Taxation Determination

TD 2003/28

Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to:

(a)
a mere object; or
(b)
a default beneficiary?

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FOI status:

may be released

Preamble
The number, subject heading, date of effect and paragraphs 1 of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of this Determination is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Determination is a 'public ruling' and how it is binding on the Commissioner.

1. (a) No, CGT event E4 does not happen if a trustee of a discretionary trust makes a non-assessable payment to a mere object in respect of their interest in the trust.

(b) No, CGT event E4 does not happen if a trustee of a discretionary trust makes a non-assessable payment to a default beneficiary in respect of their interest in the trust if the interest was not acquired for consideration or by way of assignment.

2. In this context, a mere object refers to a member of the class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee (i.e. a discretionary beneficiary). A default beneficiary refers to a beneficiary whose entitlement to income or corpus arises should the trustee decide not to exercise their discretion in favour of the objects or fail to exercise their discretion.

3. CGT event E4 does not happen in the circumstances described in paragraph 1 because a mere object or default beneficiary is not considered to have an 'interest in the trust' of the nature or character required in paragraph 104-70(1)(a).

4. The meaning to be given to the words 'interest in the trust' depends on the context in which they are used, see for example Leedale v. Lewis [1982] 3 All ER 808 and Gartside v. IRC [1968] AC 553. In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests.

5. The interest that a mere object has in a trust is not one in which another person can invest - such an interest, being a bare right of action, cannot be purchased or assigned. An interest of a default beneficiary has been held to constitute a vested, but defeasible, proprietary interest in a trust (see Queensland Trustees v. Commissioner of Stamp Duties (Queensland) (1952) 88 CLR 54 at page 63).[F1] It can be assigned and be the subject of a testamentary disposition. However, it is not an interest potentially subject to CGT event E4 where it has not been acquired for consideration or by way of assignment.

6. We take the same view in respect of the operation of section 160ZM of the Income Tax Assessment Act 1936 (ITAA 1936).

Date of effect

7. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
26 November 2003

Footnotes


1 More recent UK authorities (for example, Pearson v. Inland Revenue Commissioners [1981] AC 753) tend to the view that the interest of a default beneficiary is not more significant than the interest of a mere object.

Previously released in draft form as TD 1999/D67.

References

ATO references:
NO 2003/15348

ISSN: 1038-8982

Related Rulings/Determinations:

TD 2001/26
TD 97/15
TR 92/1
TR 92/20
TR 97/16

Subject References:
beneficiary
capital payments
CGT asset
default beneficiary
discretionary trust
taker in default
trust
trustee

Legislative References:
ITAA 1997 104-70
ITAA 1997 104-70(1)(a)
ITAA 1936 160ZM
TAA 1953 Part IVAAA

Case References:
Gartside v. IRC
[1968] AC 553


Leedale v. Lewis
[1982] 3 All ER 808

Pearson v. Inland Revenue Commissioners
[1981] AC 753

Queensland Trustees v. Commissioner of Stamp Duties (Queensland)
(1952) 88 CLR 54

TD 2003/28 history
  Date: Version: Change:
You are here 26 November 2003 Original ruling  
  29 November 2006 Original ruling + note Repeal provision note
  30 April 2008 Consolidated ruling Addendum