Edited version of your private ruling

Authorisation Number: 1012501458213

Ruling

Subject: CGT - Main residence exemption

Question

Are you entitled to the main residence exemption under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You sought legal advice and you were advised to set up a discretionary family trust and sell your home to this trust.

You do not recall being informed about the capital gains implications of this transaction or the need to keep records.

You later considered selling the home, and it was at this time that you discovered that the home would be subject to capital gains tax.

You now wish to sell your home.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 106-50,

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

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

Reasons for decision

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

(a) you are an individual; and

(b) the dwelling was your main residence throughout your ownership period; and

(c) 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 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.

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

However, 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.

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).

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 for 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 Draft Taxation Ruling TR 2004/D25 where it says that if there is a shared interest in the trust assets, this prevents absolute entitlement.

Also, as stated in paragraph 71 of TR2004/D25, the beneficiary of a discretionary trust does not have an interest in the trust asset and is not absolutely entitled to a trust asset until the trustee exercises their discretion in their favour.

As there is one real property and more than one beneficiary it is considered that no beneficiary will be absolutely entitled to the property.

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