Private ruling: CGT - main residence - trust - multiple beneficiaries - disposal
Published: February 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Can the main residence exemption apply to the property held in trust? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-30 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 106-50.

Reasons for decision: Summary: When considering the sale of the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the property. In absence to the contrary, the property is considered to be owned by person(s) registered on the title. It is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner. Trusts may be of three kinds: constructive, resulting or express. There are extremely limited circumstances where the legal and equitable interests are not the same, and there is sufficient evidence to establish that the equitable interest is different from the legal title. Where individuals are related, for example parent and child, we generally consider that the equitable right is exactly the same as the legal title. | Detailed Reasoning - Constructive Trusts: A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act. For a constructive trust to exist there needs to be a court order. In your case, no constructive trust exists. | Detailed Reasoning - Express Trusts: An express trust is one intentionally created by the owner of property to confer a benefit upon another. It is created by express declaration, which can be effected by some agreement or common intention held by the parties to the trust. For an express trust to be created there is certainty of the intention to create a trust, certainty of the subject matter of the trust and certainty as to the object of the trust. While trusts can be created orally, all State Property Law Acts contain provisions derived from the Statute of Frauds that preclude the creation or transfer of interests in land except if evidenced in writing. However, the absence of writing does not make the declaration of trust over land void, but merely unenforceable. If the trust is evidenced by writing, the writing need not be contemporaneous with the transaction that created the trust but may be brought into existence after the transaction. In your case, there is a trust deed detailing that an express trust was created. | Detailed Reasoning - Resulting Trusts: A resulting trust, sometimes called an implied trust, arises by operation of law in favour of the creator of some prior trust or other interest in certain circumstances. Those circumstances fall into two broad classifications: · cases in which a settlor fails to completely dispose of the beneficial interest, or where a surplus arises after the original purpose of a trust has been satisfied or has ceased to exist; and · cases in which someone purchases property in the name of another. A trust is presumed in favour of the party providing the purchase money. Where an individual purchases and pays for a property but legal title is transferred to another person at their direction, if that person is a stranger, the presumption of resulting trust arises and the property is held in trust for them. However where the property is transferred to the taxpayer's immediate family, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie intended to advance the interests of the family members (that is, an absolute gift). The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests unless they can rebut the presumption of advancement. | Detailed Reasoning - Multiple Beneficiaries: The core principal underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. However, if there is some basis upon which the trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust. Paragraph 24 of Taxation Ruling 2004/D25 (TR 2004/D25) advises that there is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where: · the assets are fungible; · the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and · there is a very clear understanding of the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. Paragraph 54 of TR 2004/D25 states the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset, such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it. In your situation, the capital gains tax (CGT) asset is the land which is a non-fungible asset and as such, individual beneficiaries do not have absolute entitlement to the property that was held in trust for them. | Detailed Reasoning - Capital gains on disposal: When the disposal of the CGT asset happens, CGT event A1 is triggered. As the beneficiaries are not absolutely entitled to the property, the disposal is not considered to be a disposal by you, it is a disposal by your children, as trustee. As a trustee, they will make a capital gain when the property is sold.

Relevant facts: You and your spouse purchased a block of land after 20 September 1985 for an amount. | You transferred title to a number of your children. | You and your spouse created a trust by deed and transferred ownership of the land to this trust for asset protection purposes. | Your children are trustees of the trust. | A home was built on the land. | The total costs of construction was an amount | You have obtained a recent valuation which values the dwelling at X | You and your spouse have resided in the dwelling since completion. | A number of your children have resided in the dwelling for periods. | You will sell the dwelling prior to 30 June 2016 and you will make a capital gain.