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Edited version of your written advice
Authorisation Number: 1051497743142
Date of advice: 25 March 2019
Ruling
Subject: CGT – testamentary trust – absolute entitlement
Question 1
Is G absolutely entitled to the CGT asset of the trust against the trustee of the trust?
Answer
Yes
Question 2
Will the trustee be assessed on any capital gain or loss resulting from the disposal of the property?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2019
Year ended 30 June 2020
Year ended 30 June 2021
Year ended 30 June 2022
The scheme commences on:
1 July 2018
Relevant facts and circumstances
The deceased died xx xxxx xxxx.
T (the trustee) was appointed trustee upon the granting of probate on XX June 20XX.
The deceased’s will left the residue of the estate, after minor bequests had been made, to G to be held in trust until attaining the age of XX years.
Administration of the estate was fully completed by xxxx 20XX when all debts had been paid and bequests had been made.
The Testamentary Trust was established to hold the residuary assets of the deceased’s estate on behalf of G.
The property was part of the residuary assets of the deceased’s estate, now an asset of the Testamentary Trust.
G moved into the property in xxxx 20XX and lived there with the deceased until the deceased’s death.
After the deceased’s death, G continued to reside at the property and during various periods when not residing at the property, did not make another property their main residence.
The trustee intends to place the property on the market for sale.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 106-50
Reasons for decision
Section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) is one of the main provisions to which the concept of absolute entitlement is relevant if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee.
This provision provides that just after a beneficiary becomes absolutely entitled to an asset of a trust, the asset is treated as an asset of the absolutely entitled beneficiary (and not an asset of the trustee) for the purpose of the CGT provisions. Any act done by the trustee in respect of the asset is taken to be an act of the absolutely entitled beneficiary when determining any CGT consequences. The effect being that the beneficiary, and not the trustee, is liable for any capital gain or loss which arises in relation to the asset.
Taxation Ruling TR 2004/D25 provides guidance on the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust against a trustee.
The fact that a beneficiary cannot give the trustee a good discharge for any asset transferred to them because they are suffering a legal disability, such as infancy or insanity, will not prevent the beneficiary being absolutely entitled. Absolute entitlement for CGT purposes is determined ignoring any legal disability.
The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset.
A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).
A beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect to that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.
A beneficiary of a deceased estate does not have an interest in any asset of the estate (and therefore cannot be considered absolutely entitled to any of the estate’s assets) until the administration of the estate is complete. That is, until the assets of the estate have been called in and the deceased’s debts and liabilities have been paid (Commissioner of Stamp Duties (QLD) v Livingston [1965] AC 694; [1964] 3 All ER 692).
In this case, G is the sole beneficiary and has all the interests in the property. As G is a beneficiary of a deceased estate, they will be considered absolutely entitled to the property as against the trustee (ignoring the legal disability) at the time the administration of the estate was completed.
As such when the property is sold, it will be G and not the trustee that will be liable for any capital gain or loss that arises from the disposal.
Further issues for you to consider
We have not considered the main residence exemption under section 118-110 of the ITAA 1997 or the absence rule under section 118-145 of the ITAA 1997 in relation to exemptions that may be available to G.