Edited version of private advice

Authorisation Number: 1052386725966

Date of advice: 17 April 2025

Ruling

Subject: Assessable income

Question 1

Are the payments Individual 1 makes to the Trust assessable income of the Trust on the basis the payments are considered to be payments of rent?

Answer 1

Yes.

Question 2

Does the Trust need to file a tax return?

Answer 2

Yes.

Question 3

Will Individual 1 be taken to be a person in control (significant individual) of the Trust?

Answer 3

The Commissioner declines to make a private ruling on this question because the scheme has not been fully considered by you.

Your formal review rights

If you are unhappy with this decision, you can apply to the Federal Court or the Federal Circuit Court of Australia for a review under the Administrative Decisions (Judicial Review) Act 1977 within 28 days of this decision. If you choose this option, we suggest you seek professional advice on how to proceed. You can find further information about this process and how to apply at ato.gov.au/external review.

Question 4

Will any CGT small business concessions apply to the property sale?

Answer 4

The Commissioner declines to make a private ruling on this question because the scheme has not been fully considered by you.

Your formal review rights

If you are unhappy with this decision, you can apply to the Federal Court or the Federal Circuit Court of Australia for a review under the Administrative Decisions (Judicial Review) Act 1977 within 28 days of this decision. If you choose this option, we suggest you seek professional advice on how to proceed. You can find further information about this process and how to apply at ato.gov.au/external review.

Question 5

Is the first element of the cost base of the property the market value at the date of transfer into the Trust?

Answer 5

Yes.

Question 6

Will the holding costs such as interest, rates, insurance and repairs be included in the cost base of the property when it is sold?

Answer 6

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust was established several years ago.

Individual 2 and Individual 3 are the trustees of the Trust.

Individual 2 is the sole named beneficiary of the discretionary trust.

Individual 1 is not a named beneficiary of the trust but is a general beneficiary in capacity as Individual 2's parent.

The parents of Individual 2, Individual 1 and Individual 4, entered into a settlement agreement in the Federal Circuit Court of Australia in relation to a matrimonial breakdown. The terms of the agreement included:

•                The parents would transfer ownership of their home to Individual 2 and Individual 3 in their capacity as trustees of the Trust, with the property to be held for and on behalf of, Individual 2.

•                The existing loan the parents had over the property was to be repaid, and the mortgage discharged

•                Individual 1 was to have the sole right to occupy the property.

Individual 2 and Individual 3 as Trustees for the Trust took out a bank loan to payout the loan that Individual 1 and Individual 4 had on the property.

The amount of the loan was the payout value of Individual 1 and Individual 4's mortgage, plus an amount to pay for some repairs to the property. The repayments at the time of taking out the loan were on a per month basis over a number of years.

It was a requirement by the lender that Individual 1 and the trustees enter a written lease in which Individual 1 was to pay the trustees for occupying the property.

The only money going into and out of the Trust has been the payments made by Individual 1 to the trust to cover the loan repayments, the loan repayments paid by the trustees, as well as the payment of certain property related invoices.

Since its establishment, the Trust has not filed a tax return as the trustees consider the payments made by Individual 1 to be loan repayments.

Despite not completing any tax returns, the trust has completed a trust resolution each year. In the first year it was resolved that any distributions would go to Individual 2.

Since that time, it has been resolved that any distributions from the trust would go to Individual 1.

Individual 1 has lived on the property since they and their former spouse purchased it. They are still residing on the property.

Individual 1 runs a number of small businesses on the property.

The following holding costs have been incurred by the trustees in relation to the property:

•                Interest

•                Rates

•                insurance and repairs

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 110-45

Income Tax Assessment Act 1997 section 112-20

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income.

Characteristics of ordinary income that have evolved from case law include receipts that:

•                are earned,

•                are expected,

•                are relied upon, and

•                have an element of periodicity, recurrence or regularity.

The Trust receives monthly lease payments from Individual 1 in relation to the property for her to live at the property and run their two small businesses from the property.

The regularity of the monthly lease payments indicates an income nature. The monthly payments are expected and relied upon.

The monthly lease payments have the major characteristics of ordinary income and the payments are assessable under subsection 6-5(2) of the ITAA 1997 to the Trust.

It therefore follows that the Trust is required to lodge a tax return.

The first element of the cost base of the property is its market value on the day it was transferred into the Trust.

The holding costs are not able to form part of the calculation for CGT because expenditure does not form part of the third element of the cost base to the extent that you have deducted or can deduct it.

In your case, the holding costs are an allowable deduction against the lease payments received by the Trust.