House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Removing tax issues facing special disability trusts

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide:

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a capital gains tax (CGT) exemption for an asset transferred into a special disability trust (SDT) for no consideration;

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a CGT main residence exemption for a trustee of an SDT;

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a CGT exemption for a recipient of the principal beneficiary's main residence, if their ownership interest ends within two years of the principal beneficiary's death; and

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equivalent taxation treatment amongst SDTs established under different Acts.

Context of amendments

1.2 SDTs were introduced in 2006 to assist families and carers to make private financial provision for the current and future care and accommodation needs of a family member with severe disability - referred to as the principal beneficiary.

1.3 There are two key benefits of establishing an SDT:

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Immediate family members making gifts to an SDT may access a concession of up to a combined total of $500,000 from the social security or veterans' entitlements gifting rules.

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Assets of an SDT up to $578,500 (current as at 1 July 2011 and indexed annually) plus the principal beneficiary's principal place of residence do not impact upon the principal beneficiary's ability to access income support payments.

1.4 In order to access these concessions, the trust must operate in accordance with Part 3.18A of the Social Security Act 1991 or Division 11B of Part IIIB of the Veterans' Entitlements Act 1986 .

1.5 The Senate referred a number of matters relating to SDTs to its Community Affairs Committee for inquiry and report in 2008. In particular, the Committee considered why more families of dependants with disabilities are not making use of the current provisions to establish SDTs.

1.6 In its report of 16 October 2008, the Committee highlighted that the taxation arrangements that apply to SDTs diminish their value for carers and people with disabilities.

1.7 The Government announced in the 2009-10 Budget that it would extend the CGT main residence exemption to include a dwelling that is held by a trustee of an SDT and used by the principal beneficiary as their main residence, with effect for CGT events that happen on or after 1 July 2009.

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The existing CGT main residence exemption ensures an individual will disregard a capital gain or capital loss on their main residence, subject to various conditions being satisfied.

1.8 Without these changes, the CGT main residence exemption requirements cannot be satisfied by a trustee of an SDT. This is because the trustee holds the dwelling and is responsible for claiming the CGT main residence exemption, but the dwelling is used by the principal beneficiary as their main residence. In addition, the principal beneficiary cannot access the exemption as they do not own the dwelling.

1.9 During the policy design of this measure, stakeholders raised concerns that the potential CGT liability on transferring an asset into an SDT is a major disincentive to setting up an SDT. Stakeholders were also concerned that a trustee of an SDT may have realised a CGT liability where they disposed of a dwelling before 1 July 2009, even though the dwelling was effectively being used as the principal beneficiary's main residence.

1.10 During the development of this measure, it was identified that a recipient who receives a principal beneficiary's main residence after the principal beneficiary's death would not be eligible for the CGT main residence exemption that applies to a trustee or a beneficiary of a deceased person's estate, as the dwelling does not pass to the recipient from the principal beneficiary's estate.

1.11 It was also identified that the definition of SDTs in the ITAA 1997 is limited to SDTs established under the Social Security Act 1991 and does not include SDTs established under the Veterans' Entitlements Act 1986 .

1.12 The Government announced in the 2011-12 Budget that in order to remove further income tax barriers that impede families from making contributions to an SDT and to make SDTs more beneficial for families, it would:

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provide a CGT exemption for an asset transferred into an SDT for no consideration (ignoring any interest in the trust);

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backdate the application date of the CGT main residence exemption for SDTs to apply from when SDTs were first able to be established;

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provide a CGT exemption for a recipient of a principal beneficiary's main residence, if their ownership interest ends within two years of the principal beneficiary's death; and

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ensure SDTs established under the Veterans' Entitlements Act 1986 have equivalent taxation treatment as those established under the Social Security Act 1991 .

1.13 These changes apply to income tax assessments for the 2006-07 income year and later income years. The changes are beneficial to taxpayers.

Summary of new law

1.14 These amendments will ensure that a capital gain or capital loss is disregarded when an asset is transferred directly into an SDT for no consideration, or where an asset passes from a deceased person's estate to an SDT.

1.15 In addition, a trustee of an SDT will disregard any capital gain or capital loss on the principal beneficiary's main residence, to the extent that the principal beneficiary would have been able to do so had they owned the main residence directly. These amendments will also ensure that a recipient of the principal beneficiary's main residence will disregard any capital gain or capital loss on the principal beneficiary's main residence, if their ownership interest ends within two years of the beneficiary's death.

1.16 Finally, these amendments provide that SDTs established under the Veterans' Entitlements Act 1986 will have equivalent taxation treatment as those established under the Social Security Act 1991 .

Comparison of features of new law and current law

Detailed explanation of new law

1.17 For the purposes of this explanatory memorandum, the term trustee of an SDT refers to a trustee of a trust that was an SDT at some point in the ownership period of the dwelling. In addition, the term principal beneficiary refers to a beneficiary who was the principal beneficiary of an SDT at some point in the ownership period of the dwelling.

Income tax definition of SDT

1.18 In the ITAA 1997, 'special disability trust' and 'principal beneficiary' have the meanings given by sections 1209L and 1209M of the Social Security Act 1991 respectively.

1.19 These amendments expand the definition of special disability trust and principal beneficiary in the ITAA 1997 to also include SDTs established under the Veterans' Entitlements Act 1986 . This ensures SDTs established under that Act will also be covered by these amendments. These SDTs will also be able to access the rules in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) that ensure the unexpended income of an SDT is taxed at the principal beneficiary's personal income tax rate, rather than automatically at the top personal tax rate plus the Medicare Levy, with effect for income tax assessments for the 2008-09 income year and later income years. [Schedule 1, Part 3, items 10 and 11, definitions of ' principal beneficiary' and ' special disability trust' in subsection 995-1(1)]

CGT exemption on an asset transferred into an SDT

An asset transferred directly to an SDT

1.20 When there is a change of ownership of an asset for no consideration, the market value substitution rule in section 116-30 of the ITAA 1997 applies and the taxpayer will determine a capital gain or capital loss based on the difference between the cost base (or reduced cost base) of the asset and its market value at the time of the CGT event.

1.21 The law is amended so that any capital gain or capital loss that the taxpayer would have made is disregarded when the asset is transferred into the SDT for no consideration. [Schedule 1, Part 2, item 6, section 118-85 ]

1.22 When determining whether a taxpayer receives consideration for transferring an asset into an SDT, any interest in the trust is disregarded. This ensures that where an asset is transferred into an SDT and the transferor is entitled to receive the asset at the ending of the trust, a CGT exemption is still available. [Schedule 1, Part 2, item 6, subsection 118-85(2)]

1.23 If an asset is transferred into a trust that is not yet an SDT, a CGT exemption will still be available provided the trust becomes an SDT as soon as practicable after the asset is transferred into it. Whether a trust satisfies this requirement will depend on the circumstances of each case.

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For example, a trust will satisfy this requirement if it applies to become an SDT within a reasonable time and the application is later approved.

[Schedule 1, Part 2, item 6, paragraph 118-85(1)(b)]

Example 1.1

Bright Pty Ltd (Bright) is the trustee of an SDT established for Jessica, who is the principal beneficiary. In 2007, Suban, Jessica's father, transfers ownership of a townhouse for no consideration to Bright as trustee of the SDT.

Suban acquired the townhouse in 1990 and it was not his main residence during his ownership period. Suban may be entitled to receive the asset back when the SDT comes to an end.

Based on the market value of the townhouse, Suban would make a capital gain of $100,000 (apart from these amendments) at the time the townhouse is transferred to the SDT.

As Suban has transferred the townhouse to an SDT, he disregards the capital gain of $100,000.

An asset passes to an SDT from a deceased person's estate

1.24 Typically, where an asset with an unrealised capital gain or capital loss passes from a deceased person's estate to a beneficiary of the estate, there is no taxing point for the deceased person or their legal personal representative. Instead, any unrealised capital gain or capital loss is typically deferred until a later dealing with the asset by the beneficiary of the estate.

1.25 To ensure that a trustee of an SDT disregards any unrealised capital gain or capital loss when an asset passes to the trustee from a deceased person's estate, the trustee will use the market value of the asset on the day the deceased died as the first element of its cost base (and reduced cost base).

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This effectively exempts any unrealised capital gain or capital loss that has accrued up until the transferor's death.

[Schedule 1, Part 2, items 7 and 8, subsection 128-15(4) (item 1 in the table) and (after item 3A in the table)]

1.26 If the trust is not an SDT at the time the asset passes to it from the deceased person's estate, the trust must become an SDT as soon as it is practicable after the asset passes to it. This provides consistent treatment with what is available when an SDT is established outside of a deceased person's estate (see paragraph 1.23).

1.27 If the trust is not an SDT or does not become an SDT as soon as practicable, the normal deceased estate cost base rules will apply.

Example 1.2

Further to Example 1.1, Jessica's grandfather, Muhammad passes away and leaves shares in his will to Bright as trustee of the SDT, who is a beneficiary of Muhammad's estate. The shares are worth $20,000 at the time of Muhammad's death.

Muhammad and his legal personal representative disregard any capital gains or capital losses on the shares using the normal deceased estate provisions.

These amendments ensure Bright obtains a market value cost base (and reduced cost base) of $20,000 for the shares. One year later, Bright sells the shares for $21,000. Assuming that Bright has not incurred any other costs in relation to the shares, Bright makes a capital gain of $1,000 on the shares.

CGT main residence exemption

1.28 If a trustee of an SDT holds a dwelling (or an ownership interest in the dwelling) for the benefit of the principal beneficiary, the trustee will be eligible for the CGT main residence exemption if the principal beneficiary used the dwelling as their main residence and the dwelling was not used to produce assessable income [Schedule 1, Part 1, item 4, section 118-215 and subsections 118-218(1) to (3)] .

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The existing CGT main residence exemption, which is located in Subdivision 118-B, disregards all or part of a capital gain or capital loss on an individual's main residence, provided certain conditions are satisfied.

1.29 The trustee of the SDT will be eligible for the CGT main residence exemption in the same way as the principal beneficiary would have been had they owned the dwelling directly.

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This is achieved by treating the trustee of the SDT as holding the asset personally and using the asset in the same particular way as the principal beneficiary on each day the trust is an SDT [Schedule 1, Part 1, item 4, subsections 118-218(1) and (2)] .

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Where the trustee is not an individual, they are treated as if they were an individual [Schedule 1, Part 1, item 4, subsection 118-218(3)] .

1.30 The map of the CGT main residence provisions, which is located in section 118-105, is amended to include references to the new provisions. [Schedule 1, Part 1, item 3, section 118-105 ]

Example 1.3 : Basic case

Debbie and Marina are the trustees of an SDT established for Jack, who is the principal beneficiary.

The trustees purchase a dwelling for the benefit of Jack. Settlement occurs on 1 January 2008 and Jack moves in as soon as practicable after minor modifications are made to the dwelling to assist Jack with his independent occupation of the dwelling.

The trustees later sell the dwelling, making a capital gain of $20,000 (apart from these amendments). Jack continues to live in the dwelling until settlement occurs on 31 December 2011.

The dwelling was never used to produce assessable income and the trust is an SDT throughout the entire ownership period.

If Jack owned the dwelling directly, he would have been able to disregard the entire capital gain. Therefore, the trustees will be able to disregard the entire capital gain.

1.31 There are specific rules that extend the existing CGT main residence exemption (sections 118-135 to 118-160). These rules allow an individual to treat a dwelling as their main residence even when it is not their main residence.

1.32 A trustee of an SDT will access these extensions, to the extent the principal beneficiary could access them if they owned the dwelling (or interest in the dwelling) directly. [Schedule 1, Part 1, item 4, subsections 118-218(1) to (3)]

Example 1.4 : Absence rule

Further to Example 1.3, assume that in mid-2010, Jack moved out of the dwelling into a nursing home, with the dwelling being rented out at market value until the dwelling was sold in 2011. The trust remains an SDT for all of the ownership period.

If Jack owned the dwelling directly, he could access the absence rule under section 118-145. Therefore, the trustees can decide to continue to treat the dwelling as a main residence during this period under the absence rule and disregard the $20,000 capital gain when the dwelling is sold.

1.33 An individual may make a capital gain or capital loss where a dwelling is their main residence for only part of the ownership period or where the dwelling was used for income producing purposes.

1.34 A trustee of an SDT will access the partial CGT main residence exemption and the income producing rules to the extent the principal beneficiary could have accessed these rules if they owned the dwelling (or an interest in the dwelling) directly. [Schedule 1, Part 1, item 4, subsections 118-218(1) to (3)]

A trust is not an SDT for part of the ownership period

1.35 For any day that a trust is not an SDT, that day will be treated as a non-main residence day for the purposes of the CGT main residence exemption. This outcome arises as the trustee cannot use these amendments to treat themselves as using the dwelling as their main residence on that day.

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For example, the trustee cannot use the absence rule in section 118-145 for any day when the trust is not an SDT.

[Schedule 1, Part 1, item 4, subsections 118-218(1) and (2)]

1.36 This treatment will not apply where the trust becomes an SDT as soon as practicable after a dwelling is transferred into it (see paragraphs 1.23 and 1.26) or after the trustee purchases a dwelling. That is, where the dwelling is the principal beneficiary's main residence in the time leading up to the trust becoming an SDT, those days will be main residence days.

Example 1.5

Respect Pty Ltd (Respect) is the trustee of an SDT established for Mark. Respect, in its capacity as trustee, purchases a dwelling for the benefit of Mark, with settlement occurring on 1 January 2007. Mark moves in on this day.

Respect sells the dwelling with settlement occurring on 31 December 2010. Mark moves out on this day. Respect would make a capital gain of $15,000 (apart from these amendments).

The trust is not an SDT during the calendar year of 2010 (including at the time of the CGT event) as during this period, the trustee paid a weekly allowance of $200 to Mark's mother for her personal expenditure.

When Respect sells the dwelling in 2010, the trustee is required to use the partial main residence formula in subsection 118-185(2). For the year of 2010, the days are counted as non-main residence days .

Therefore, Respect will be taken to have made a capital gain of $3,747 - calculated as follows:

CG amount * Non-main residence days / Days in Respect's ownership period
$15,000 * (365/1,461) = $3,747.


A trustee inherits a dwelling from a deceased person's estate

1.37 If a trustee of an SDT inherits a dwelling from a deceased person's estate, the trustee may be able to disregard or reduce a capital gain or capital loss on a later dealing with that dwelling (or an ownership interest in it).

1.38 The trustee will determine the extent to which they can access the exemption by applying either section 118-195 (for a complete exemption) or 118-200 (for a partial exemption) as if they were a trustee or a beneficiary of the deceased person's estate. [Schedule 1, Part 1, item 4, subsections 118-218(1) to (3)]

1.39 These amendments provide a market value cost base for any asset that passes to an SDT from a deceased person's estate (see paragraphs 1.24 to 1.27). Therefore when the trustee of the SDT calculates any applicable CGT liability on a later dealing with that dwelling using the CGT main residence rules, any use of the dwelling by the deceased is ignored. This ensures that the trustee of the SDT will be able to access section 118-195 even where the dwelling was not the deceased's main residence or the dwelling was used to produce assessable income. [Schedule 1, Part 1, item 4, subsection 118-218(4)]

Example 1.6

Radovan purchased a dwelling, with settlement occurring on 1 January 2000. He died on 31 December 2009. Just before Radovan's death, the dwelling was his main residence although part of the dwelling was used to produce assessable income.

Radovan had set up a testamentary trust in his will to become an SDT for the benefit of Sue (the principal beneficiary). Sue had undergone the beneficiary assessment process prior to Radovan's death and the trust is recognised as an SDT at the time the asset passes to it. Kind Pty Ltd (Kind) is the trustee of the SDT.

The dwelling is used by Sue as her main residence until the dwelling is sold and settlement occurs on 2 March 2014. During the ownership period, the trust was an SDT.

Kind makes a capital gain of $20,000 (apart from these amendments).

These amendments disregard any income producing use before the deceased's death. Therefore, as the dwelling was Sue's main residence during all of Kind's ownership period, Kind disregards the capital gain of $20,000 when the dwelling is sold.

Death of the principal beneficiary

1.40 The social security and veterans' entitlements rules provide that an SDT ends on the death of the principal beneficiary, with assets being disposed of by a trustee or passed to the relevant beneficiary as determined by the trust deed. An implied trust may arise over the assets of the SDT. The assets are then transferred out of the implied trust to the beneficiary.

The dwelling is disposed of by either a trustee of the SDT or a trustee of the implied trust with proceeds given to the beneficiary

1.41 After the death of the principal beneficiary, the terms of the trust deed may require the dwelling to be disposed of, with the proceeds being distributed to the beneficiary or beneficiaries. This disposal may be by a trustee of the SDT or a trustee of the implied trust (the trustee). Under the amendments, the trustee will access a complete or partial CGT main residence exemption, based on the use of the dwelling by the principal beneficiary.

1.42 Diagram 1.1 highlights this outcome where the dwelling is disposed of by the trustee.

Conditions for the trustee

1.43 In order for the trustee to qualify for the treatment available following a principal beneficiary's death, the following conditions must be satisfied:

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the CGT event must happen at or after the principal beneficiary's death;

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the dwelling must have been owned by a trust that was an SDT at some point in the dwelling's ownership period (at or before the principal beneficiary's death); and

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when the CGT event happens, the dwelling must be owned by a trustee of the SDT or a trustee of an implied trust arising because of the principal beneficiary's death.

[Schedule 1, Part 1, item 4, section 118-220 ]

1.44 Prior to determining whether a full or partial CGT main residence exemption is available, to work out the amount of the capital gain or capital loss, the trustee will use the following as the first element of the cost base (and reduced cost base) as appropriate:

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Where the trustee of the SDT disposes of the dwelling and distributes the proceeds to a beneficiary - the trustee will retain its original cost base, unless it satisfies the requirements of a market value cost base (see paragraph 1.45).

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Where the trustee of the implied trust disposes of the dwelling and distributes the proceeds to a beneficiary -the trustee will use the trustee of the SDT's cost base of the asset just before the deceased's death (unless the market value cost base rule in paragraph 1.45 applies) [Schedule 1, Part 1, item 4, subsection 118-227(2)] .

1.45 The trustee of the SDT and the trustee of the implied trust will use the market value of the asset just before the principal beneficiary's death as the first element of the asset's cost base provided certain conditions are met. These conditions require that the dwelling was used by the principal beneficiary as their main residence, it was not used to produce assessable income and the dwelling was owned by the trust that was an SDT just before the principal beneficiary's death. This provides consistent outcomes with the Division 128 treatment that is available to a legal personal representative.

•

This effectively exempts any unrealised capital gain or loss that has accrued up until the principal beneficiary's death.

[Schedule 1, Part 1, item 4, subsection 118-227(1)]

Calculation of the CGT liability by the trustee

1.46 Where the trustee of the implied trust acquires the dwelling from the trustee of the SDT, any capital gain or loss is disregarded by the trustee of the SDT. This ensures that any CGT liability is deferred until the trustee of the implied trust disposes of the asset. [Schedule 1, Part 1, item 4, subsection 118-225(1)]

1.47 The trustee of the SDT or the implied trust that ultimately disposes of the dwelling will determine their eligibility for the CGT main residence exemption by decreasing the amount of the capital gain or capital loss they would have made by an amount that is reasonable. Factors that may affect the availability of the exemption include the time the dwelling was the principal beneficiary's main residence, the time the trust was an SDT and whether the dwelling was used to produce assessable income during the relevant period.

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The 'relevant period' for the trustee is generally the period starting when the trustee of the SDT first acquired the dwelling and ending when the relevant trustee disposes of the dwelling.

[Schedule 1, Part 1, item 4, paragraphs 118-225(2)(a ), ( 3)(a) and (c) and subsection 118-225(4)]

1.48 In determining what is a reasonable decrease in the capital gain or capital loss, the taxpayer should have regard to the principles applying in Subdivision 118-B, assuming the dwelling passed to the trustee as a trustee in a deceased person's estate. [Schedule 1, Part 1, item 4, paragraphs 118-225(2)(a ), ( 3)(a) and (c) and subsection 118-225(4)]

Example 1.7 : Full exemption for the trustee on disposal

Caring Pty Ltd (Caring) is the trustee of an SDT established for Peter, who is the principal beneficiary. Caring purchases a dwelling for the benefit of Peter. Settlement occurs on 1 January 2007 and Peter moves in on that day.

On 31 December 2012, Peter dies. Immediately, the trustee of an implied trust acquires the dwelling from the trustee of the SDT. Six months later, the trustee of the implied trust disposes of the dwelling and gives the proceeds to John.

In this situation, the trustee of the SDT disregards any capital gain or capital loss when the trustee of the implied trust acquires the dwelling.

Using the principles of section 118-195, the trustee of the implied trust determines that it is reasonable to disregard any capital gain or capital loss on the dwelling because:

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the trustee's ownership interest ends within two years of Peter's death; and

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just before Peter's death:

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the dwelling was Peter's main residence;

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it was not used to produce assessable income; and

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the trust was an SDT.

The trustee passes the dwelling to the beneficiary

1.49 On the death of an individual, typically there is no CGT taxing point on an asset of the deceased. Instead, any CGT liability is typically deferred until a later dealing with the asset by a beneficiary of the deceased person's estate.

1.50 For main residence dwellings, a beneficiary of the deceased estate may be eligible for a complete CGT main residence exemption, provided certain conditions in section 118-195 are satisfied. Where these conditions are not satisfied, a partial CGT main residence exemption may be provided. In these cases, section 118-200 requires the beneficiary to take into account the extent to which the dwelling was the deceased's main residence and whether it was used to produce assessable income.

1.51 To ensure comparable treatment for SDT cases, when a beneficiary acquires the main residence dwelling (including where it acquires the dwelling from an implied trust), no CGT taxing point will occur for a trustee of the SDT or a trustee of an implied trust (the trustee). This ensures that where there is an unrealised CGT liability in the hands of the trustee, this is deferred until a later dealing with the asset by the beneficiary. [Schedule 1, Part 1, item 4, section 118-220 and subsection 118-225(1)]

1.52 Diagram 1.2 highlights this outcome where the trustee passes the dwelling to a beneficiary.

CGT consequences for the trustee

1.53 To ensure that any applicable CGT liability flows through to a beneficiary, the trustee of the SDT and the trustee of the implied trust (if relevant) will disregard any capital gain or capital loss on the dwelling. This is on the condition that the relevant trustee satisfies the conditions in paragraph 1.43. [Schedule 1, Part 1, item 4, subsection 118-225(1)]

Calculation of the CGT liability on the subsequent disposal by the beneficiary

1.54 In order for a beneficiary to qualify for the treatment available following the principal beneficiary's death, the beneficiary must acquire the asset from a trustee of an SDT or trustee of an implied trust. [Schedule 1, Part 1, item 4, section 118-222 ]

1.55 Prior to determining whether a complete or partial CGT main residence exemption is available, to work out the amount of the capital gain or capital loss, the beneficiary will use the following as first element of cost base (and reduced cost base) as appropriate:

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where the beneficiary acquires the dwelling from a trustee of an implied trust - the trustee's cost base for the asset, just before the beneficiary acquired the asset (further information about the trustee's cost base is in paragraphs 1.44 and 1.45); or

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where the beneficiary acquires the asset directly from a trustee of an SDT - the trustee of the SDT's cost base for the asset just before the beneficiary acquired the asset.

[Schedule 1, Part 1, item 4, subsection 118-227(3)]

1.56 The relevant trust will use the market value of the asset just before the principal beneficiary's death for the first element of the asset's cost base provided certain conditions are met. These conditions require that the dwelling was used by the principal beneficiary as their main residence, it was not used to produce assessable income, and the trust was an SDT just before their death. This use will flow through to the beneficiary, providing outcomes consistent with the Division 128 treatment that is available to a beneficiary of a deceased person's estate. [Schedule 1, Part 1, item 4, subsection 118-227(1)]

1.57 The beneficiary determines the extent of their main residence exemption by decreasing the amount of capital gain or capital loss they would have made without the exemption by an amount that is reasonable. In determining what is a reasonable decrease in the capital gain or capital loss, the taxpayer should use the principles that apply in paragraphs 1.47 and 1.48, assuming the dwelling passed to them as a beneficiary in a deceased person's estate. [Schedule 1, Part 1, item 4, paragraphs 118-225(2)(b ), ( 3)(b) and (c) and subsection 118-225(4)]

Example 1.8 : Full exemption for the beneficiary

Health Pty Ltd (Health) is the trustee of an SDT established for John, who is the principal beneficiary. Health purchases a dwelling for the benefit of John. Settlement occurs on 1 January 2007 and John moves in on that day.

On 31 December 2012, John dies. Immediately, the trustee of the implied trust acquires the dwelling from the trustee of the SDT, as the SDT ends on the death of the principal beneficiary. Three months later, the beneficiary of the trust, Casey, acquires the dwelling. Casey later disposes of the dwelling, with settlement occurring on 1 July 2014.

Both the trustee of the SDT and the trustee of the implied trust will disregard any capital gain or capital loss as a result of the CGT event happening to the dwelling.

In addition, using the principles of section 118-195, Casey determines that it is reasonable to disregard any capital gain or capital loss on the dwelling because:

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Casey's ownership interest ends within two years of John's death; and

•

just before John's death:

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the dwelling was John's main residence;

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it was not used to produce assessable income; and

-

the trust was an SDT.

Example 1.9 : Partial exemption for the beneficiary

Further to Example 1.8, assume that during Health's entire ownership period, a part of the dwelling was used for income producing purposes.

Casey, as beneficiary of the SDT, takes into account the cost base of the dwelling in the hands of the trustee of the implied trust and determines that, without a partial CGT main residence exemption, a $14,000 capital gain would be made when he sells the dwelling in 2014.

As there was income producing use of the dwelling just before John's death, Casey decides it is reasonable to use the principles in sections 118-190 and 118-200 to determine the amount of capital gain or capital loss that will be disregarded.

When Casey disposes of the dwelling, he considers that it is reasonable that 25 per cent of the dwelling was used for income producing purposes. Therefore, of this total capital gain, the following amount is not disregarded due to the income producing use:

$14,000 * 25% = $3,500


Therefore, Casey would make a capital gain of $3,500 as it is reasonable for Casey to reduce the capital gain of $14,000 by $10,500.

Other issues relating to the CGT main residence exemption

Exception for the beneficiary's interest in the trust

1.58 To ensure the main residence exemption at the trustee level is not unwound at the beneficiary level, the beneficiary will disregard a capital gain or capital loss on their interest in the trust ending. This is on the condition that the trustee of the SDT or implied trust is eligible for a CGT main residence exemption.

•

This will apply where the beneficiary becomes absolutely entitled to the dwelling (CGT event E5) or where the trustee disposes of the dwelling in satisfaction of the beneficiary's interest in the trust (CGT event E7).

[Schedule 1, Part 1, items 1 and 2, subsections 104-75(6) and 104-85(6)]

Additional CGT events relevant for SDTs

1.59 The list of CGT events that is required to happen in order for a taxpayer to access a CGT main residence exemption is expanded for SDT cases to include CGT event E5 (where a beneficiary becomes absolutely entitled to a dwelling held in an SDT) and CGT event E7 (where the trustee disposes of the dwelling in satisfaction of the beneficiary's interest in the SDT). [Schedule 1, Part 1, item 4, section 118-230 ]

Interaction with the trustee's personal dwelling

1.60 The trustee will disregard the use of their personal dwelling when determining whether they are eligible for the CGT main residence exemption in their capacity as trustee of an SDT. Under subsection 960-100(3) of the ITAA 1997, the trustee of an SDT is taken to be a different entity for tax purposes to the individual who accesses the main residence exemption in their personal capacity.

1.61 For the same reason, the trustee can ignore the deemed use of the dwelling held in the SDT when the trustee accesses the CGT main residence exemption in their personal capacity.

Application and transitional provisions

1.62 These amendments apply to income tax assessments for the 2006-07 income year and later income years. These amendments, which are beneficial to taxpayers, are retrospective so as to ensure transactions that have occurred since SDTs were first able to be established are covered by these amendments. [Schedule 1, Parts 1 to 3, items 5, 9 and 12 ]

1.63 The operation of section 170 of the ITAA 1936 is modified so that taxpayers are able to seek an amended assessment to take advantage of these amendments in circumstances where their original assessment was made before the commencement of these amendments but their period for seeking an amendment to their tax return has expired. Taxpayers have two years following the commencement of these amendments in which their amended assessment must be made. [Schedule 1, Clause 4 ]