Private ruling: main residence exemption and special disability trusts
Published: August 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the Trust a Special Disability Trust (SDT)? | A1: No | Q2: Is the Trust required to lodge tax returns? | A2: Yes | Q3: Is the capital gain made on the disposal of the house tax exempt under the main residence exemption? | A3: No

Relevant facts and circumstances: An invalid pensioner is the sole beneficiary of the Trust. The Trust purchased a house for the sole occupancy of the beneficiary. The Trust disposed of the house in the income year ended 30 June 2011. The house was disposed of at a profit and the proceeds of the sale were used to purchase a replacement house for the sole occupancy of the beneficiary. The beneficiary is currently residing in the replacement house. The excess funds from the disposal of the first house are being held in the Trust for the exclusive use of the beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 118-110(1) | Income Tax Assessment Act 1997 Section 118-218 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Is the Trust a SDT?: A SDT is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 995-1 refers to the definition of the term contained in the Social Security Act 1991 (section 1209L). Briefly, the characteristics of a SDT are as follows: · have only one principal beneficiary (the person for whom the Trust is established), who must meet the eligibility criteria · provide for the accommodation and care needs of the principal beneficiary · have a Trust deed that contains the clauses as set out in the model Trust deed · have an independent Trustee, or alternatively have more than one Trustee · comply with the investment restrictions · provide annual financial statements and · conduct independent audits when required A SDT model trust deed has been developed by the Department of Families, Housing, Community Services and Indigenous Affairs to assist with the creation of SDT trusts. The model trust deed contains the clauses which are essential for a trust to comply with the requirements of the special disability trust legislation. All compulsory provisions of the model Trust deed must be included in the Trust deed for the Trust to gain SDT status. As the powers granted to the Trustee of the Trust are at odds with these provisions, the Trust is ineligible to be classified as a SDT. | Detailed Reasoning - Is the Trust required to lodge a tax return?: A Trustee is required to lodge a trust income tax return, regardless of the amount of income involved, unless we advise that a return is not required. As we have provided you with no such advice the Trustee of the Trust is required to lodge a trust income tax return. Is the capital gain made on the sale of the house tax exempt under the main residence exemption? Subsection 118-110(1) of the ITAA 1997 makes it clear that in the general case, the main residence exemption is only available to an individual (defined in section 995-1 of the ITAA 1997 as a natural person). Recent changes to the taxation of SDT's extends the capital gains tax (CGT) main residence exemption to include a residence that is owned by the trustee of a SDT and used by the principal beneficiary of the SDT (section 118-218 of the ITAA 1997). As the Trust is not considered to be a SDT as defined in section 995-1 of the ITAA 1997 the main residence exemption does not apply. Normal CGT rules apply to gains made from the sale of the house.

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