Edited version of your written advice

Authorisation Number: 1012941793426

Date of advice: 28 January 2016

Ruling

Subject: Capital gains tax

Question 1

Is the full amount of any capital gain from the sale of the Property owned by the Trust but used by Person X as their private residence exempt from tax?

Answer

No.

Question 2

Is the Trust able to reduce the amount of the capital gain from the sale of the Property using either the discount capital gains or indexation methods?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Trust purchased a property in 19XX.

The property consisted of a residence.

Person X used the property as their private residence until they passed away in the 20XX-XX financial year.

The property was not rented or used for commercial purposes.

The property was sold in the 20XX-XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-20

Income Tax Assessment Act 1997 Section 100-30

Income Tax Assessment Act 1997 Section 100-33

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 110-36

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

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

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The Trust is not entitled to disregard the full amount of the capital gain relating to the sale of the property using the main residence exemption or any other provision in the taxation legislation.

Any capital gain from the sale of the property may be reduced by using either the discount capital gains or indexation method. The Trust can calculate the assessable capital gain using both methods and then choose the method which is most beneficial to it.

Detailed reasoning

Section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. It states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or operation of the law.

The taxation legislation can operate to:

• exempt the capital gain from being included in your assessable income

• disregard all or part the amount of the capital gain to be included in your assessable income, or

• defer or roll-over the capital gain to a later income year.

The different types of exemptions, discounts and deferrals which may apply to the Trust's circumstances will be discussed separately.

Main residence exemption

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or loss made by an individual from a CGT event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period.

The requirement that the taxpayer be an individual is specified in paragraph 118-110(1)(a) of the ITAA 1997. Subsection 995-1(1) of the ITAA 1997 defines an individual to mean a natural person.

Whilst it is acknowledged that Person X used the property as their private residence, it is owned by the Trust which is not a natural person.

The fact that the beneficiary or trustee of a trust uses a property owned by a trust as their private residence, does not allow the trust to use the main residence exemption to disregard a capital gain from the sale of the property. The exemption is only available to a property owner who is a natural person.

As the property is not a natural person, any gain from its sale cannot be disregarded using the main residence exemption contained in section 118-10 of the ITAA 1997.

Small business CGT concessions

The small business CGT concessions are contained in Division 152 of the ITAA 1997. These concessions allow you to disregard all or part of a capital gain or to rollover the gain to a later income year in certain situations.

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. One condition is that the CGT asset is used in a business carried on by you, your affiliate or an entity connected with you. This is known as the active asset test.

As the property was not used for commercial purposes it would not meet the active asset test. Therefore the Trust is not entitled to use small business CGT concessions to disregard, or rollover, all or part of a capital gain resulting from the sale of the property.

Rollovers

You may be allowed to rollover a capital gain that results from a CGT event until another CGT event happens in the case of assets involved in the following events:

• marriage or relationship breakdown

• loss, destruction or compulsory acquisition

• disposal of land to an entity who holds a mining lease over it

• disposal of shares in a company or interest in a trust as a result of a takeover

• demergers

• other replacement asset rollovers, or

• other same asset rollovers.

The Trust has disposed of the property by entering a sale contract. From the information provided, the above events did not relate to the disposal of the property. Therefore the relevant rollover provisions do not apply to allow the Trust to disregard any capital gain incurred in the 20XX-XX financial year.

Discount capital gains

Division 115 of the ITAA 1997 states a trust may discount a capital gain where:

• the gain results from a CGT event which occurs after 21 September 1999

• the capital gain is worked out using a cost base that has been calculated without reference to indexation at any time (see below)

• the asset must have been acquired by the trust at least 12 months prior to the CGT event.

The discount percentage which can be applied to the capital gain is 50%.

In this case, the capital gain resulted from a CGT event which occurred in the 20XX-XX financial year to the property which was acquired in 19XX. Therefore, if the trustee of the Trust chooses not to index the cost base of the property, they are eligible to discount the capital gain from its sale by 50%.

Indexation

Section 110-36 of the ITAA states the trustee of a trust may choose to index the cost base of a CGT asset acquired before 11.45 am on 21 September 1999 and held for 12 months or more before the relevant CGT event.

As Trust purchased the property in 19XX and has held it for more than 12 months, they are eligible to use the indexation method when calculating the capital gain from the sale of the property.