Private ruling: Capital gains tax
Date of advice: 11 July 2017
Published: October 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the disposal of the dwelling by the trust be considered an act done by you in your personal capacity and be eligible for the main residence exemption? | A1: No.

Relevant facts and circumstances: You are the primary beneficiary of a family trust. You are the trustee of the trust. The property has always been your main residence and has not been used to produce income. The trust deed states that the general beneficiaries of the trust includes any parent of any Primary Beneficiary and any issue of such parent, the widows, widowers, brothers, sisters and children of the Primary Beneficiary or the Primary Beneficiaries and children of such brothers and sisters and children of the children of the Primary Beneficiary or the Primary Beneficiaries and the spouse for the time being of any person named or described. You, as trustee, can distribute the net income of the trust fund to any general beneficiary in your absolute discretion without being bound to assign any reason. You are now looking to sell the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Main residence exemption: A capital gain or capital loss you make from a capital gains tax (CGT) event in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. In most cases the full exemption will apply where an individual or individuals own a dwelling and occupy it as their main residence. The Income Tax Assessment Act 1997 (ITAA 1997) recognises that a legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity. The trustee of a trust is taken to be an entity consisting of the person who is the trustee at any given time. However, if a provision of the ITAA 1997 refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity. Therefore, the reference to an individual in the main residence exemption legislation is a reference to an individual acting in their personal capacity only. It does not include an individual in the capacity of a trustee. Similarly, the term individual does not apply to companies, trusts or other entities. An individual is defined in the ITAA 1997 to mean a natural person. A trust is not a natural person as required by the main residence exemption, so the main residence exemption cannot be claimed by a trust. In your case, the dwelling is owned by you in your capacity as trustee of a family trust. In order to receive the main residence the dwelling is required to be owned by you in your personal capacity. Therefore, you do not meet the requirements to be eligible for the main residence exemption. However, where a beneficiary of a trust is absolutely entitled as against the trustee to the dwelling, an exemption may be available to the beneficiary if the dwelling is the principal residence of the beneficiary. This is because the CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary where the beneficiary is absolutely entitled to a CGT asset against the trustee. | Detailed Reasoning - Absolute entitlement: 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. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. | Detailed Reasoning - Conclusion: While you are listed as the only primary beneficiary of the trust, the trust deed also includes general beneficiaries. The income of the trust fund can be distributed to any of the general beneficiaries at the trustee’s discretion. Therefore, the trust is a discretionary trust and no one beneficiary has an entitlement to the entire asset. Consequently, you are not absolutely entitled to the property and the provisions treating an absolutely entitled beneficiary as the relevant taxpayer in respect of the dwelling for the purposes of the CGT provisions do not apply. While we acknowledge your circumstances, in your case it will be the family trust that makes a capital gain or capital loss on the disposal of the property and, as a trust is not considered to be an individual, the main residence exemption will not apply.