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Edited version of private advice
Authorisation Number: 1051633766450
Date of advice: 11 February 2020
Ruling
Subject: Capital gains tax and absolute entitlement
Question 1
Is the second life tenant entitled to use the main residence exemption to reduce the capital gain incurred upon the sale of the property?
Answer
No
Question 2
Did a capital gains event occur when the residuary beneficiary relinquished their interest in the trust?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Trust was created by the first life tenant which was intended to be for the benefit of their children.
The trust deed was created in the 19XX's.
The trust deed had a first life tenant, a second life tenant and a residuary beneficiary.
The first life tenant transferred the property to the trust in the late 19XX's.
The Property was their main residence before this point.
By deed of retirement of trustee and appointment of new trustee and self-exclusion of beneficiary, the residuary beneficiary retired as Trustee. They also relinquished their interest as the residual beneficiary on this date.
In 20XX, both the first and second life tenant moved to a supported accommodation unit.
The Property from this point to the date of sale was vacant.
The second life tenant had no interest in returning to the property however was resistant to renting or selling the property.
The first life tenant passed away in Spring 20XX. The second life tenant then became the sole life tenant.
Assumption
An assumption is being made that this is a valid trust for all the years concerned.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 subsection 104-10(1)
Income Tax Assessment Act 1997 section 106-50
Income Tax Assessment Act 1997 subsection 106-50(1)
Income Tax Assessment Act 1997 section 118-110
Reasons for decision
Summary
The second life tenant cannot use the main residence exemption to disregard the capital gain upon the sale of the property.
Capital gains tax event A1 occurred when the residuary beneficiary relinquished their interest in the trust.
Detailed reasoning
Trust vesting
The trust deed states that the vesting date "means the later of the date of death of the First Life Tenant and the date of death of the Second Life Tenant".
The second life tenant is still living therefore the trust cannot vest as per the terms of the deed. The trust therefore has not vested for the purposes of answering the ruling questions.
Absolute Entitlement and the Main Residence Exemption
Section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) and CGT event E5 in section 104-75 of the ITAA 1997 are the main provisions to which the concept of absolute entitlement is relevant. These provisions apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability).
These provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust.
While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5 of the ITAA 1997, neither is the CGT asset to which the relevant provisions refer.
Taxation Ruling TR 2004/D25 explains the circumstances in which the beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust against a trustee.
The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset.
If there is more than one beneficiary with an interest in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their discretion. This is because their entitlement is not to the entire asset.
There are particular circumstances where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. These circumstances are 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 clear understanding on 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.
If all these factors are present, then the beneficiary will be considered absolutely entitled to that specific number of the trust's assets for CGT purposes.
Assets are fungible if each asset matches the same description such that one asset can be replaced with another.
A capital gain or loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:
a) You are an individual; and
b) The dwelling was your main residence throughout your ownership period; and
c) The interest did not pass to you as a beneficiary in, and you did not acquire it as trustee of, the estate of a deceased person.
Usually assets held by trusts will not qualify as the exemption only applies to individuals. However if the beneficiary is absolutely entitled to the asset, then the individual will be taken to have the CGT consequences. Therefore they could have the benefit of using the exemption subject to meeting the other requirements.
The second life tenant's interest is a life interest which is only measured by their life. Once they die, their interest will end. It is not an interest that can be passed onto their estate. The interest that the second life tenant has does not equate to having an ownership of the property. Therefore the second life tenant cannot be absolutely entitled to the property. Due to this lack of absolute entitlement, the main residence exemption cannot be utilised by the second life tenant. The capital gain will be incurred by the trust, not the second life tenant. The trust cannot use the main residence exemption to disregard the capital gain from the sale of the property as it is not an individual.
Relinquishing of residuary beneficiary's interest
When the beneficiary relinquished their interest, CGT event A1 would occur as per paragraph 66 of Taxation Ruling TR 2006/14. This states:
If a life interest or remainder owner surrenders of releases their interest CGT event A1 (in section 104-10) rather than CGT event C2 (in section 104-25) happens. The Commissioner considers that CGT event A1 is the applicable event, as there is a change of ownership of the interest from one party to the other, rather than a mere ending of it.
If no capital proceeds are received then the market valuation substitution rule in subsection 116-30(1) applies to determine the amount of capital proceeds from the event.