Private ruling: Main Residence Exemption - Absolute entitlement
Date of advice: 25 May 2020
Published: June 2020
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the main residence exemption apply to disregard the capital gain you have made on the disposal of the dwelling? | A1: No.

Relevant facts and circumstances: You purchased a property on ## April ####. The property was purchased by you and your spouse in your capacity as trustees of the trust. The trust had no other assets or other activity while it held the property. The property is less than 2 hectares. The trustee has always lived in the property. Your spouse passed away and you became the sole trustee of the trust. The property has never been rented out. On ## April ####, you in your capacity as the trustee signed a contract to sell the property and the property settled. Capital gain tax (CGT) event A1 was triggered by the trust, on sale of the property. The trustee of the trust resolved to distribute 100% of the gross capital gains (including any discount portion) of the trust for the year ended 30 June #### to the beneficiary.

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 104-75 | Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Subdivision 115-A | Income Tax Assessment Act 1997 Subdivision 115-C | Income Tax Assessment Act 1997 Section 118-100 | Income Tax Assessment Act 1997 Section 118-110

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The dwelling is a CGT asset. Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. The sale of the property is a CGT event. The CGT event happened in relation to an asset of the trust. Under section 118-110 of the ITAA 1997 you can disregard a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling or your ownership interest in it if all of the following conditions apply: · you are an individual · the property is less than two hectares. · the dwelling was your main residence throughout your ownership period · the ownership interest did not pass to you through a trust or a deceased estate A trust is not eligible for the main residence exemption. | Detailed Reasoning - Absolute entitlement: Section 106-50 of the ITAA 1997 and CGT event E5 in section 104-75 of the ITAA 1997 are the main provisions to which the concept of absolute entitlement is relevant. These provisions apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability). These provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5 of the ITAA 1997, neither is the CGT asset to which the relevant provisions refer. Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 explains the circumstances in which the beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust against a trustee. The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. If there is more than one beneficiary with an interest 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 discretion. This is because their entitlement is not to the entire asset. There are particular circumstances where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. These circumstances are where: · The assets are fungible; · The beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and · There is a clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. If all these factors are present, then the beneficiary will be considered absolutely entitled to that specific number of the trust's assets for CGT purposes. Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Land is rarely fungible because each parcel of land is unique (paragraph 94 of TR 2004/D25). Real estate is traded based on the actual sale price, not the sale price per unit. This is because the value of one part of the land may, for example have better views and access to the main street than another part of the land and therefore be worth more. Unlike fungible commodities, parcels of real estate do not have equal value.