Edited version of private advice

Authorisation Number: 1052248873876

Date of advice: 8 May 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Will the capital gain expected to be derived on sale of the Dwelling be disregarded under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

If the Dwelling is not sold prior to the consent orders being made, will the capital gain expected to be derived on transfer of B's beneficial interest in the Dwelling to their spouse qualify for CGT roll-over under section 126-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 2024

Income year ending 30 June 2025

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

1.      A entered into a contract to purchase a residential dwelling (Dwelling).

2.      A entered into this transaction at the request of B.

3.      While the Dwelling is registered in A's name, the Dwelling has always been treated as B's.

4.      B obtained a loan to purchase the Dwelling. The loan has been repaid.

5.      A did not incur any expenses in relation to the ownership or maintenance of the Dwelling.

6.      A has never lived in the Dwelling nor had any beneficial enjoyment of the Dwelling.

7.      Some years later, A and B documented the arrangement that has existed at all times since the acquisition of the Dwelling by entering into a Trust Deed.

8.      The Trust Deed provides that A (as Trustee) must hold the Dwelling on behalf of B (the Beneficiary) absolutely and only deal with or transfer the Dwelling where directed by the Beneficiary.

9.      Since acquiring the Dwelling, B has paid all rates, taxes and maintenance costs in relation to the Dwelling and attended to its upkeep.

10.   B and their spouse have resided in the Dwelling since its acquisition.

11.   B and their spouse recently separated and there is no prospect of cohabitation being resumed.

12.   B still resides in the Dwelling.

13.   B and their spouse are now seeking a divorce and it is envisaged that consent orders will be provided under the Family Law Act 1975 to govern the division of property and financial resources between the parties.

14.   The Dwelling may be sold prior to the consent orders being finalised.

15.   A will not benefit from any sale of the Dwelling.

16.   If the Dwelling is not sold prior to finalisation of the consent orders, it is proposed that B's beneficial interest in the Dwelling will be transferred to their spouse under the consent orders.

17.   The Dwelling has never been used for the purpose of producing assessable income.

18.   A has not received any rental income from the Dwelling.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 106-50 of the Income Tax Assessment Act 1997

Section 118-110 of the Income Tax Assessment Act 1997

Section 118-115 of the Income Tax Assessment Act 1997

Section 118-130 of the Income Tax Assessment Act 1997

Section 126-5 of the Income Tax Assessment Act 1997

Reasons for decision

Subsection 118-110(1) of the ITAA 1997 states that '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'.

Subsection 118-110(2) of the ITAA 1997 provides that CGT event A1 is a relevant CGT event for section 118-110 of the ITAA 1997.

Relevantly, subsection 118-115(1) of the ITAA 1997 provides that a dwelling includes a unit of accommodation that is a building or is contained in a building and consists wholly or mainly of residential accommodation, and the land immediately under the unit of accommodation.

The meaning of 'ownership period' is provided in section 118-125 of the ITAA 1997 which states that 'your ownership period of a dwelling is the period on or after 20 September 1985 when you had an ownership interest in:

(a)    the dwelling; or

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

Relevantly, subsection 118-130(1) of the ITAA 1997 provides that 'you have an ownership interest in land or a dwelling 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...'.

Subsection 104-10(1) of the ITAA 1997 states that 'CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that 'you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner'.

In Ellison & Anor v Sandini Pty Ltd & Ors; FC of T v Sandini Pty Ltd & Ors [2018] FCAFC 44, Jagot J stated, the following about the meaning of 'beneficial owner' for the purposes of section 104-10 of the ITAA 1997:

... a "beneficial owner" of an asset has more than a mere proprietary interest in the asset. To be a beneficial owner the person must have rights which a court of equity would enforce involving full dominion over the asset... (at paragraph 99)

In the current circumstances, A purchased the Dwelling at the request of B who funded the purchase of the Dwelling. At all times since the acquisition of the Dwelling, A (the legal owner) has held the Dwelling on trust for the benefit of B.

Generally, where a CGT event happens to a CGT asset held on trust, the CGT event happens to the trustee of the trust (the legal owner). As such, where a trust disposes of a dwelling (CGT event) it owns, the main residence exemption will not apply to any capital gain or loss as a trust is not an individual. However, where a dwelling is held on trust, and there is a beneficiary that is absolutely entitled to the dwelling (CGT asset) as against the trustee of a trust, the main residence exemption in section 118-110 of the ITAA 1997 may apply.

Subsection 106-50(1) of the ITAA 1997 states that '... from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust)'. Subsection 106-50(2) of the ITAA 1997 treats an act done in relation to the asset by the trustee as an act done by the absolutely entitled beneficiary.

Draft 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 states that '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 ...'. (paragraph 10)

Under the arrangement, A purchased the Dwelling at the request of B using funds provided by B and has always held the dwelling beneficially for B who has resided at the property with their spouse. Since the time of acquisition A has held the property for B. The Trust Deed provides that A (as Trustee) must hold the Dwelling on behalf of B (the Beneficiary) absolutely and only deal with or transfer the Dwelling where directed by the Beneficiary.

B is the sole beneficiary of the trust who has all of the interest in the trust property (Dwelling) and can call on the trustee (A) to deal with the trust property as they direct. As such, B is an absolutely entitled beneficiary as against the trustee of the trust and section 106-50 of the ITAA 1997 will apply to treat acts done by the trustee (A) in relation to the CGT asset (the Dwelling) as acts done by the absolutely entitled beneficiary (B). B will be responsible for any capital gain or loss resulting from a disposal of the Dwelling.

In the event that the Dwelling is sold to a third party prior to consent orders being provided under the Family Law Act 1975, B will be able to apply the main residence exemption in section 118-110 of the ITAA 1997 to any gain or loss made from its sale (CGT event A1). B is an individual who has an ownership interest in the Dwelling (paragraph 118-110(1)(a) of the ITAA 1997), they have resided in the Dwelling since it was acquired; it has been B's main residence throughout their ownership period (paragraph 118-110(1)(b) of the ITAA 1997), and B's interest was not acquired from a deceased estate (paragraph 118-110(1)(c) of the ITAA 1997). Further, the Dwelling has not been used to produce assessable income (see section 118-190 of the ITAA 1997).

B can disregard the whole of any capital gain or loss.

Question 2

Summary

Detailed reasoning

Relevantly, subsection 126-5(1) of the ITAA 1997 states that 'there is a rollover if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee) because of:

(a)    a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationship between spouses...'

Subsection 126-5(2) of the ITAA 1997 provides that CGT event A1 is a relevant CGT event for section 126-5.

Subsection 126-5(4) of the ITAA 1997 states that 'a capital gain or a capital loss the transferor makes from the CGT event is disregarded'.

Taxation Determination TD 1999/47 Income tax: capital gains: is there a roll-over under section 126-5 or 126-15 of the Income Tax Assessment Act 1997 if a CGT event happens because of a court order under the Family Law Act 1975 made by consent? provides that 'an order made by consent is a 'court order' in terms of paragraphs 126-5(1)(a) and 126-15(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997). If a CGT event happens because of a consent order under the Family Law Act 1975, there is a roll-over under section 126-5 or 126-15 of the ITAA 1997'.

As discussed in question 1, section 106-50 of the ITAA 1997 will apply to treat acts done by the trustee (A) in relation to the CGT asset (the Dwelling) as acts done by the absolutely entitled beneficiary (B), and B will be responsible for any capital gain or loss arising from a CGT event that happens to the Dwelling.

In the event that the Dwelling is not sold and consent orders are made under the Family Law Act 1975 that require B to transfer their beneficial interest in the Dwelling to their spouse, CGT event A1 will happen in respect of the Dwelling as the beneficial ownership of the Dwelling will transfer from B to their spouse. As consent orders under the Family Law Act 1975 are a court order, section 126-5 of the ITAA 1997 will apply and there will be a roll-over.

Any capital gain or capital loss can be disregarded by B.