Edited version of private advice

Authorisation Number: 1052318299935

Date of advice: 29 October 2024

Ruling

Subject: CGT - main residence exemption

Question 1

Did capital gains tax (CGT) disposal event A1 happen to you on the sale of property 1?

Answer 1

No.

Question 2

Can you claim the capital gains tax (CGT) main residence exemption on the sale of property 1?

Answer 2

No.

Question 3

Did CGT disposal event A1 happen to you on the sale of property 2?

Answer 3

No.

Question 4

Can you claim the CGT main residence exemption on the sale of property 2?

Answer 4

No.

This ruling applies for the following periods:

Period ended 30 June 20XX

Period ended 30 June 20XX

Period ended 30 June 20XX

Period ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Trust 1

The Trustee for the Trust 1 purchased a property at XXX on XXX and settlement was completed on XXX.

You are the Trustee of Trust 1.

You lived in the XXX property for a period of time.

On XXX the XXX property was made available for rent.

On XXX, a contract for sale was entered into by the Trustee for the sale of the XXX property and settlement occurred on XXX.

The Trust deed specifies that the primary beneficiary is XXX and the secondary beneficiaries are the spouse and child of the primary beneficiary.

The Trust deed states that the capital of the trust is held on trust for any one or more of the beneficiaries in proportions that the trustee at its discretion decides.

Trust 2

The Trustee for Trust 2 purchased a property at XXX on XXX and settlement was completed on XXX.

XXX is the Trustee of Trust 2.

You lived at the XXX property commencing on XXX.

On XXX, a contract for sale was entered into by the Trustee for the sale of the XXX property and settlement occurred on XXX.

The Trust deed states that the General beneficiaries include the Specified beneficiary and the spouse, parents, siblings, children or grandchildren of the Specified beneficiary.

The Trust deed states that the Specified beneficiary is XXX and the additional general beneficiary is XXX.

The Trust deed states that capital of the trust is held on trust for any one or more of the beneficiaries at the discretion of the trustee.

You have a partner and a child.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

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

Income Tax Assessment Act 1997 subsection 960-100(2)

Income Tax Assessment Act 1997 subsection 960-100(3)

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

Summary

A property is considered to be owned by the person(s)/entity registered on the title. A trust cannot apply the main residence exemption as the entity making the capital gain must be an individual. You did not own the properties and during the period the trusts legally owned the properties, you were not absolutely entitled to them because the respective trust deeds did not give you a vested and indefeasible interest in the entire trust assets.

Detailed reasoning

A capital gain or capital loss may result if a CGT event happens to a CGT asset in which you have an ownership interest. CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose of your ownership interest in a CGT asset. You dispose of that interest if a change of ownership occurs from you to another entity.

Subsection 118-110(1) provides that a capital gain or capital loss from a CGT event 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 beneficiary in, and you did not acquire it as trustee of, the estate of a deceased person.

The ITAA 1997 recognises that a legal person can have a number of different capacities in which the person does things. In each of these capacities, the person is taken to be a different entity (subsection 960-100(3) of the ITAA 1997). The trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time (subsection 960-100(2) of the ITAA 1997).

However, if a provision of the ITAA 1997 refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity (subsection 960-100(4) of the ITAA 1997). Therefore, the reference in paragraph 118-110(1)(a) of the ITAA 1997 to an individual is a reference to an individual acting in their personal capacity only. It does not include an individual acting in the capacity of a trustee.

The issue of the main residence exemption being available to a company or trust is addressed in CGT Determination TD 58. The determination states that a family trust is not a natural person as required by the main residence exemption, therefore the exemption cannot be claimed. However, the addendum to TD 58 also states that where beneficiaries of a trust are absolutely entitled as against the trustee to the dwelling, an exemption may be available to the beneficiaries if the dwelling is the principal place of residence of the beneficiaries.

In most cases, legal ownership is determinative of who owns the CGT asset for income tax purposes, and in the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title.

However, in some cases actual ownership of an asset may be shown to lie with the beneficial owner instead of the legal owner. Where it can be shown that there is an absolute entitlement to a CGT asset, as evidenced by a trust agreement, then the beneficiary of the trust will be considered the beneficial owner of the CGT asset, and therefore the actual owner for the purposes of the CGT provisions within the ITAA 1997.

As a general rule, paragraph 71 of Taxation Ruling TR 2004/D25 states that because 'an object of a discretionary trust does not have an interest in the trust assets, they cannot be considered absolutely entitled to any of the trust assets prior to the exercise of the trustee's discretion in their favour.'

However, a beneficiary may be absolutely entitled to trust property if there is no other person with an interest in that property. Paragraph 10 of TR 2004/D25 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.'

Analysis

In your case, the XXX and XXX properties were owned by the respective family trusts and you were a beneficiary under the respective trust deeds. The trust deeds also specified that other family members were included as beneficiaries of the trusts. Therefore, there were other persons who held an interest in the assets of each trust.

Consequently, during the period for which the trust legally owned the properties, you were not absolutely entitled to the properties because the respective trust deeds did not give you a vested and indefeasible interest in the entire trust assets and did not allow for the assets to be transferred to you at your direction.

Therefore, CGT event A1 did not happen to you when the respective trusts disposed of the properties and you are not entitled to the main residence exemption as you did not have an ownership interest in the properties and were not absolutely entitled to the properties.

Instead, CGT event A1 happened to the respective trusts and the trusts are not entitled to the main residence exemption as they are not individuals.