Edited version of your private ruling

Authorisation Number: 1012451274952

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Ruling

Subject: Capital gains tax

Question and answer:

Will you, as trustee of the Trust, have a CGT liability as a result of transferring the property from the Trust to the deceased estate where the deceased was the sole beneficiary of the Trust and used the property as their main residence?

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

the deceased purchased a property after 20 September 1985 as trustee of a discretionary trust (the Trust) which they used as their main residence.

The Trust is a discretionary trust.

The area of the property is less than 2 hectares.

The property was never used for income producing purposes.

The deceased passed away.

The property has been vacant since the deceased's death.

You are the executor for the estate of the deceased.

The Trust Deed for the Trust cannot be located.

The Court has appointed you as the new trustee of the Trust and ordered the assets of the Trust be distributed to the estate of the deceased in the deceased estate's capacity as sole beneficiary of the Trust.

There are a number of beneficiaries listed in the deceased's will.

The property is on the market waiting to be sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 118-110.

Income Tax Assessment Act 1997 Section 106-50.

Reasons for decision

Capital gains tax

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax assessment Act 1997 (ITAA 1997)).

The most common CGT event is a CGT event A1 which occurs when you dispose of a CGT asset. The time of the event is when you enter into the contract for the disposal or if there is no contract when change of ownership occurs.

However, there are a number of different exemptions or exceptions that, if they apply, can mean that a capital gain or capital loss that you make as a result of a CGT event can be disregarded, either in full or in part. One such exemption is known as the 'main residence exemption'.

Main residence exemption

Generally, a person can disregard a capital gain or capital loss made on the disposal of a dwelling that is their main residence if:

· the dwelling was their main residence for the whole period the person owned it

· the dwelling was not used to produce assessable income, and

· any land on which the dwelling is situated is not more than two hectares.

In most cases the full exemption will apply where an individual or individuals own a dwelling and occupy it as their main place of residence. The term individual does not apply to companies, trusts or other entities. An individual is defined in the income tax legislation to mean a natural person.

As a trust is not a natural person and therefore not an individual, the main residence exemption cannot apply to it.

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 a beneficiary of a trust is absolutely entitled as against the trustee to the dwelling, an exemption may be available to the beneficiary if the dwelling is the principal place of residence of the beneficiary.

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 (section 106-50 of the ITAA 1997).

Absolute entitlement

It is considered that a beneficiary is absolutely entitled to an asset of a trust as against the trustee if the beneficiary is:

· absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and

· able to direct the trustee how to deal with the asset.

Application to your case

In your case, the property in question was owned by the Trust and the deceased was the trustee of the Trust. The property is less than 2 hectares in area, was the deceased's main residence and was never used to produce assessable income.

The trust deed for the Trust cannot be located. The deceased passed away. The Court has ordered the property in question to be distributed to the estate of the deceased in the deceased estate's capacity as sole beneficiary of the Trust.

As the deceased estate is the sole beneficiary of the Trust, the deceased estate is absolutely entitled to the property of the Trust as against the trustee. In addition as the main residence conditions are satisfied, there will be no CGT liability when the property is transferred from the Trust to the deceased estate.