Private ruling: Main residence exemption
Date of advice: 25 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a main residence exemption on the sale of the property? | A1: No. | Q2: Are you entitled to a partial main residence exemption on the sale of the property? | A2: Yes.

Relevant facts and circumstances: In the early 19AA’s your parents were experiencing severe financial hardship. A relative suffered a stroke in 19AA, which resulted in their entering a nursing home and the subsequent sale of their main residence. Your relative agreed to acquire the property in mid 19BB for you and your parents to reside in rent free. The property was paid for by your relative with the proceeds of the sale of their residence. On legal advice the legal title was kept in your relative’s name and no life tenancy was provided. This was due to ongoing financial issues being experienced by your parent. At the time the property was acquired both you and your sibling were under age and attending school. You and your parents treated the property as your family home and did not own any other property at this time. Your parents were responsible for paying for all costs associated with the running and upkeep of the property, including rates, utilities, maintenance, etc. Your sibling moved out of the property in late 19DD. Your relative passed away in 20WW and left the property to you and your sibling in their will. You moved out of the property in 20VV and acquired a new residence in 20XX. Your parents continued to reside in the property on a rent free basis after your relative’s passing and continued to meet all costs associated with the running and upkeep of the property. A parent passed away in early 20YY. Your other parent continued to reside in the property on the same basis as before. Your living parent has recently relocated to be closer to family. The property was sold in late 20ZZ with settlement occurring in late 20ZZ.

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 118-195 | Income Tax Assessment Act 1997 – Section 118-200 | Income Tax Assessment Act 1997 – Section 128-20

Reasons for decision: Summary: You are not eligible for the full main residence exemption under section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997). However, under section 118-200 of the ITAA 1997 you are eligible for a partial exemption. | Detailed Reasoning - Reasons for decision: CGT event A1 happens if you dispose of a CGT asset as per subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). 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. | Detailed Reasoning - Beneficial Ownership: In the absence of information to the contrary, a property is considered to be legally and beneficially owned by the person/s registered on the title. It is possible for the legal ownership to differ from the 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. The creation of a trust falls within the jurisdiction of equity. According to G. Teh and B. Dwyer, Introduction to Property Law , at paragraph 606: A trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary. There may be various kinds of trust: express, constructive, resulting or implied and bare. | Detailed Reasoning - Express Trusts: An express trust is one intentionally created by the owner of property in order 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 it is necessary that 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. Therefore express trusts must be evidenced in writing. | 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. Therefore for a finding that a constructive trust exists, there must be an existing court order to that effect. | Detailed Reasoning - Resulting or Implied Trusts: A resulting trust, sometimes referred to as an implied trust, is a trust that 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 and retains legal title to it, it is not possible to infer that the property is held on trust for another, as both the legal and beneficial interests remain with the purchaser. | Detailed Reasoning - Bare Trusts: A trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of the legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiary or at their direction (see Herdegen & Anor v. Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271). However it is not the existence of a bare trust that is the crucial concept. It is the establishment of absolute entitlement to the asset by the beneficiary as against the trustee. 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. Generally, if there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to be absolutely entitled to it, unless the asset is fungible. Land is not considered to be a fungible asset. | Detailed Reasoning - Main Residence Exemption: Generally, you ignore a capital gain or capital loss from a CGT event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: ● the dwelling must have been your home for the whole period you owned it ● you must not have used the dwelling to produce assessable income, and ● any land on which the dwelling is situated must be two hectares or less. Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where a property has passed to a beneficiary from a deceased estate any capital gain or capital loss made from a CGT event that happens in relation to the property is disregarded if: ● the deceased acquired the property on or after 20 September 1985, and ● the property was the main residence of the deceased before their death, ● the property was not being used for income producing purposes, and ● the beneficiary has disposed of their ownership interest within two years of the deceased’s death. | Detailed Reasoning - Partial main residence exemption: Section 118-200 of the ITAA 1997 provides that a partial main residence exemption is available if: ● you are an individual and your ownership interest in a property passed to you as a beneficiary of a deceased estate, and ● section 118-195 of the ITAA 1997 does not apply The partial exemption is calculated using the following formula: capital gain or capital loss amount x non main residence exemption days total days The non main residence days are the sum of: ● the number of days in the deceased’s ownership period when the property was not the deceased’s main residence; and ● the number of days in the period from the deceased death until your ownership interest ends when the property was not your main residence. | Detailed Reasoning - Application to your circumstances: In this instance it is clear from the evidence provided that there is no express or constructive trust over the property. Your relative provided the funds used to purchase the property for your parents to reside in. Therefore a resulting or implied trust cannot exist. You believe that there was a bare trust arrangement in place over the property between your relative and your parents, that carried over to you and your sibling upon your relative’s passing. As land is not a fungible asset and there is more than one potential beneficiary there can be no absolute entitlement in this case. For this reason they would not have had beneficial ownership due to them not having a vested and indefeasible interest. Having examined the facts of your case we find that there is no trust relationship in your situation. Your relative acquired the property for your family to live in rent free. This was due to ongoing financial issues being experienced by your parent. We consider that your relative held both legal and beneficial ownership of the property. This ownership passed to you when they died and the property was left to you and your sibling as beneficiaries. Given that the property was not your relative’s main residence section 118-195 of the ITAA 1997 will not apply and you are not entitled to a full main residence exemption. However, you are entitled to a partial exemption given that you were residing in the property when your ownership interest began. While you have moved out in 20XX, you didn’t purchase your own main residence until 20YY. Given that the property was not being used to produce assessable income you would be eligible for a partial exemption for the time between receiving your ownership interest and purchasing your main residence so long as you had no other main residence in that time.