Edited version of your written advice

Authorisation Number: 1012825391195

Date of advice: 18 June 2015

Ruling

Subject: Main residence exemption

Question

Is the trustee entitled to disregard any capital gain or loss that results from the disposal of the property?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

An individual owned a property.

The property was transferred to a trust as a form of asset protection.

The individual continued to live in the property and they treated it as their main residence for the entire period until their death.

No rental income was ever collected by the trust.

The property was sold.

The terms of the trust are that the individual has the benefit of the trust property only for their life but that on their death the trust property is to be held on trust for certain relatives of the individual.

The property did not form part of the individual's will.

The proceeds of the sale are being distributed to the individual's relatives as specified in the terms of the trust.

The proceeds of the sale did not form part of the estate of the individual.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 118-110

Reasons for decision

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and you receive a gain from the event.

CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1.  Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else. Land and buildings are CGT assets.

Main residence exemption

Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling if:

• you are an individual (paragraph 118-110(1)(a) of the ITAA 1997)

• the dwelling was your main residence for the whole period it was owned

• you have not have used the dwelling to produce assessable income, and

• any land on which the dwelling is situated on and adjacent to is two hectares or less

In your case, as a trust is not an individual you are not entitled to apply the main residence exemption, under paragraph 118-110(1)(a) of the ITAA 1997.

Legal v beneficial ownership

When the disposal of an asset occurs one of the most important elements in the application of the CGT provisions is ownership. Both legal and beneficial ownership must be determined. In most cases, in the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title.

Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary.

Example:

An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee.

Draft Taxation Ruling TR 2004/D25, discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its trustee.

A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 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.

Multiple Beneficiaries

The core principal underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. However, if there is some basis upon which the trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust.

Paragraph 24 of TR 2004/D25 advises that there is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

• the assets are fungible;

• the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

• there is a very clear understanding of the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

Paragraph 54 of TR 2004/D25 states the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset, such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it.

Your circumstances

In your case, upon the death of the individual, the beneficiaries of the trust changed to specified relatives. As there are multiple beneficiaries, and the asset is a non-fungible asset, the individual beneficiaries do not have absolute entitlement to the property. Therefore, the main residence exemption is not available and CGT event A1 was triggered when the property was sold.