Private ruling: Main residence exemption
Date of advice: 5 December 2023
Published: 22 January 2024
Ruling period: Year ended 30 June 2023
Date scheme commenced: 1 July 2022

Ruling: Q1: Is a main residence exemption allowed under section 118-110 of the Income Tax Assessment Act 1997 to disregard the capital gain made on the sale of Property Z? | A1: No.

Relevant facts and circumstances: X passed away several decades ago. Their will left Property A to their spouse Y, with the residue of their estate to be held on trust for the income to be paid to Y for life, with their child (you) being given the remainder interest. Property A was transferred to Y. During the subsequent period until 19XX, Y sold their existing home and purchased a new home a few times. Y also remarried. In 19XX, Y and their spouse acquired Property B to be their new home. Property B was purchased in your name as some additional funds were required, which were sourced from the funds of X's estate (the 'estate funds') that were being managed by a trustee. Property B was acquired using the proceeds from the sale of Y's previous home and the estate funds. The residue of X's estate was all used on Property B. Prior to this, the estate funds had been invested by the trustee to provide an income for Y. As you were the remainder beneficiary of X's estate, the trustee required that your name be placed on the title of any assets purchased with the use of the estate funds so they were following the terms of the estate. The trustee ceased managing the estate in 19XX when the estate funds were used for Property B. During the next decade, Y moved homes a few times. Each time the existing home was sold and the sale proceeds were used to acquire the new home which was purchased in your name. The last of these homes was Property Z. Y resided in Property Z until they moved into aged care a few years ago. After Y went into care, you gained joint financial power of attorney for them with the Public Trustee. Property Z was then rented out to pay for Y's care. Property Z was later sold as the costs of maintaining the property were increasing. All the sale proceeds are being held in an interest bearing account in your name with the interest being put towards paying for Y's care. The sale proceeds will be held this way indefinitely until Y passes away. On Y's death all of the sale proceeds will go to you. Under Y's will, you are the sole beneficiary as Y's spouse has passed away. Y did not own any property during the period you held the title to Property Z.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 section 118-110

Reasons for decision: Summary: CGT event A1 happens under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. Section 118-110 of the ITAA 1997 provides a CGT exemption for any capital gain or loss you make from a CGT event that happens to a dwelling or your ownership interest in it if you are an individual and the dwelling was your main residence throughout your ownership period. In your private ruling application, it was contended that although you were the legal owner of Property Z, you held the property in trust for Y who was absolutely entitled to the property and consequently section 106-50 of the ITAA 1997 applied to treat them as being the owner for CGT purposes. Therefore, it was contended that as Y was treated as the owner of the property for CGT purposes and it had been their main residence, a main residence exemption under section 118-110 of the ITAA 1997 is allowable in relation to the sale of the property. 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 concept of absolute entitlement is based on the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282. This rule states that if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustee to transfer the trust property to them. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it. It is only possible for a beneficiary to be absolutely entitled to a trust asset if no one else has an interest in the asset. In your case, you had a remainder interest in the part of the property that was funded by the residue of X's estate and therefore Y was not absolutely entitled to the property. Consequently, section 106-50 of the ITAA 1997 cannot apply to treat Y as the owner of the property for CGT purposes. As a result, a main residence exemption under section 118-110 of the ITAA 1997 is not allowable in relation to the sale of the property. We acknowledge that the property was acquired using funds sourced from both Y and the residue of X's estate which Y had a life interest in, and that the property had been Y's main residence. However, as Y was neither the owner of the property or absolutely entitled to it, the requirements for a main residence exemption to be allowed under section 118-110 of the ITAA 1997 are not met.