary is the sole beneficiary of the Trust, therefore having a vested and indefeasible interest in the entire trust asset.

The beneficiary of this Trust has absolute entitlement to income and capital.

In accordance with paragraph 10 of TR 2004/D25, absolute entitlement in respect of the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

The CGT provisions ignore legal disability in relation to determining absolute entitlement.

Therefore it is considered that the sole beneficiary of the Trust is 'absolutely entitled' to the trust's CGT assets as against the trustee for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) and has been since the commencement of the trust.

Main residence exemption

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence if:

· you are an individual, and

· the dwelling was you 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 occupy it as a main residence.

Ordinarily a trust cannot apply the main residence exemption as the entity making the gain must be an individual. However, where a beneficiary is absolutely entitled as against the trustee to the dwelling and it is the main residence of that beneficiary the main residence exemption would be available. This is because the CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary where the beneficiary is absolutely entitled to a CGT asset against the trustee

As the beneficiary is absolutely entitled to the dwelling, the main residence exemption is available.

Therefore, the capital gain made on the disposal of the house is disregarded.

Lodgement of returns

A Trustee is required to lodge a trust income tax return, regardless of the amount of income involved, unless we advise that a return is not required. As we have provided you with no such advice the Trustee of the Trust is required to lodge a trust income tax return.