Many thousands of Australians hold their home in a trust or company, often for asset-protection, or estate planning reasons, unaware that with the correct structuring they can still be eligible for the capital gains tax (‘CGT’) main residence exemption when the trustee or company sells the home.
There is an automatic exemption in the Income Tax Assessment Act 1997 (ITAA 97’) for the capital gain that arises when a ‘main residence’ dwelling, or a taxpayer’s ‘ownership interest’ in it is sold. An ‘ownership interest’ in the dwelling comes about if you have:
While the main residence exemption is only available for individuals (and not to trusts or companies), you may still be able to access the exemption even if you do not own the freehold in the property, which will be the case where the home sits in a trust or company.
For the reasons above it is necessary to provide ownership interests in a home held in a trust / company, by an instrument that is external to the trust deed or company constitution. We have assisted clients with taxation advice including providing instructions to legal advisers to ensure the individual obtains the correct level of ownership interests in a property that can result in the use of main residence exemption on disposal. This approach has been sanctioned by the ATO in the past as evidenced by private binding rulings.
Ultimately, this allows the taxpayer to still maintain a level of asset protection and also to claim the main residence exemption. The capital gain that the trustee or company owner makes is effectively migrated to the ownership interest of the individual homeowner.
As well as obtaining the CGT main residence exemption for our clients, we have also applied for a Queensland Land Tax exemption for clients on properties held by discretionary trusts that are used as private homes, without which several thousand dollars a year of Land Tax can be imposed by the Queensland Revenue Office.
Tax and trust distribution planning is critical. As evidence, the trustee of a discretionary trust must provide the Commissioner with written copies of all distributions made during the 12 months prior to the latest 30 June. The trustee must also provide the names and residential addresses of all beneficiaries who received distributions during that year.
Recently, the Commissioner has sought not just these trustee resolutions and minutes for the year, but also a copy of the trust deed, copies of rate notices, electricity, or other invoices, with the names of both beneficiaries (in the case of a couple) to prove their occupation as a home.
Timing though can be critical, since the Queensland Revenue Office are renowned for denying applications if additional information (such as rate notices etc) is not provided within the short timeframe granted to the property owner.
Pre-emptive action is required if you wish to avail yourself of relevant concessions. For advice on this matter, please contact your usual Exant Advisor or our Tax specialists Jamie Towers and Dean Rallison via the form below or on 07 3218 3900.
Author: Dean Rallison (Tax)