ATO Interpretative Decision

ATO ID 2002/395 (Withdrawn)

Income Tax

• This ATO ID is withdrawn because the ATO is reconsidering the position stated in the ATO ID. The ATO has now reconsidered the position stated in the ATO ID. While the ATO ID decision may be correct in the context of the particular facts to which it relates, the reasoning is not necessarily correct. A replacement ATOID will be issued if the issue arises in the context of another case.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will a capital gain or loss be made by a beneficiary, under subsection 104-75(5) of the Income Tax Assessment Act 1997 (ITAA 1997), upon the vesting of the trust with the beneficiaries becoming absolutely entitled to the trust assets (shares in a company)?

Decision

No, a capital gain or loss will not arise under subsection 104-75(5) of the ITAA 1997 when the beneficiary becomes absolutely entitled to the shares as against the trustee.

Facts

A discretionary trust was established prior to 20 September 1985. The trust property comprises shares (acquired prior to 20 September 1985) in a private company. It is proposed to vest the trust, with the beneficiaries becoming absolutely entitled to the shares.

Reasons for Decision

When a beneficiary becomes absolutely entitled to a CGT asset of the trust (in this case, shares) as against the trustee, the beneficiary makes a capital gain if the market value of the shares at that time is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the shares. A capital loss will arise if that market value is less than the reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the shares (subsection 104-75(5) of the ITAA 1997).

Taxation Determination TD 97/15 (as amended by Addendum TD 97/15A) explains that CGT event E4 (section 104-70 of the ITAA 1997) does not apply to a non-assessable payment made by a trustee to a beneficiary of a discretionary trust. One of the reasons for this position as set out in paragraph 1 of TD 97/15 is:

'... because a discretionary beneficiary does not hold an "interest ... in the trust" of the nature or character referred to in subsection 104-70(1)

Paragraph 3 of Taxation Determination TD 97/15 expresses the following view:

'The interest that a discretionary beneficiary has in a discretionary trust (to have the trust estate properly administered and to be considered by the trustee in exercising a power or appointment to distribute income or corpus of the trust) is of a different nature from the type of interest in a trust referred to in subsection 104-70(1).'

However, in the case of CGT event E5 (subsection 104-75(5) of the ITAA 1997) refers not to the beneficiary's 'interest in the trust' as in section 104-70 of the ITAA 1997, but to the beneficiary's 'interest in the trust capital to the extent it relates to the asset'.

The cost base of the beneficiary's interest, if the beneficiary did not incur expenditure to acquire it, would be subject to the market value substitution rule set out in subsection 112-20(1) of the ITAA 1997, which would make the first element of the cost base of the interest its market value at the time the beneficiary acquired the interest. That time would be when the beneficiary became absolutely entitled to the asset constituted by the interest, as the beneficiary would not have any interest in the trust capital prior to becoming absolutely entitled to the trust asset.

As the market value of the shares at the time the beneficiary becomes absolutely entitled to them, and the cost base of the beneficiary's interest in the trust capital to the extent it relates to the shares are the same, there will be no CGT consequences for the beneficiary upon becoming absolutely entitled to the shares.

Year of income:  Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 104-70
   subsection 104-70(1)
   section 104-75
   subsection 104-75(5)
   section 112-20

Related Public Rulings (including Determinations)
TD 97/15

Keywords
Beneficiaries
Capital gains
Capital gains tax
CGT assets
Market value cost base
Non fixed trusts
Time of CGT event
Trust beneficiaries
Trust deeds
Trusts

Business Line:  Centres of Expertise Capital Gains Tax

Date of publication:  28 March 2002

ISSN: 1445-2782