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Edited version of your private ruling
Authorisation Number: 1012618587387
Ruling
Subject: Capital gains tax - main residence exemption
Question 1
Will the main residence exemption apply to the property and any other subsequent main residence in the trust?
Answer
Yes.
This ruling applies for the following periods
Year ending 30 June 2014.
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commenced on
1 July 2013
Relevant facts
You propose to establish a trust to provide proper maintenance, advancement, accommodation and benefit for your child.
The trust will be a fixed trust.
The sole beneficiary will be your child who has a legal disability.
It is proposed that a property will be transferred to the fixed trust.
You and your former spouse will be joint trustees.
Your child is absolutely entitled to the property as against the trustee of the trust.
Clause X of the trust deed for the Trust declares that the trust estate is held by the trustee upon trust solely for the beneficiary.
Clauses X, X and X of the trust deed have the effect that the beneficiary is presently entitled to the capital of the trust, and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property.
Clauses X and X make it clear that the beneficiary's interest in the assets of the Trust will be neither contingent nor defeasible.
If your child dies the relevant asset will go to their estate.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 106-50.
Income Tax Assessment Act 1997 Paragraph 118-110(1)(a).
Reasons for decision
Ordinarily a trust cannot apply the main residence exemption as paragraph 118-110(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) requires that the entity making the gain must be an individual. However, Taxation ruling 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 states that 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 position stems from section 106-50 of the ITAA 1997 that states that any actions done by the trustee are considered to be done by the beneficiary when the beneficiary is absolutely entitled to the CGT asset in question.
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. This derives from the rule in Saunders v. Vautier (1841) BEAV 115 applied in the context of the CGT provisions.
For the purposes of determining absolute entitlement any legal disability suffered by the beneficiary is ignored. In other words, if the only thing that prevents a beneficiary from being absolutely entitled under the rule in Saunders v. Vautier is their legal disability, then they will be absolutely entitled for the purposes of the CGT provisions.
The interest a beneficiary has in the trust asset must be vested in possession and indefeasible. A trustee would only be obliged to satisfy such a demand from a beneficiary with such an interest. To be indefeasible, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event.
Ignoring your child's legal disability they are the sole beneficiary of the trust assets and they are able to demand that title to the property is transferred to them and as such has absolute entitlement and the relevant asset will go to their estate in the event of their death.
As your child is absolutely entitled the main residence exemption will apply to the property and any subsequent properties which your child uses as their main residence.