Edited version of private advice

Authorisation Number: 1051953799064

Date of advice: 25 February 2022

Ruling

Subject: CGT - disposal

Question

Will the sale of the Property be exempt from capital gains tax?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust purchased the Property X years ago.

The trustees of the Trust immediately rented out the Property to their adult child W (a primary beneficiary), and W's spouse Y, and W's children.

The Property was to be part of their inheritance, so they were told to treat the Property as their own home, and they were not charged any bond.

An annual lease has been signed to comply with the insurance company's requirements.

The family made improvements to the Property.

Recently, W's health deteriorated, which has impacted their income earning ability. The trustees want to help financially and have agreed to a contract with W and Y for a private sale of the Property for $X, some of which will be a gift and some a loan.

The contract was entered into in XX/20XX and the title to the Property was transferred to W and Y in XX/20XX.

The Trust has multiple beneficiaries.

Under the terms of the Trust, the trustee has, at any time before the winding up of the Trust, the discretionary power to make a distribution of any of the capital of the Trust to any of the beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-110

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that CGT is incurred when a CGT event takes place, and you make 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. A CGT event occurred on the transfer of ownership of the Property from the trustee of the Trust to W and Y.

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 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 the present case, as the Property was owned by a trust, and a trust is not an individual, the Trust is not entitled to apply the main residence exemption under section 118-110 of the ITAA 1997. This is the case even though beneficiaries of the Trust used the property as their main residence.

Asset of a trust

A CGT event in relation to an asset of a trust happens to the trustee on behalf of the trust unless a beneficiary is absolutely entitled to the asset. Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the 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. That is, the absolutely entitled beneficiary is treated as the owner of the CGT asset.

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 of the ITAA 1997 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 principle 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.

TR 2004/D25 states if there is more than one beneficiary with interests in a 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 direction. This is because their entitlement is not to the entire asset. 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 (for example, shares in the same company and with the same characteristics);
• 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 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.

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.

In the present case, although W is a beneficiary of the Trust, W is not the sole beneficiary of the Trust and therefore, W could not have been absolutely entitled to the Property. Consequently, W cannot be treated as having ownership of the Property while it was legally owned by the Trust and the transfer from the Trust will be subject to CGT.