Capital Gains Tax when a beneficiary has lived in a house owned by a trust

Question

Hi Julia,

My family trust (of which I am a beneficiary) has owned a house for 5 years. It has been rented out for the whole 5 years and interest has been claimed as a tax deduction, on the loan against the house. The trust has losses of 100,000.

If I move into this house,as my principal place of residence and live there for 5 years, how is capital gain assessed and taxed if the house is sold in say 10 years.

If there was say $1 million capital gain, can you tell me please, which scenario below, would apply?

A. Would the full $1mill capital gain be considered for tax purposes? ie $1 mill less 50% capital gains tax discount= 500,000 to be taxed less the 100,000 losses leaving 400,000 to pay tax on. OR

B. Would only $500,000 (half of the $1 mill capital gain) be considered for tax because it was my principal place of residence for half the time. ie $500,000 only to be considered less 50% capital gains discount= 250,000. And could the 100,000 losses still be deducted from this,so that the taxable amount would then be $150,000?

I presume that scenario A would apply.

If i lived there could the trust continue to claim the interest payments each year as a deduction? I presume not. (By claiming the interest each year, this would increase the losses)

Thank you Regards Maddy

Answer

This idea is not going to fly because you cannot cover a property owned in a trust with your main residence exemption. Section 118-110 ITAA 1997 http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.110.html requires the property to be owned by an individual.
Accordingly, the CGT calculation would be on all the capital gain whether you sell it now or in 5 years time. The 50% CGT discount would apply then the $100,000 loss would be offset against the net gain after the discount because it is a revenue loss. In other words A. in your example. If it was a capital loss it would be offset against the gain before the discount.
All these concessions will flow through to the beneficiaries when they declare the trust distribution in their tax returns. That is unless a beneficiary is a company. Companies do not qualify for the 50% CGT discount so even though the trust did the discount will be added back in the company tax return.
Regarding negatively gearing the house in the trust while you are living there. Generally the ATO would consider the cost of running the house for you a private expense. Being a discretionary trust you cannot be said to be trying to negatively gear it in your tax return so you are in with a chance. You would have to pay market rent. If it is not a family trust that you control that would also help. There are contradicting cases and it is all about Part IVA – scheme with the dominant purposes of a tax benefit so you are at the mercy of the ATO’s interpretation. If you do want to try and rent the house from the trust, I suggest you obtain a ruling from the ATO as to whether they will consider the expenses private or not. If they consider it private you may as well not pay rent and then at least the trust will be allowed to increase the cost base by the costs that would have been able to be claimed against the rent. But this means that they are effectively deducted before the 50% discount is applied