Edited version of private advice

Authorisation Number: 1052324546721

Date of advice: 30 January 2025

Ruling

Subject: Absolutely entitled beneficiary

Question 1

At all relevant times (including at the time of the proposed disposal of the Property) was P1 absolutely entitled to the Property such that the Property was treated as being P1's asset for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

Question 2

If the answer to question 1 is yes, is P1 entitled to disregard the capital gain made on the disposal of the Property under section 118-110 of the ITAA 1997 as it was their main residence for their entire ownership period?

Answer 2

Yes.

Question 3

Will P2 have a CGT A1 event under Division 104 of the ITAA 1997 on the proposed disposal of the Property in respect of their interest?

Answer 3

No.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

P1 wanted to buy the Property but needed to take a mortgage to finance the purchase.

P2 provided security to enable P1 to get finance to purchase the Property.

P2 obtained an interest in the Property.

It was agreed by P1 and P2 that P2 holds their interest on trust for P1 (the Trust), and that P1 would pay all out goings related to the Property and this is proved in writing.

P1 resides at the Property.

P1 intends to sell the Property.

Relevant legislative provisions

Conveyancing Act 1919 (NSW) section 23C

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 section 118-115

Income Tax Assessment Act 1997 section 118-125

Income Tax Assessment Act 1997 section 118-130

Reasons for decision

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 (TR 2004/D25) states the following about when a beneficiary is absolutely entitled as against a trustee:

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 ...

74.          A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

75.          Also, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event...

76.          A beneficiary is a sole beneficiary in respect of a trust asset if no other beneficiary has an interest in the asset...

77.          Because a sole beneficiary in respect of an asset has the totality of the beneficial interests in the asset, they automatically satisfy the requirement ... that their interest in the asset be vested in possession and indefeasible. Therefore, a sole beneficiary in respect of a trust asset will be absolutely entitled to the asset as against the trustee if the beneficiary can (ignoring any legal disability) terminate the trust in respect of the asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

Subsection 23C (1) of the Conveyancing Act 1919 (NSW) states:

Subject to the provisions of this Act with respect to the creation of interests in land by parol -

(a)           no interest in land can be created or disposed of except by writing signed by the person creating or conveying the same, or by the person's agent thereunto lawfully authorised in writing, or by will, or by operation of law,

(b)           a declaration of trust respecting any land or any interest therein must be manifested and proved by some writing signed by some person who is able to declare such trust or by the person's will,

(c)           a disposition of an equitable interest or trust subsisting at the time of disposition, must be in writing signed by the person disposing of the same or by the person's will, or by the person's agent thereunto lawfully authorised in writing.

Subsection 23C (2) of the Conveyancing Act 1919 (NSW) states 'this section does not affect the creation or operation of resulting, implied, or constructive trusts'.

Under the arrangement, P2 provided security to enable P1 get finance to purchase the Property, and obtained an interest in the Property (the remaining 75% interest was held by P1). It was understood and agreed between P1 and P2 that P2 held their interest in the Property on trust for P1, and that P1 would be entirely responsible for all outgoings relating to the Property.

Under the trust, P1 is the sole beneficiary entitled to the trust asset (P2's interest in the Property). P1's interest in the trust asset is vested in possession and indefeasible and they could call on the trustee (P2) to transfer the trust asset at their direction. There is nothing in the arrangement that would enable the trustee to resist the beneficiary's call.

TR 2004/ D25 provides that the fact there is a mortgage, encumbrance or other charge over the asset in favour of a third party does not of itself prevent a beneficiary being absolutely entitled to the asset as against the trustee (paragraph 17). The existence of such a charge does not prevent the trustee from stepping aside and, for example, transferring the asset to the beneficiary subject to the charge. The charge does not affect the beneficiary's relationship with the trustee (paragraph 62).

In the present case, P2 will transfer their interest in the Property at P1's direction at the time of the proposed sale.

P1 is absolutely entitled to the trust asset as against the trustee (P2), and section 106-50 of the ITAA 1997 will apply to treat the trust asset (CGT asset) as P1's asset. Any acts done by the trustee (P2) in relation to the trust asset will be treated as acts done by the absolutely entitled beneficiary (P1).

Question 2

Detailed reasoning

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.

Subsection 118-115(1) of the ITAA 1997 provides that a dwelling includes:

(a)           a unit of accommodation that

(i)            is a building or is contained in a building; and

(ii)           consists wholly or mainly of residential accommodation; and

(b)           ...

(c)           any 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.

P1 will be able to apply the main residence exemption in section 118-110 of the ITAA 1997 to any gain or loss made from the sale of the Property (CGT event A1). P1 is an individual who has an ownership interest in the whole of the Property (paragraph 118-110(1)(a)), the Property has been their main residence throughout their ownership period (paragraph 118-110(1)(b)), and their interest was not acquired from a deceased estate (paragraph 118-110(1)(c)). Further, the Property has not been used to produce assessable income (see section 118-190 of the ITAA 1997).

P1 can disregard the whole of any capital gain or loss.

Question 3

Detailed reasoning

As discussed in question 1, section 106-50 of the ITAA 1997 will apply to treat acts done by the trustee (P2) in relation to the CGT asset (trust asset) as acts done by the absolutely entitled beneficiary (P1).

As such, no CGT event under Division 104 of the ITAA 1997 will happen to P2 when the Property is sold.