Edited version of your written advice

Authorisation Number: 1051476379173

Date of advice: 28 February 2019

Ruling

Subject: Main residence exemption and pre-capital gains assets.

Question 1

Is the property considered a pre-capital gains tax (CGT) asset?

Answer

No

Question 2

Are you entitled to claim the main residence exemption for capital gains tax (CGT) in respect of the property?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You and your then spouse purchased the property as a vacant block of land and subsequently built a house on it in prior to 20 September 1985. You subsequently moved into the dwelling.

After a period of time legal ownership of the property was transferred to Company Z as the trustee of the Y Trust, prior to 20 September 1985. The trust was a family discretionary trust with the members of your family as named beneficiaries.

You and your then spouse divorced after 19 September 1985 and they resided elsewhere.

Your former spouse began court proceedings a number of years later, seeking a formal property settlement in the Family Court.

The Family Court made Consent Orders that you pay your ex-spouse a sum of money and that they transfer their interest in the property to you or your nominee.

The transfer of the property took place and the title was registered in your name as trustee of the Z Trust.

The Z Trust lists a number of individuals and a company as beneficiaries of the trust.

You have resided in the dwelling on a continuous basis for a number of years and the property has been your principal place of residence.

The dwelling has never been rented out.

The entire property, and the dwelling on it, has been used exclusively as a private residence for the benefit and enjoyment of the occupants and has not been used for any other purpose.

You personally have paid the outgoings and repair and maintenance of the property and no deductions have been claimed in respect of either the outgoings or expenses.

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 112-140

Income Tax Assessment Act 1997 section 112-150

Income Tax Assessment Act 1997 section 115-228

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 126-5

Income Tax Assessment Act 1997 section 126-15

Income Tax Assessment Act 1997 section 960-100

Reasons for decision

Summary

You cannot apply the main residence exemption as you will not make a capital gain or loss on the disposal of the dwelling. You will make a capital gain or loss only in your capacity as trustee, which will not be eligible for the main residence exemption.

The property is not considered a pre-CGT asset.

Detailed reasoning

CGT Status

Most CGT events involve the disposal of a CGT asset. A CGT asset acquired prior to 20 September 1985 is referred to as a “pre-CGT asset”. The disposal of a pre-CGT asset is in most cases exempt from capital gains tax.

Changes in ownership

CGT applies to all changes of ownership of assets on or after 20 September 1985. However same-asset roll-over in subdivision 126-A of the ITAA 1997 may apply. The effect of a CGT event being a same asset roll-over is to allow the taxpayer transferor to disregard a capital gain or loss it makes from disposing of the CGT asset to the transferee, so that any capital gain or loss is deferred until a CGT event happens in relation to the asset in the hands of the transferee (section 112-140). Additionally, if the transferor acquired the asset before 20 September 1985, the transferee is taken to have acquired it before that day.

Subsection 126-15(1) of the ITAA 1997 outlines the circumstances in which there will be a roll-over for a CGT event involving a company or trustee (the transferor) and the spouse of an individual (the transferee) broadly as a result of marriage or relationship breakdowns. These circumstances include, but are not limited to, if the transfer is due to:

a. a court order under the Family Law Act 1975 (Family Law Act) or under a State, Territory or foreign law relating to relationship breakdowns of spouses

b. a maintenance agreement approved by a court under section 87 of the Family Law Act or a corresponding agreement approved by a court under a corresponding foreign law

c. something done under:

i. a financial agreement made under Part VIIIA of the Family Law Act that is binding because of section 90G of that Act or a corresponding written agreement that is binding because of a corresponding foreign law

ii. a financial agreement made under Part VIIIAB of the Family Law Act that is binding because of section 90UJ of that Act or a corresponding written agreement that is binding because of a corresponding foreign law

iii. an award made in arbitration in accordance with section 13H of the Family Law Act or a corresponding written agreement that is binding because of a corresponding foreign law, and

iv. a written agreement that is binding as a result of State or Territory law or foreign law relation to relationship breakdown and, because of that law, the court is prevented from making an order about matters to which the agreement applies or that is inconsistent with the terms of the agreement.

However, the Subdivision 126-A roll-over only applies where the transferee is either a spouse or former spouse. A transfer to, or the creation of an asset in, a third party under a relevant order, agreement or award will not attract the roll-over relief despite the CGT event being a consequence of the breakdown of a relationship between spouses.

Conclusion

The same asset roll-over will not apply in this case as the property was transferred from Company Z as the trustee of the Y Trust to you in the capacity of trustee of Z Trust and therefore the underlying ownership of the property has changed.

The property was acquired by you as trustee of Z Trust in mid 20XX and therefore is not considered a pre-CGT asset.

Main Residence Exemption

CGT is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a capital gains tax event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common capital gains tax event is CGT event A1 which happens when you dispose of an asset to another party, for example disposal of a dwelling (section 104-10 of the ITAA 1997).

Subsection 118-110(1) of the ITAA 1997 provides that a capital gain or capital 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.

The ITAA 1997 recognises that a legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity (subsection 960-100(3) of the ITAA 1997). The trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time (subsection 960-100(2) of the ITAA 1997).

However, if a provision of the ITAA 1997 refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity (subsection 960-100(4) of the ITAA 1997). Therefore, the reference in paragraph 118-110(1)(a) of the ITAA 1997 to an individual is a reference to an individual acting in their personal capacity only. It does not include an individual in the capacity of a trustee.

When considering the disposal of a property, one of the most important elements in the application of the CGT provisions is ownership. Generally, the owner of the property is the person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership.

Subsection 960-100(4) of the ITAA 1997 states that if a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity and not to that entity in any other capacity.

In this case the trustee of Z Trust is the legal owner of the property. Thus on sale of the property, it is the trustee who will make a capital gain or loss, unless it can be shown there is beneficial ownership by another party, for example absolute entitlement.

Absolute entitlement of trust property

If a beneficiary is absolutely entitled to a trust asset, the asset is treated for capital gains tax purposes as if it is owned directly by the beneficiary and not the trustee. Any actions taken by the trustee in relation to the asset are taken to have been done by the beneficiary directly. This means that if a capital gains tax event happens in relation to the asset, any capital gain or loss will be made directly by the beneficiary and doesn't form part of the trust's net income.

A beneficiary is absolutely entitled to an asset of a trust if they have a 'vested and indefeasible' interest in the entire trust asset - that is, they can direct the trustee to immediately transfer the asset to themselves or to someone else.

Where the trust is established by deed, (which in the case of a deceased estate is the will), the trustee must deal with the trust property in line with the intentions of the settlor as set out in the trust deed. They must also act in accordance with the relevant state or territory law regulating trusts, and with any other applicable law, including tax law.

The core principle underpinning the concept of absolute entitlement in the capital gains tax 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.

It is the Commissioner's view that in order to be deemed 'absolutely entitled' an individual must have the sole and exclusive right to instruct trustees with regard to the management of assets held in trust.

The Z Trust deed identifies several other individuals and a company as having an interest in the Trust property. As you are not the sole interest holder we do not consider that you have absolute entitlement over the property. It then follows that the Trust will be the entity that will realise any capital gain or loss upon the disposal of the property.

Conclusion

The property was acquired in your capacity as trustee of Z Trust and therefore the main residence exemption will not be available as it is the trustee who will make a capital gain or loss on the sale of the property. You in your individual capacity will not make a capital gain or loss on the sale of property.