Private ruling: CGT - main residence
Published: May 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the trust entitled to disregard any capital gain or loss that results from the disposal of the property? | A1: Yes.

Relevant facts and circumstances: An individual owned a property. Due to their personal issues as well as rising debts, a trust was established and the property was transferred to the trust as a form of asset protection. The individual continued to live in the property and treated it as his main residence for the entire period. No rental income was ever collected by the trust. The property was sold. The trust is a fixed trust whereby all the benefits arising from the trust are to be held in trust for the individual.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | 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: Detailed Reasoning - Capital gains tax: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place and you receive a gain from the event. CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else. Land and buildings are CGT assets. | Detailed Reasoning - Main residence exemption: Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling if: • you are an individual (paragraph 118-110(1)(a) of the ITAA 1997) • the dwelling was your main residence for the whole period it was owned • you have not have used the dwelling to produce assessable income, and • any land on which the dwelling is situated on and adjacent to is two hectares or less In your case, as a trust is not an individual you are not entitled to apply the main residence exemption, under paragraph 118-110(1)(a) of the ITAA 1997. | Detailed Reasoning - Legal v beneficial ownership: When the disposal of an asset occurs one of the most important elements in the application of the CGT provisions is ownership. Both legal and beneficial ownership must be determined. In most cases, in the absence of evidence to the contrary, property is considered to be owned absolutely by the person(s) registered on the title. Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary. Example: An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee. Draft Taxation Ruling TR 2004/D25 discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its trustee. TR 2004/D25 explains that the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. 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. | Detailed Reasoning - Your circumstances: In your case, the individual is the sole beneficiary and it is considered that they are absolutely entitled to the property. As the individual has absolute entitlement to the asset held in trust, you (in your capacity as trustee) are entitled to disregard any capital gain or loss that results from the disposal of the property.