Tax Tip 338: Inheriting a Beneficial Interest in Property and the Main Residence Exemption

The beneficial owner doesn’t necessarily need to be the legal owner. The property could be owned by Person A, but the beneficial owner be Person B. For tax purposes it is the beneficial owner that is assessed on the income and capital gains of the property.

This means that if someone inherits a beneficial interest of a property the usual rules for CGT apply.


Example

Homer is the legal owner of 123 Smith Street for Bart. Bart paid the deposit and paid the loan on the property for several years before dying.

Homer has another property which he owns and lives in as his main residence.

Bart dies and leaves all of his assets to his sister Lisa.

What happens to 123 Smith Street?


Lisa inherits all of Barts property, assets, which includes Bart’s beneficial interest in 123 Smith Street.

Since Bart was living in the property as his main residence it will be treated as his main residence for CGT purposes, even though he is not the legal owner.

The cost base of the property for Lisa would be the value at Bart’s death


There is a private binding ruling with an example some what similar. See PBR Authorisation Number: 1051784939525

https://www.ato.gov.au/law/view/document?docid=EV/1051784939525

 

A discretionary interest as beneficiary wont be sufficient. A private tax ruling by such affected persons is wise to ensure they are absolutely entitled. I encountered someone who had a hybrid trust and since they had apparent beneficial interest to all trust units they applied for a ruling. ATO disagreed and held the minor discretionary issue prevented this use. And seeking to amend to exclude any discretionary interest posed a concern. They inherited fixed and discretionary elements and couldnt "enliven" the benefit through disclaiming a discretionary interest.

This is the common wording used in private rulings :

It is possible for the legal ownership to differ from the beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

The creation of a trust falls within the jurisdiction of equity.

According to G. Teh and B. Dwyer, Introduction to Property Law, at paragraph 606:

A trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary....
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snip...

However it is not the existence of a bare trust that is the crucial concept. It is the establishment of absolute entitlement to the asset by the beneficiary as against the trustee.​

Unrecorded trust entitlement can be difficult to convince the ATO about. Just claiming a bare trust exists may not work.
Many people overlook that the CGT main residence exemption is based on a ownership "interest" and not title. This can include a license to occupy. A solicitor may advise on a equitable right of interest through a long term lease by a disc trust or company to a specific beneficiary. .