Private ruling: Main residence exemption
Date of advice: 21 April 2026
Published: 13 July 2026
Ruling period: Year ending XX XXX 20XX
Date scheme commenced: XX XXX 20XX

Ruling: Q1: Does the main residence exemption under subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the capital gain arising from the sale of a dwelling held by trustees where you are the sole unit holder and sole beneficiary of the trust? | A1: No

Relevant facts and circumstances: On XX January 20XX, The XXX Trust (the Trust) was established under the Trust deed (the Deed). Item 3 of Schedule 1 of the Deed defines the Trustee as Company A (the Trustee). Item 4 of Schedule 1 of the Deed defines the Initial subscriber as Person A. Item 6 of Schedule 1 of the Deed defines Person A's Initial subscription as 1 unit. Clause X of the deed states that: Subject to any contrary rights of holders of Units of a class or special rights, restrictions orconditions attaching to the issue of particular Units as permitted by this Deed: (a) a Unit does not entitle the holder of the Unit to any particular asset comprised in, or any particular part of, the Trust Fund unless the Unitholder becomes so entitled by operation of a provision of this Deed; and (b) each Unit entitles a Unitholder equally with all other Unitholders to the beneficial interest in the Trust Fund as an entirety Clause X of the deed provides the trustee powers and discretions. Clause X of the deed states that: (a) To invest the same and deal with, manage, transpose, vary and realise such investments entirely as it thinks fit and with such powers in all respects as if the Trustee were the sole absolute owner thereof including, without limitation: (b) the acquisition, disposal, exchange, subdivision or development of real or personal property or any interest therein, including any form of intellectual property, chose-inaction or other proprietary right. Clause X of the deed states that: If at any time the Trust Fund comprises real or personal property or any interest in real or personal property, to: (a) manage, use, lease, sub-lease, licence, sub-licence or let the same or any part of the property on such terms as the Trustee thinks fit. (b) permit any Unitholder to have the use of the property with or without payment of rent or outgoings and on such other terms as the Trustee thinks fit. (h) pay for the general expenses relating to the property from the Trust Fund including without limitation any insurance premiums, rates, taxes and other outgoings. Clause X of the deed states that: If the Trustee is given a power or discretion by or under this Deed, then unless otherwise provided, the Trustee will be entitled to exercise that power or discretion as the Trustee thinks fit and such power or discretion will be absolutely unfettered. On XXXXX 20XX, the Trustee made a resolution to transfer the sole unit of the Trust from Person A to Person B. On XX XXX 20XX, the Trustee acquired the property located at Address A (the Property). Person B resided at the Property from XX XXX 20XX to XX XXX 20XX. The Trustee leased the Property to unrelated tenants from XX XXX 20XX to XX XXX 20XX. The name on the loan which was used to purchase the property was the Trustee's. Loan repayments were paid by Person B's personal bank account. Utilities such as electricity and home insurance were under Person B's name. Rental income and deductions on expenses such as council rates, interest on loan and property agent fees associated with the property were claimed under the trust for the 20XX-XX income year. On XX XXX 20XX, the Trustee sold the property for $X,XXX,XXX and made a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 Section 104-75

Reasons for decision: Summary: The Trustee is not eligible for the main residence exemption and they cannot disregard the capital gain made on the sale of the property. | Detailed Reasoning - Detailed reasoning: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss is made only if a CGT event happens. Under subsection 104-10(1) of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. However, subsection 104-10(2) of the ITAA 1997 provides that a disposal of a CGT asset does not occur if there is only a change of legal ownership and no change of beneficial ownership. Section 104-10 of the ITAA 1997 treats the entity that owns the asset as the entity that makes the capital gain or loss. For trust-held property, this is the trustee, not the beneficiary. Section 106-50 of the ITAA 1997 is however an exception to the rule above by treating absolutely entitled beneficiaries as the entity to whom the CGT gain/loss applies. Absolute entitlement Where a dwelling is held on trust, section 104-75(1) of the ITAA 1997 (CGT event E5) recognises an exception to the trustee being the owner only where the beneficiary is absolutely entitled to the asset of the trust (except unit trust or trust to which Division 128 applies) as against the trustee. Under section 104-75(2) of the ITAA 1997, CGT event E5 triggers at the time a beneficiary becomes absolutely entitled to the asset. Currently, both the trustee and beneficiary make either a capital gain or loss. In some instances, a beneficiary may disregard any capital gain or loss where certain conditions are met under subsection 104-75(6) of the ITAA 1997. 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 (TR 2004/D25), examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'. Paragraph 5 TR 2004/D25 states: This Ruling does not apply to a unit holder in a unit trust in respect of assets of the trust. The scheme of the ITAA 1997 is to treat a unit as the relevant asset for capital gains purposes rather than any asset of the trust, even if the unit holder has an interest in the trust property at general law (see Taxation Determination TD 2000/32). Therefore, the holder of all the units in a unit trust is not subject to the general treatment that applies to those who are absolutely entitled for CGT purposes to the assets of a trust. Paragraph 10 TR 2004/D25 states: 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. The concept of vested and indefeasible is explained in the following paragraphs: 73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest. 74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it. 75. Also, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event. Oswal v Federal Commissioner of Taxation (2013) FCA 745 (the Oswal case)states: If a trustee has a power of sale the beneficiary cannot be absolutely entitled to the trust asset. This is because the trustee retains an active power that defeats the beneficiary's ability to treat the property as their own. These powers exist in "almost every trust deed in Australia" unless specifically removed, due to default trustee powers under state trustee legislation. A beneficiary is not absolutely entitled where the trustee has incurred liabilities relating to the trust asset, because the trustee's right of indemnity attaches to the property. The existence of any such liabilities means the trustee retains an equitable charging right over the property. This prevents the beneficiary from having a clear, unconditional exclusive interest. Main residence exemption Subdivision 118-B of the ITAA 1997 provides a CGT exemption for a dwelling that is the main residence of an individual. The exemption is generally only available where the dwelling is owned by an individual who occupies it as their main residence. Trusts do not qualify for the main residence exemption, because a trust cannot have a main residence. For trust-held property, the main residence exemption requires a beneficiary to be absolutely entitled to be treated as the owner of the property and access the exemption. Where the beneficiary is a unit holder in a unit trust, the owner is the Trustee and they are not eligible for the exemption. | Detailed Reasoning - Application to your circumstances: As stated in paragraph 5 ofTR 2004/D25, since the scheme of the ITAA 1997 is to treat the unit as the relevant asset for CGT purposes rather than the asset itself, we do not consider Person B is absolutely entitled to the Property. For totality, we have considered though whether Person B would be absolutely entitled on the alternative the property was the asset under the trust to which Person B held interest in. Section 104-10 of the ITAA 1997 treats the Trustee as the owner of the Property and it is the Trustee who makes the capital gain or loss. Therefore, unless the beneficiary is absolutely entitled, the main residence exemption is not available as the Trustee is ineligible for it. Section 104-75 of ITAA 1997 however provides an exception where a beneficiary cannot be absolutely entitled to a CGT asset of a unit trust or trust to which Division 128 applies. Therefore, the law specifically excludes unit trusts under CGT event E5 i.e. beneficiary becoming (absolutely) entitled to trust asset. In this case, the CGT event A1 will therefore be the appropriate taxing mechanism, and the question is whether Person B is absolutely entitled. Although Person B resided at the Property, the main residence exemption requires him to be absolutely entitled to the Property. To be absolutely entitled, Person B must have both a vested and indefeasible interest in the Property. This means that Person B must have the right to immediate possession or enjoyment of the asset via being able to call for its transfer at any time and, that interest in the asset must not be defeated by any other person or subsequent event. We observe that clauses of the Trust Deed confirm that the Trustee has powers to acquire, dispose and manage real property and gives the trustee a right of indemnity against the trust assets for any liabilities it incurs in its duties. This means Person B cannot hold a vested and indefeasible interest in the Property as his rights are defeasible by the Trustee to whom may dispose of the Property and/or indemnify themselves against the Property. It is irrelevant that Person B was both Trustee and unitholder. In considering your contentions that the trust was a bare trust, we disagree. The concept of a bare trust was discussed by Gummow J in Herdegen & Anor v FC of T 88 ATC 4995; (1988) 84 ALR 271. The usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them. In your circumstances, the Trustee in leasing the Property, acted in a capacity beyond being a simple bare trustee, having fiduciary duties associated both in entering into agreements for leases and managing the affairs of the Property and therefore cannot in accordance with the Court authorities, be accepted to be a bare trust. Additionally, as the Trustee had unfettered discretion within the Trust Deed to deal with the Property, it cannot be said that Person B was entitled to require the trustee to deal with the trust asset as the beneficiary directs, rather to the contrary, clauses of the Trust Deed provided the Trustee the power to exercise any power or discretion as it saw fit and such power or discretion was absolutely unfettered. Consistently, the Trustee has treated the Property as a trust asset which is evidenced through: • The claiming of rental income and deductions in the annual Trust Returns • The lease agreement being under the name of the Trust In Mingos v Commissioner of Taxation [2019] FCAFC 211, the Federal Court considered that documentation, such as yours above, which demonstrate the use of property being an asset of the trust are detrimental in establishing a taxpayer holds equitable interest in a property where contemporaneous evidence supports the trust to be the owner of the property. Lastly, the Commissioner observes issues with both the Trustee resolution and Deed of Confirmation dated XX XXX 20XX and XX XXX 20XX respectively provided as part of the ruling. It is noted that although both documents advance the position that Person B is absolutely entitled and that the XXX trust was a bare trust, these must be viewed through the lens of the Trust Deed to which they are subordinate to. It is recognised that the Trust Deed does not support any contentions advanced in the Trustee resolution nor Deed of Confirmation that the XXX Trust is a bare trust, nor that Person B in his capacity as beneficiary exercised full financial control. Rather, the Trust Deed clearly sets out the Trustee's discretions and capabilities to invest and manage the Property as already discussed and the nature of the trust being that of a unit trust. In the circumstance the Commissioner accepted the resolution varied the Trust structure from a unit trust to a bare trust, the Commissioner considers there would be a 'fundamental change' to the trust relationship and that the change, being the 'essential nature and character' of the trust relationship would have resulted in the creation of a new trust. In this circumstance, we consider a CGT event E1 or E2 would have occurred on either the date of the resolution or confirmation. Lastly, for totality, it's observed that a beneficiary becoming absolutely entitled does not mean there will be no CGT. CGT event E5 (i.e., a beneficiary becoming absolutely entitled) still results in a capital gain or loss for both the trustee and beneficiary, the latter which may be able to disregard any capital gain or loss provided certain conditions are met under subsection 104-75(6) of the ITAA 1997. Therefore, even in the circumstance Person B demonstrated a time upon which he became absolutely entitled to the Property, a CGT event E5 would have occurred for both the Trustee and Person B. Therefore, the Trustee is not eligible for the main residence exemption and they cannot disregard the capital gain made on the sale of the property.