Edited version of private advice

Authorisation Number: 1052346260793

Date of advice: 31 January 2025

Ruling

Subject: CGT - rental income

Issue 1

Question 1

Whether all of the rental income derived from the properties owned by Company A and Company D as trustee for the Family Trust as tenants in common in unequal shares is derived by the Family Trust for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of determining the Family Trust's net income under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes. It is accepted that the Family Trust derives the rental income in its entirety such that it represents assessable income under section 6-5 of the ITAA 1997 for the purpose of determining the Family Trust's net income under section 95 of the ITAA 1936.

Question 2

If the answer to question 1 is yes, whether the expenses incurred by the Family Trust in deriving that rental income is deductible under section 8-1 of the ITAA 1997 for the purposes of determining the Family Trust's net income under section 95 of the ITAA 1936?

Answer 2

Yes. As the Family Trust derives the rental income, the outgoings which are on revenue account and which are incurred by the Family Trust are deductible under section 8-1 of the ITAA 1997 for the purposes of determining the Family Trust's net income under section 95 of the ITAA 1936.

Issue 2

Question 1

Whether the capital gain or loss under Part 3-1 of the ITAA 1997 resulting from the disposal of a property is a capital gain derived, or a capital loss incurred, by Company A and the Family Trust in the proportions of XX% and XX% respectively?

Answer 1

Yes, CGT event A1 will occur when a contract is entered into for the sale of each property. The resulting capital gain or capital loss will be calculated per the rules in Part 3-1 of the ITAA 1997 and assessable to Company A and assessable to the Family Trust in accordance with their respective interests of XX% and XX%.

This ruling applies for the following period:

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.              Person X died in March 20XX. He was an Australian citizen and resident of Australia for tax purposes at the time of his death.

2.              The Estate of Person X (the Estate) included the following assets:

•                shares in Company A

•                shares in Company B

•                Properties consisting of:

°                Property 1 being a retail shop

°                Property 2 being a retail shop including 2 car parking spaces

°                Property 3 being 2 residential car parking spaces

3.              Company B held redeemable preference shares in Company A.

4.              The Will of Person X bequeathed his Estate to Company D as Trustee for the Family Trust.

5.              On XX July 19XX, The Family Trust was established by deed with Company D as corporate trustee.

6.              Company A held a XX% interest and Person X held a XX% interest respectively in the Properties as tenants in common.

7.              Following the completion of the administration of the Estate, the shares in Company A and Company B were transferred to the Family Trust.

8.              Company B redeemed the redeemable preference shares held by Company A for a consideration of $XX.

9.              On XX March 20XX, Company A was deregistered by the Australian Securities and Investments Commission (ASIC) on the company's application.

10.          The sole shareholder of Company A was then the Family Trust.

11.          On XX May 20XX, the XX% interest in the properties held by Person X was transferred to the Family Trust pursuant to the Will.

Lodgment of income tax returns by company

12.          The directors understood from the accountant Company A will not derive income and not be required to lodge an income tax return. Email correspondence between the accountant and Company A's director advised that Company A would not be required to lodge income tax returns from the income tax year ending 30 June 20XX.

13.          Company A has not lodged income tax returns since the income tax year ending 30 June 20XX. The last tax return was labelled as 'final return'.

14.          On XX April 20XX, the Tax Advisor for Company A contacted the Australian Taxation Office (ATO) in respect of the non-lodgment of income tax returns since the income tax year ending 30 June 20XX. The Tax Advisor was advised to let the ATO know when the property was sold and then the registration of Company A would be reinstated.

15.          The properties in which Company A has a XX% interest are now being offered for sale.

Leases of 3 properties

16.          The Family Trust owns XX% and Company A owns XX% of the properties.

17.          The shares in Company A are owned by the Family Trust.

18.          The Family Trust is directly and indirectly the owner of the properties.

19.          On XX June 20XX by resolution, the directors of both Company A and the Family Trust made the following agreement: Company D (as trustee) will pay all expenses and collect all income.

20.          The rental payments were made to the Family Trust. All leases were so far as possible in the name of the corporate trustee as Lessor. Due to difficulties and misunderstandings of the Land Titles Office, requirements for registration of leases, some leases were recorded in the name of Company A and Company D. Company D and its solicitors sought to correct the Land Titles Office where possible. Details of the leases and corrections to the Land Titles Office have been provided.

The family trust - income tax returns

21.          Company D is the corporate trustee of the Family Trust.

22.          All income derived and expenditure incurred relating to the three properties were included in the Family Trust's income tax returns for the income tax year ended 30 June 20XX up to and including the income tax year ended 30 June 20XX.

23.          The net income of the Family Trust has been distributed each year to Person Y. Distributions have also been made to Person Y's spouse, in all years other than the 20XX and 20XX income tax years.

24.          The Family Trust has been registered for GST from 1 July 2000.

25.          The rental income derived is from commercial properties. BAS have been lodged quarterly by the Family Trust for all rental income received.

26.          Company A is not registered or required to register for GST because no rental income has been derived or received by the company.

27.          Company A was registered for GST from 1 July 20XX and the registration was cancelled on 30 June 20XX.

28.          The Family Trust has included GST input tax credits in respect of expenses charged in relation to the rental income and for which tax invoices addressed to the Family Trust.

Relevant legislative provisions

The Income Tax Assessment Act 1997 section 6-5

The Income Tax Assessment Act 1997 section 8-1

The Income Tax Assessment Act 1997 section 104

The Income Tax Assessment Act 1936 section 95