Edited version of your private ruling

Authorisation Number: 1012497096270

Ruling

Subject: Capital gains tax

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 the beneficiary is absolutely entitled?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

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.

You are a trust (the trust).

The trust was established by deed of settlement dated in 19XX.

At the time of establishment, there were two trustee directors.

The trust acquired a property (the property) in 19XX.

The property was renovated and rented out to tenants until 19XX.

In 19XX, the trustee directors separated. At this time one of the trustee directors (trustee director one) moved into the property and made it their principal place of residence.

Divorce proceedings were finalised in 20XX and the Family Court ordered that the company be transferred completely to trustee director one and that trustee director two relinquish all and any interest in the claim to the property.

Trustee director one has used the property as their own including paying for and effecting extensive renovations and paying all costs of holding the property including rates and insurance.

Trustee director one registered with the State Revenue Office that this property is their principal place of residence and therefore pays a reduced rate of Land Tax. No other property has been owned since acquiring the property.

Trustee director one is the sole beneficiary of the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 104-15.

Reasons for decision

Summary

As trustee director one is absolutely entitled to the property, any capital gain will be disregarded.

Detailed reasoning

Asset treated as belonging to absolutely entitled beneficiary

Under section 106-50 of the Income Tax Assessment Act 1997 (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

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'.

If the beneficiary of a trust is absolutely entitled to a CGT asset as against a trustee, any act carried out by the trustee is treated as if it was carried out by the beneficiary. In these cases, as an example, if the trustee disposes of a CGT asset, then it is seen that the beneficiary was the one who actually disposed of the asset, not the trustee.

The foundation that supports the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a secured and unbeatable interest in the entire trust asset, to call for that asset to be transferred to them or to be transferred to someone else 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 be absolutely entitled to the asset. In such cases, absolute entitlement can only be established if the assets are fungible. Land is not a fungible asset.

Therefore it is considered that as the sole beneficiary of the trust, trustee director one 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).

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 trustee director one is absolutely entitled to the dwelling, the main residence exemption is available.

Therefore, any capital gain made on the disposal of the house will be disregarded.