Edited version of private advice

Authorisation Number: 1052053412716

Date of advice: 3 November 2022

Ruling

Subject: CGT - disposal of property

Question

Is the Trustee for the Person A Trust able to disregard any capital gain or loss on the disposal of the property?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

I July 20XX

Relevant facts and circumstances

The Person A Trust was first established in March 19XX.

The trust was established for the sole benefit of Person A.

In 19XX, Person A was diagnosed with a mental illness and was often hospitalised.

A deed for the Person A Trust was established in April 19XX.

The Deed named Person A as a beneficiary of the Person A Trust. The Deed included others as potential beneficiaries.

In 19XX, Person A was awarded a sum of money by the court.

In August 19XX, Person A was placed under a protection order which deemed him not fit to manage money.

From early 19XX, Person A's condition began to improve. This meant that they did not require long term hospitalisation and the trustees of the Person A Trust began to search for a home for them to live in.

A property was found to be suitable for Person A to live in and the property was purchased under the Person A Trust in August 19XX.

Person A resided in the property from August 19XX.

The property had always been the trust's only asset.

The trust did not derive any assessable income.

Person A was not permitted to enter into any contracts or own property in their own name under the protection order.

Person A managed their day-to-day life with assistance from care workers.

Person A did not have a spouse or any dependants.

On XX February 20XX, Person A passed away.

The property was vacant from the time that Person A passed away until the time that it was sold.

The property was never used as an investment and never generated any income.

The current trustee broke their arm three weeks prior to the deceased's death.

The trustee discovered the deceased on the day of their death. The trustee sustained further injuries to their wrist following the deceased's death which limited their ability to undertake any work required on the property to prepare it for sale.

In early 20XX, the trustee began attending to the property, however, was limited in time as they were the primary carer for their elderly mother.

In August 20XX, a relative of the trustee passed away and the trustee needed to travel interstate several times to attend to the estate matters and funeral arrangements.

From 20XX, Covid-19 lockdowns, travel restrictions and isolation requirements meant that it was difficult for the property to be attended to.

In July 20XX, the property was ready to be placed on the market to be sold.

The trustee consulted with lawyers and discovered that they did not have authority to sell the property as they were the sole trustee.

The trustee was advised that a minimum of two trustees were required for the property to be sold.

A second trustee was appointed.

The property was listed for sale in early 20XX.

The trustee was advised by the real estate company that it was difficult to sell the property due to it having a particular title.

The price of the property was lowered twice before a sale was agreed upon.

A contract to sell the property was entered into in April 20XX with settlement occurring in June 20XX.

The trustees' mother passed away during this time and a deed of appointment was executed to appoint an additional trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

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 capital gains tax (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.

CGT event A1 will happen if the transfer of legal ownership of the property occurs, and this is treated as a disposal for CGT purposes.

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 your case, as the property is owned by a trust, and a trust is not an individual, you are not entitled to apply the main residence exemption under section 118-110 of the ITAA 1997.

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.

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.

Application to your circumstances

Your situation involves you as the trustee having legal ownership in the trust asset being property you have held for the benefit of Person A.

Person A was the primary beneficiary for the Person A Trust. A Deed of Appointment listed other potential beneficiaries for the trust.

Person A is not absolutely entitled to the property due to the other potential beneficiaries being listed on the Deed.

For a beneficiary to have absolute entitlement, the trust asset is to be a fungible asset and easily divisible. Real property is not a fungible asset and the trust asset cannot be easily divided.

Consequently, Person A is not absolutely entitled to the property. Therefore, CGT event A1 will happen to the trust as the current owner for CGT purposes once the property is sold.