Edited version of private advice

Authorisation Number: 1052173965896

Date of advice: 9 October 2023

Ruling

Subject: CGT - main residence exemption - trust

Question

Is any capital gain or loss you make due to the disposal of the Property disregarded?

Answer

No.

This private ruling applies for the following period:

Year ending XX June 20XX.

The scheme commenced on:

X July 20XX.

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased passed away on XX April 20XX.

Probate was granted to the Executors on X June 20XX.

The following is stated in the deceased's will:

AND FOURTHLY I direct my Trustee to purchase another residence or residences and to permit my child (X) and X's children to reside therein during the life of my child, on payment of rates, insurance, and the cost of keeping the residence in good repair.

The Estate purchased the Property for X and their children to reside in, and the Executors names are listed on the title.

The Property is situated on less than 2 hectares of land.

X and their children began residing in the Property at purchase on or around X June 20XX.

X passed away in February 20XX and since their death, their children have remained residing in the Property.

One the children now wishes to purchase their sibling's interest in the Property. The disposal to that child will be completed during the year ending XX June 20XX.

Relevant legislative provisions

Income Tax Assessment Act section 102-20

Income Tax Assessment Act section 104-10

Income Tax Assessment Act section 118-110

Income Tax Assessment Act section 118-210

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The dwelling is a CGT asset. Its sale is a CGT event under section 104-10 of the ITAA 1997.

Main residence exemption - normal case

Under section 118-110 of the ITAA 1997 you can disregard a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling or your ownership interest in it if all of the following conditions apply:

•         you are an individual

•         the property is less than two hectares

•         the dwelling was your main residence throughout your ownership period, and

•         the ownership interest did not pass to you through a trust or a deceased estate.

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 case

In your case, the trust owns the property, and the beneficiaries who occupy it are not absolutely entitled to it, so they are not deemed to own it for CGT purposes. Therefore, the general main residence exemption under section 118-110 of the ITAA 1997 does not apply.

Main residence exemption - dwelling acquired by Estate

However, section 118-210 of the ITAA 1997 may apply if you are the trustee of a deceased estate and under the deceased's will, you acquire an ownership interest in a dwelling for occupation by an individual.

One of the conditions for this exemption to apply is that the dwelling is purchased in accordance with the deceased's will.

Subsection 118-210(3) of the ITAA 1997 provides that if the trustee receives money or property from a CGT event happening to such a dwelling, the trustee does not make a capital gain or capital loss if the dwelling was the main residence of the individual from the time the trustee acquired an ownership interest in it until the time of the event.

Application to your circumstances

Having considered the circumstances of your case, it is accepted that the Property was acquired under the will of the deceased. The ownership interest in the Property was acquired by the trust for occupation by those specified in the will of the deceased, being:

AND FOURTHLY I direct my Trustee to purchase another residence or residences and to permit my child (X) and X's children to reside therein during the life of my child, on payment of rates, insurance, and the cost of keeping the residence in good repair.

The right to occupy only applies until the date X passed away, but the trust continued to own the Property beyond that date. Therefore, from the time the ownership interest was acquired in the Property, to the date of death of X in February 20XX, the exemption under section 118-210 of the ITAA 1997 applies. The exemption under section 118-210 is not applicable at any time after the date of X's death. The conditions for the full exemption provided by subsection 118-210(3) are not satisfied because the dwelling was not the main residence of X from the time the Property was required until the time that the CGT event occurs.

Subsection 118-210(4) provides that if the dwelling was the main residence of the individual during part only of that period, the Estate makes a capital gain (CG), or capital loss (CL), worked out using the formula:

CG or CL amount × non-main residence days ÷ Days in that period

The Estate will therefore be entitled to a partial exemption under section 118-210(4). The Estate will be required to calculate any capital gain it makes on the disposal of the Property, having regard to the number of days that the property was not X's main residence (that is, from the date of their death until the time the CGT event occurs).