Tax Tip 268: The Main Residence CGT Exemption on a Property Held in Trust?

Discussion in 'Accounting & Tax' started by Terry_w, 23rd Jan, 2020.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    The Main Residence CGT Exemption on a Property Held in Trust?

    A property held by a trust generally doesn’t qualify for the main residence CGT exemption. But if you look at the law carefully it actually just might.


    The main residence CGT exemption is covered by s118-110 ITAA97.

    Have a read of the legislation and make note of the wording in the first line of subsection (1)

    INCOME TAX ASSESSMENT ACT 1997 - SECT 118.110 Basic case


    Here is a copy n paste:

    (1) A * capital gain or * capital loss you make from a * CGT event that happens 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.




    Note the words that I have made bold above. “Ownership Interest”

    This has a hyperlink so the phrase is defined elsewhere – it has a definition in the legislation. Clicking on it leads to section 995-1 ITAA97 which contains definitions for words and phrases used in the act.

    This section defines ‘ownership interest’ as:

    "ownership interest" : an ownership interest :

    (a) in land or a * dwelling--has the meaning given by section 118-130; and

    (b) in a company or trust--has the meaning given by section 125-60.


    So now we have to go and look at section 118-130 of the same act.

    Here is a link:

    INCOME TAX ASSESSMENT ACT 1997 - SECT 118.130 Meaning of ownership interest in land or a dwelling


    The section of this law that is relevant to us is subsection (1)(a) which states:

    Meaning of ownership interest in land or a dwelling

    (1) You have an ownership interest in land or a * dwelling if:

    (a) for land--you have a legal or equitable interest in it or a right to occupy it; or


    Note the words “right to occupy it”


    So what does all of this mean?


    If X owns a property this will be an ownership interest – they have a legal title. If X is an average person they will have an equitable interest in the property. The trustee of a discretionary trust will have a legal interest but not an equitable interest in it.


    Going back to s 118-110 it states the capital gain or capital loss of disposal of your ownership interest can only be disregarded if you are an “individual” which Is defined to be a natural person – i.e. not a trustee or a company.


    What is a right to occupy?
    A right to occupy is an interest in land that is less than a legal interest – someone else will own the land, but the person with the right to occupy will be able to use that land. This right will come because of contract, deed or will. It is a personal right that cannot be passed to others.


    So what does this all mean? A trustee of a discretionary trust owning the land with an individual beneficiary of that trust having a right to occupy that land could mean the individual has an ownership interest which is able to obtain the CGT exemption.


    If the property is sold it will be partially exempt from CGT potentially. It could even be fully exempt in some limited circumstances. The trust would trigger a CGT on disposal too so both the CGT of the individual and the trust needs to be considered.


    Heaps of side issues though because granting a right to occupy will in itself be a CGT event. Disposal would too – topics for another day.
     
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  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The Commissioner can attack a trust under the deduction principles when a trust is not fixed. And loan from A to trust could be held to be private purposes where A resides.

    As well as the CGT event for a occupancy right (which could be bypassed through a deed granting beneficiaries right to use trust property in existence prior to settlement) and even Div 7A. Part IVA has also been used for Janmore type cases.

    And also consider state land tax + surcharges + duty.

    All reasons why legal advice is paramount
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Not sure what this means or how it is relevant/
     
  4. Trainee

    Trainee Well-Known Member

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    A discretionary trust is by definition not fixed, isnt it?
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Yes not fixed. This thread is really about a discretionary trust holding the property - which I may not have made clear in the op.
     
  6. Gen-Y

    Gen-Y Well-Known Member

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    A hybrid trust held by a corporate company trustee.
    That can be a fixed unit allocated to the beneficiary trustee.
     
  7. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    A hybrid trust will usually fail as not 100% of the interests are fixed. "Others" can benefit. And the ATO considers a 100% fixed right is impossible since the settkled sum gives rise to a discretionary element. This is soemthing I would only see being subject to a binding private ruling.

    A well know advisory firm tried to tell people its special trademarked trust could access the MRE and NSW land tax concessions. It was not the case.
     
  8. Gen-Y

    Gen-Y Well-Known Member

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    Depends - if you are the sole beneficiary trustee and there is a 100% allocated fixed to the beneficiary name.
    How is that be argue by ATO? ATO can request the Trust deed from you anytime.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    A hybrid trust couldn't be a fixed trust under the tax laws. It is part fixed and part not fixed - hence the 'hybrid'
     
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  10. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Incorrect. Most deeds for hybrids dont contain the fixed bits the OSR want. And cant. What a fixed trusts isnt actually defined by tax law which seems nuts. And then there is Hybrid Disc Trusts and Hybrid Unit Trusts. A HUT cant be a fixed trust. HDTs will always fail the absolute 100% entitlement anyway. I have also seen hybrid unit trusts with a settled sum and this can leave a element of the trust net assets not entitled by a beneficiary.

    There is also a potential issue here - who is the trustee ? If the sole beneficiary is the trustee you need to consider the CPT Custodian case and merger may have applied so that the beneficiary is now the legal owner.

    And land tax is a cost annually o_O (Unimproved value of land x 1.6%) in NSW.