Private ruling: Capital gains tax and the main residence exemption
Date of advice: 22 March 2017
Published: August 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will CGT event E7 occur when the legal title of the property is transferred to the beneficiaries? | A1: Yes. | Q2: Will the trustee of the Testamentary Trust (the trust) be assessed on any capital gain or loss resulting from the transfer of the legal title of the property to the beneficiaries? | A2: Yes. | Q3: Is the trustee of the trust entitled to the main residence exemption from the date the property was purchased, until the date the legal title is transferred to the beneficiaries? | A3: No. | Q4: Will the beneficiaries be assessed on any capital gain or loss resulting from the transfer of the legal title of the property to them? | A4: No.

Relevant facts and circumstances: The property was acquired by the trust, as directed by the trust deed. The legal title of the property remained with the trustee after it was purchased. The beneficiaries of the trust were allowed to occupy the property for the period of time from the settlement date of the contract for the purchase of the property, provided all outgoings in respect to the property were paid by the beneficiaries. At the end of a period of time, provided some conditions were met, the legal title of the property will be transferred to the beneficiaries. The property has been the main residence of the beneficiaries since its acquisition. The beneficiaries acquired their trust interest for no expenditure.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 100-20 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-85 | Income Tax Assessment Act 1997 Subsection 104-85(3) | Income Tax Assessment Act 1997 Subsection 104-85(5) | Income Tax Assessment Act 1997 Subsection 104-85(6)(a) | Income Tax Assessment Act 1997 Section 115-100 | Income Tax Assessment Act 1997 Subsection 118-110(1) | Income Tax Assessment Act 1997 Paragraph 118-110(1)(c) | Income Tax Assessment Act 1997 Paragraph 118-110(2)(a) | Income Tax Assessment Act 1997 Section 118-195 | Income Tax Assessment Act 1997 Division 128 | Income Tax Assessment Act 1997 Section 128-15

Reasons for decision: Detailed Reasoning - CGT event E7: Section 102-5 includes in assessable income any 'net capital gain' made by the taxpayer in an income year. Section 100-20 states that a taxpayer makes a capital gain (or loss) only if a capital gains tax (CGT) event happens. Division 104 sets out all the CGT events for which a taxpayer can make a capital gain or loss. Where more than one CGT event may apply, you use the one that is most specific to your situation. Section 104-10 states a CGT event A1 happens in relation to a taxpayer, if the taxpayer disposes of a 'CGT asset'. However section 104-85 states a CGT event E7 happens when the trustee of a trust disposes of a CGT asset of the trust to the beneficiaries, in the satisfaction of the beneficiaries' interest, or part of it, in the trust capital. CGT event E7 is more specific to your situation. | Detailed Reasoning - Transfer of property to the beneficiaries: A disposal of the property will occur when the trustees of the trust, transfer the legal title of the property to the beneficiaries of the trust. The transfer will be a change of ownership of the property for CGT purposes. The time of the event is when the disposal occurs. CGT consequences to trustee Under subsection 104-85(3), the trustee will make a capital gain if the market value of the asset is greater than the cost base, and a capital loss if the market value of the asset is less than the reduced cost base. CGT Discount As the trust has owned the property for at least 12 months prior to the CGT event happening, it can apply the 50% CGT discount under section 115-100. CGT consequences to beneficiaries Under subsection 104-85(5), the relevant beneficiaries will also make a capital gain or a capital loss. However, because the beneficiaries acquired their trust interest for no expenditure, the capital gain will be disregarded under paragraph 104-85(6)(a). | Detailed Reasoning - Main residence exemption: Subsection 118-110(1) provides that a capital gain or capital loss made by an individual from a CGT event that happens in relation to a dwelling is disregarded if the dwelling was their main residence throughout their ownership period. In your circumstances, provided certain conditions are met, the title of the property will be transferred from the trustee to the beneficiaries after the five year period. When the transfer occurs and event E7 will happen. Paragraph 118-110(2)(a) list the CGT events which apply to the main residence exemption, and E7 is not listed. Therefore the main residence exemption does not apply to the trustee on the transfer of the title of the property to the beneficiaries. Whilst the property was occupied by the beneficiaries as their main residence since it was acquired, it does not change the outcome as they were not the owners of the property during the ownership period. Main residence exemption after transferred to beneficiaries After the title of the property is transferred to the beneficiaries, the basic conditions for the main residence exemption listed under 118-110(1) will apply moving forward. As the main residence exemption may only apply when a CGT event happens to the property in the future, we are unable to advise whether the full main residence will apply until the event occurs and all facts are known. However as the beneficiaries are individuals, the interest in the dwelling (property) will not pass to them as a beneficiary in the estate of a deceased person, and provided the dwelling will be their main residence throughout the ownership period, the beneficiaries may be entitled to the main residence exemption when the CGT event occurs to the property. Note, the interest in the dwelling (property) did not pass to you as a beneficiary in the estate of a deceased person, as the property was not acquired by the deceased prior to their death (section 118-195).