Edited version of private advice

Authorisation Number: 1052104713595

Date of advice: 4 April 2023

Ruling

Subject: CGT - main residence exemption

Question

Will the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) be available to the Taxpayer the sole unit holder in the Trust, in relation to the gain realised on disposal in the year ended 30 June 20XX of the Property held by the trustee of the Trust, where that Property was used by the taxpayer as their sole residence throughout the period Date X to Date X?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances:

1.         The Taxpayer is a resident of Australia for income tax purposes, as defined in subsection 6(1) of the Income Tax Assessment Act 1936, throughout the period Date X to Date X.

2.         The company registered as a company in Australia on Date X.

3.         The Trust was established as a unit trust.

4.         Company is the trustee for the Trust.

5.         On Date X XXX transferred their X units in the Trust to the Taxpayer, and the Taxpayer became the sole unit holder in the Trust.

6.         No other units have been issued in the Trust.

7.         The Property was purchased on Date X by the Company in its capacity as trustee for the Trust. The purchase price was XXX. The Property is part of a multi-level strata unit development, and the Trust holds a share or unit in the strata company which gives the share/unit holder a right to occupy the unit.

8.         The legal ownership of the Property rested with the Company in its capacity as trustee for the Trust.

9.         According to the Trust's income tax returns for the income years from and including the year ended 30 June 20XX, the Property was first rented out on 5 June 20XX.

10.      The Taxpayer moved into the Property on Date X.

11.      The Property was sold to an unrelated party on Date X for consideration of $X.

12.      The Deed of Trust of the Trust does not confer on a unit holder absolute entitlement to one, some, or any of the assets held on trust by the Trust.

13.      The taxpayer has not provided any resolutions by the trustee of the Trust which evidence absolute entitlement to the Property having been conferred on the Taxpayer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10(1)

Income Tax Assessment Act 1997 section 104-10(2)

Income Tax Assessment Act 1997 section 104-10(3)

Income Tax Assessment Act 1997 section 104-75(1)

Income Tax Assessment Act 1997 section 104-85(1)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 subsection 118-110(1)

Income Tax Assessment Act 1997 subsection 118-130(1)(c)

Income Tax Assessment Act 1997 subsection 960-100(4)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Issue 1

CGT - Unit Trust - Main Residence Exemption

Detailed reasoning

1.         Subsection 118-110(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss made by an individual from a CGT (capital gains tax) event that happens in relation to an ownership interest is disregarded if the dwelling was their main residence throughout their ownership period. An individual is defined in subsection 995-1(1) of the ITAA 1997 as a natural person.

2.         An ownership interest in land or a dwelling is defined in section 118-130(1)(c)(i) to include a share in a company that owns a legal or equitable interest in the land on which the home unit is erected and that gives the shareholder a right to occupy that holder unit.

3.         The Property sold was legally owned by the Trust. The use of the property had been initially as a rental property and, from Date X, as the main residence of the sole unit holder, the Taxpayer, in the Trust.

4.         The Trust's entry into the contract for sale of the Property triggered a CGT event A1, per section 104-10(1),(2) and (3) of the ITAA 1997.

5.         The Trustee for the Trust is not a natural person and so does not satisfy the requirements of paragraph 118-110(1)(a) of the ITAA, and cannot access the main residence exemption.

6.         In limited circumstances, under section 106-50 of the ITAA 1997, section 118-110 of the ITAA 1997 may apply to disregard the gain realised by an individual on disposal of a dwelling held within a trust, if it can be demonstrated that beneficiary of the trust is absolutely entitled to the CGT asset as against the trustee.

7.         CGT Determination TD 58 Income tax: capital gains: is a principal residence exemption available where a dwelling is owned by a family company or family trust? (CGT TD 58), which discussed the main residence exemption where a dwelling is owned by a family company or family trust, states at paragraph 1 that the dwelling is required to be owned by a natural person (under the then paragraph 160ZZQ12(a), equivalent to the current paragraph 118-110(1)(a)). Paragraph 3 of CGT TD 58 states that where a beneficiary of a trust is absolutely entitled as against the Trustee to the dwelling, the (then current equivalent) main residence exemption may be available to the beneficiary, if the dwelling is the main residence of the beneficiary.

8.         Draft Taxation Ruling TR 2004/D25Income 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 (TR 2004/D25), which sets out the Commissioner's preliminary though considered view of the meaning of the words 'absolutely entitled to a CGT asset as against the Trustee of a trust' for CGT purposes, includes the following at paragraphs 2 and 10:

2. Broadly, an absolutely entitled beneficiary (rather than the trustee) is treated as the relevant taxpayer in respect of the asset for the purposes of the capital gains tax (CGT) provisions.

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

9.         TR 2004/D25 further states in paragraphs 134 and 135:

Unit Trusts

134. Even though a unit holder in a unit trust may, depending on the terms of the Trust, have an interest in the property of the Trust (see Charles v. FCT (1954) 90 CLR 598) they are not subject to the treatment that otherwise applies to a person who is absolutely entitled to any asset of the Trust for CGT purposes. This is because the scheme of the CGT provisions is to treat the units in the Trust as the relevant asset rather than any interest the unit holder might have in the underlying property of the Trust (see Taxation Determination TD 2000/32). Therefore the concept of absolute entitlement is not relevant to the holder of a unit in a unit trust in respect of the assets of the Trust. It is for this reason that this Ruling does not apply to them.

Unit trusts: alternative view

135. The alternative view is that a unit holder can be absolutely entitled...would be contrary to the general scheme of the CGT provisions as it could result in a beneficiary holding two assets for CGT purposes (the units and the underlying trust asset) which represent the one thing. The statutory scheme is to treat that interest as being represented by the units on the basis that the units are also assets and, importantly, assets that are traded and that are treated as discrete investment vehicles. It is noted that section 108-5 of the ITAA 1997 specifically identifies units in a unit trust as examples of CGT assets.

10.      As established above, it is the unit in a unit trust that is the relevant CGT asset, and not the underlying asset.

11.      Also as above, it would be highly unusual for a unit trust to allow absolute entitlement. However, for the sake of completeness, consideration has been given to the Trust Deed, clause X of which states:

Each Unit shall entitle the registered holder thereof together with the registered holders of all other Units to the beneficial interest in the Trust Fund as an entirety but subject thereto shall not entitle a Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof and no Unit Holder shall be entitled to the transfer to him of any property comprised in the Trust Fund.

12.      Thus, by the operation of Clause X of the Trust Deed, the Taxpayer does not hold absolute entitlement to the Property, or to any particular security or investment, comprised in the Trust fund. No other clause of the Trust Deed is relevant.

13.      No resolutions by the Company as trustee for the Trust have been provided which evidence the absolute entitlement of The Taxpayer to the Property.

14.      Thus, there is no evidence of the Trust Deed operating in this way to give absolute entitlement to The Taxpayer.

15.      The scheme of the ITAA 1997 and the Income Tax Assessment Act 1936 is to treat a unit as the relevant asset for capital gains purposes, rather than any asset of the Trust, even if the unit holder has an interest in the Trust property at general law (see Taxation Determination TD 2000/32). That is, the holder of units in a unit trust is not subject to the general treatment that applies to a trust beneficiary who is absolutely entitled for CGT purposes to the assets of a trust. Note 1 to section 108-5 specifically identifies units in a unit trust as examples of CGT assets.

16.      Tax Determination TD2000/32 confirms that the unit in the unit trust is the relevant CGT asset irrespective of any interest the unit holder has in the property of the unit trust.

17.      As The Taxpayer did not own the Property, nor were they absolutely entitled to the Property when it was held by the Company as trustee for the Trust, thus The Taxpayer is not eligible for the main residence exemption in relation to the gain realised by the Trust on disposal in the year ended 30 June 20XX of the Property.