Edited version of private advice

Authorisation Number: 1052080504434

Date of advice: 25 January 2023

Ruling

Subject: CGT - main residence exemption

Question 1

Will you as the sole beneficiary be entitled to apply the capital gains tax (CGT) main residence exemption in accordance with section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 20XX, you and your spouse decided to purchase a property and build a dwelling to be your main residence.

You contributed funds to go towards the land purchase.

You were unable to borrow the remainder of the funds to complete the purchase and build, so it was agreed the property to be purchased in your child's name.

The mortgage was taken out by your child.

There was a Trust established with a Deed of Trust (20XX Deed) between your child and you and your spouse.

You and your spouse were the beneficiaries of the Trust.

The 20XX Deed states that the beneficiary has and will accept responsibility for payment of all mortgage instalments due under the mortgage for purchase of the realty and construction of the dwelling house.

The 20XX Deed provides that the Trustee should acquire the legal title to the reality in their sole name for the benefit of the beneficiary as joint tenants.

Your spouse passed away leaving the whole of the estate to you.

A Deed of Amendment to Deed of Trust was prepared (Amended Deed).

The Amended Deed confirmed the Trustee holds the property in trust for you on the same terms as the enunciated in the 20XX Deed.

You are the sole beneficiary of the Trust.

The property is your main residence.

The property was not used to produce assessable income.

The property was situated on less than two hectares of land.

You wish to move from the property and require the Trustee to sell the property.

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

Income Tax Assessment Act 1997 Section 118-125

Income Tax Assessment Act 1997 Section 118-130

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, event A1, occurs with the disposal of a CGT asset. A CGT event A1 may arise when property is sold.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property.

The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset.

To prove that a different equitable interest exists, there must be evidence that a trust has been established - such that one party is taken merely to hold their interest in the property for the benefit of the other.

Absolute entitlement

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'.

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). Such 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 of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction (paragraphs 21 and 22).

Section 106-50 of the ITAA 1997 provides that any 'act done by the trustee in relation to the asset' is treated as if it had been an act of the person absolutely entitled. As a result, if the act triggers a CGT event, then the taxpayer will be the person subject to any CGT liability rather than the trustee.

Main residence exemption

Under section 118-110 of the ITAA 1997, a capital gain or capital 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 a trustee of, the estate of a deceased person.

You have an ownership interest (section 118-130 of the ITAA 1997) in a dwelling or land if:

(a)  for land - you have a legal or equitable interest in it or a right to occupy it, or

(b)  for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it, or

(c)   for a flat or home unit - you have:

                      i.        a legal or equitable interest in a stratum unit in it; or

                     ii.        a licence or right to occupy it; or

                    iii.        a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you a right to occupy it

Your ownership period (section 118-125 of the ITAA 1997) of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in:

(a)  dwelling; or

(b)  land (acquired on or after 20 September 1985) on which the dwelling is later built.

In most cases the full exemption will apply where an individual or individuals own a dwelling and occupy it as a main residence.

Application to your circumstances

The Amended Deed confirmed the Trustee holds the property in trust for you on the same terms as the enunciated in the 20XX Deed and you are the sole beneficiary of the Trust. It is considered that you are absolutely entitled to the property.

You have instructed the Trustee to sell the property, the relevant CGT event will occur to the property, any capital gain or loss from the sale will be made by you, not the Trustee.

You live in the property and treat the property as your main residence throughout the ownership period; you did not use the property to produce any assessable income. Therefore, you will be entitled to apply the CGT main residence exemption under section 118-110 of the ITAA 1997 to the sale of your property.