Private ruling: CGT - main residence exemption
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to the full main residence exemption from capital gains tax on disposal of your property? | A1: No | Q2: Are you entitled to a partial main residence exemption from capital gains tax on disposal of your property? | A2: Yes | Q3: Will the date of acquisition be the date of the contract to purchase the land? | A3: Yes | Q4: Will the cost base of the property include the cost of the land and the cost of construction of the dwelling? | A4: Yes

Relevant facts and circumstances: The beneficiary is an adult under legal disability. The trust deed was made in year ended 30 June 199X on behalf of the beneficiary, appointing the trustee of the trust. The trust was created as a result of a superannuation entitlement. The trustee purchased vacant land on trust in year ended 30 June 199Y (the property). Completion date for the construction of a dwelling on the property was in year ended 30 June 199Z. The construction cost of the dwelling was $XX. The beneficiary resided in the property for less than three months. The property became income producing from year ended 30 June 199Z to year ended 30 June 20VV. The beneficiary moved back into the property in year ended 30 June 200V and continued to reside in the property until the relevant year with other individuals who did not pay any board or rent. The beneficiary did not own any other properties in this period. The individuals were evicted from the property in the relevant year. A contract for sale of the property was signed in the relevant year ended. Settlement occurred on prior to the relevant year. Proceeds from the sale of the property remain on trust for the maintenance, education and advancement or benefit of the beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-130 | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-150 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Subsection 109-5

Reasons for decision: Summary: To determine the extent to which a capital gain is assessable in your situation, it must be determined who is the beneficial owner of the asset. Where the beneficiary of a trust is absolutely entitled (disregarding any legal disability) to an asset of the trust, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) treats all acts done by the trustee in relation to the asset as having been done by the beneficiary. A beneficiary is a sole beneficiary in respect of a trust asset if no other beneficiary has an interest in the asset. Because a sole beneficiary in respect of an asset has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible. Therefore, a sole beneficiary in respect of a trust asset will be absolutely entitled to that asset as against the trustee if the beneficiary can (disregarding any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction. Ignoring legal disability ensures that there is no taxing point in respect of a person's assets if they commence to suffer a legal disability or when they are free from their disability. It also means that the main residence exemption can, if relevant, be satisfied during the period of the disability. In your case, you are the sole beneficiary in respect of the property. Accordingly, as section 106-50 of the ITAA 1997 ignores any legal disabilities, you are taken to be the owner of the property at the time the trust became the property owner. | Detailed Reasoning - Main Residence Exemption: Subdivision 118-B of the ITAA 1997 contains the CGT main residence exemption. The exemption disregards a capital gain or capital loss a taxpayer makes from a CGT event that happens to a dwelling, or their ownership interest in a dwelling, which is their main residence. The exemption may disregard all or part of any capital gain or capital loss, dependent on the circumstances surrounding the CGT event. A capital gain or capital loss made from a CGT event that happens to a CGT asset that is a dwelling, or a taxpayer's ownership in it, is disregarded if: · the taxpayer is an individual · the dwelling was the taxpayer's main residence throughout their ownership period, and · The interest did not pass to the taxpayer as beneficiary in or was not acquired by the taxpayer as trustee of a deceased estate. Section 118-130 of the ITAA 1997 provides that an individual will have an ownership interest in land or a dwelling in the following situations: (a) Land, where the person has: · a legal or equitable interest in it, or · a right to occupy it. (b) Dwelling that is not a flat or home unit, where the person has: · a legal or equitable interest in the land on which it is erected, · a licence or right to occupy it. As beneficiary of a trust where you are presently entitled, you will have an ownership interest in the property in this instance. The basic main residence exemption requirements are contained in section 118-110 of the ITAA 1997. A capital gain or capital loss may only be partially disregarded if the dwelling was: · not the taxpayer's main residence throughout their ownership period, or · used for the purpose of producing assessable income. Section 118-145 of the ITAA 1997 provides that if you leave your dwelling, such that it is no longer your main residence, you may choose to continue to treat it as your main residence, even if you have rented it out, for a maximum period of six years. In your case, the property was income producing for a period in excess of six years. Therefore, you are not entitled to a full exemption from capital gains tax under the main residence provisions. However, you may be entitled to a partial exemption. Section 118-150 of the ITAA 1997 provides that if you are building, repairing or renovating a dwelling you can choose to treat it as your main residence so long as it: · actually does become your main residence as soon as practicable after the work is finished, and · it continues to be your main residence for at least three months. If this occurs, you can apply the main residence exemption to the dwelling from the time you acquired your ownership interest in the land. In your case, the property was your main residence for a period of less than three months after the completion of the dwelling. This period is less than the minimum required under section 118-150 of the ITAA 1997. Therefore, for the initial period of your ownership of the dwelling, the property is not considered to be your main residence. Section 118-185 of the ITAA 1997 provides that where a dwelling was not a main residence for the whole of your period of ownership, the amount of the capital gain that is exempt may be restricted. Your capital gain or loss is calculated on the basis of the number of days when the dwelling was not a main residence compared to the number of days of ownership of the dwelling. The capital gain (or loss) under this section is determined by the following formula: Capital gain or loss x Non main residence day Days in the ownership period where: · the capital gain or the capital loss amount is the capital gain or capital loss the taxpayer would have made apart from subdivision 118-B of the ITAA 1997. · Non-main residence days are the number of days in the ownership period when the dwelling was not your main residence. You moved back into the property in the 200V financial year and continued to reside in the property until it was eventually sold in the relevant year. You shared the property with others during a portion of this time, but did not receive any rent or board from the people who resided in the property with you. Therefore, you are entitled to the main residence exemption for the period of ownership from the 200V financial year until disposal of the property. | Detailed Reasoning - Acquisition date and cost base: Subsection 109-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that: In general, you acquire a *CGT asset when you become its owner. In this case, the time when you *acquire the asset is when you become its owner. If you entered into a contract to purchase a CGT asset, the time of acquisition is when you enter into the contract. Therefore the acquisition date is the date that you entered into the contract to purchase of the vacant land, that is, the date you signed the contract. The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. The cost base of a CGT asset consists of five elements: · The first element, being the acquisition costs, is the total of the money paid, or required to be paid, in respect of the acquisition. · The second element is the incidental costs that the taxpayer incurs in acquiring the asset of which relate to a CGT event that happens in relation to the asset. · The third element is costs of ownership, including both capital and non-capital costs. · The fourth element is capital costs associated with increasing or preserving the value of your asset, or installing or moving the asset. · The fifth element is capital expenditure incurred by a taxpayer in establishing, preserving or defending their title to an asset, or right over an asset. Therefore, in your circumstances, the cost base of the property is the cost of the vacant land (first element of the cost base) and construction of the dwelling (fourth element of the cost base), and will also include all five elements of the cost base for the calculation of your capital gain.