Will a Capital Gains Tax (CGT) event occur for the Trustee of the Trust when it transfers its interest in the Property to Person A?
Yes. Question 2 Is Person A or any beneficiary of the Trust absolutely entitled to the Property as against the Trustee of the Trust? Answer No Question 3 Is the Trust entitled to apply the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer No. Summary A capital gains tax (CGT) event will happen on the transfer of the property from the Trustee of the Trust to Person A. Although Person A, who resides at the Property, is a beneficiary of the Trust, which is a discretionary Trust, they are not absolutely entitled to the Property. This is because the trustee of a discretionary Trust has absolute discretion with regard to beneficiary entitlements of income or capital, in whole or in part, to the exclusion of other beneficiaries in such proportions as the trustee may determine. Therefore, as no beneficiary is absolutely entitled to the Property, the relevant CGT event will happen to the Trust because it is the current owner of the property for CGT purposes when the property is transferred to Person A. Subsection 104-75(1) of the ITAA 1997 and the principles discussed in Draft 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 (TR 2004/D25) apply such that CGT event E5 (Beneficiary becoming entitled to a trust asset) will not occur in this case. Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property occurs, and this is treated as a disposal for CGT purposes. CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. A main residence or partial main residence exemption pursuant to section 118-110 of the ITAA 1997 will not apply as the Property is owned by the Trust and not an individual. Person A as a beneficiary, would have a right to occupy the Property, which would be sufficient to satisfy the definition of ownership interest in section 118-130 of the ITAA 1997. However, the CGT event is not happening to their ownership interest being the right to occupy. It is happening to the dwelling and associated property which is owned by the Trust.
The property is owned by the Trust and therefore cannot be an asset of person B's Deceased estate. Consequently, the exemption from CGT provided under subsection 128-15(3) of the ITAA 1997 on the passing of an estate asset to a beneficiary of the Deceased estate does not apply in this case. This ruling applies for the following periods : Year ending 30 June 20XX. Year ending 30 June 20XX. The scheme commenced on: 1 July 20XX
The Trust is a discretionary trust established by the Trust Deed on DD MM 20XX. Person B, now deceased, was sole director of the corporate trustee and the sole appointer of the Trust. The Trust Deed provides: • the beneficiaries are referred to throughout as specified beneficiaries and general beneficiaries. Clause 1.4 states, Beneficiary will include any of the specified beneficiaries and general beneficiaries. • Person B and Person A are the specified beneficiaries of the Trust. In 20XX, The Property was purchased in the name of the Trust. The Deceased was a self-employed professional and the Property was placed in the Trust for asset protection. The property was not used as the business premises at any time. Between 20XX and 20XX the Property was used to derive rental income. In 20XX, Person B and Person A moved into the Property as their main residence. They had not previously resided at the Property. Person B passed away on DD MM 20XX. The business ceased upon their death. Person A, their spouse, did not have a role in the business. The Property is the main residence of Person A and has been since 20XX.
Following Person B's death, Probate was granted to Person A who is the sole executor and sole beneficiary of Person B. In accordance with the Schedule of the Trust Deed, Person A will now assume position as Appointer of the Trust. Ownership of the property is to be transferred from the Trust to Person A.
Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 section 102-25 Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 104-85 Income Tax Assessment Act 1997 section 106-50 Detailed Reasoning Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. All assets acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. The Property is a CGT asset. CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you