ATO Interpretative Decision

ATO ID 2003/1116 (Withdrawn)

Income Tax

• This ATO ID has been withdrawn as the ATO view on this matter now appears in TR 2005/D14
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does CGT event E7 in section 104-85 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the trustee of a trust transfers to a remainder beneficiary of a trust, a legal interest in remainder to an asset of the trust?

Decision

Yes. CGT event E7 happens because the trustee disposed of the legal remainder interest to the remainder beneficiary in satisfaction of the remainder beneficiary's right to the capital of the trust.

Facts

After 19 September 1985 a trust was established inter vivos. The trust is not a unit trust.

The trust property consists of a piece of real estate acquired.

The trust deed requires the trustee to hold the land on trust to pay the income from it to an individual for life and to hold the remainder interest for another individual.

After a number of years the beneficiaries, both of whom are the original beneficiaries named in the trust deed (that is, they did not purchase their interests or acquire them by way of an assignment), wish to bring the trust to an end. They approached the trustee and asked that life and remainder interests in the property be transferred to them.

In the 2003 income year, the trustee transferred the respective life and remainder interests and the transfers were registered on the title.

Reasons for Decision

CGT event E7 in section 104-85 of the ITAA 1997 happens if the trustee of a trust disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's right, or part of it, in the trust capital.

The issue that needs to be determined in this case is whether the trustee has disposed of the remainder interest to the beneficiary or whether the interest was created in them.

Taxation Ruling IT 2561 provides that certain interests in real property are to be treated as created interests. Paragraph 16 of the ruling provides:

An easement, profit a prendre or licence (or other comparable right) is an asset created at the time it is granted. The asset is taken by paragraph 160M(5)(c) of the Act to have been acquired by the grantor. Subsection 160C(2) then treats the grantor as owning the asset. The time of acquisition is determined by section 160U.

(references to the Act in the above paragraph are to the Income Tax Assessment Act 1936)

It is considered that a legal life or remainder interest in land is not comparable to an easement, profit a prendre or licence. The life and remainder interests together represent the entire freehold interest in the land. By transferring the remainder interest, the trustee is actually disposing of part of the freehold interest in the land in a similar way to the disposal of a percentage interest in the fee simple interest in the property.

Accordingly, it is considered that CGT event E7 in section 104-85 of the ITAA 1997 happened in this case, because the trustee disposed of a CGT asset (the remainder interest) to a beneficiary of the trust (the remainder beneficiary) in satisfaction of part of the beneficiary's right to the trust capital. CGT event E7 happened at the time of disposal (subsection 104-85(2) of the ITAA 1997). As CGT event E7 has happened, there may be consequences for both the trustee and the remainder beneficiary.

Consequences for trustee

The trustee makes a capital gain under CGT event E7 if the market value of the asset disposed of is more than its cost base. It makes a capital loss if the market value is less than the asset's reduced cost base (subsection 104-85(3) of the ITAA 1997).

In determining the capital gain or capital loss from CGT event E7 happening to the remainder interest, the trustee must apportion their cost base or reduced cost base of the property in accordance with section 112-30 of the ITAA 1997.

Consequences for remainder beneficiary

The remainder beneficiary makes a capital gain under CGT event E7 if the market value of the remainder interest in the land that it acquires is more than the cost base of their interest in the trust. The remainder beneficiary makes a capital loss if the market value of the remainder interest in the land is less than the reduced cost base of their interest in the trust (subsection 104-85(5) of the ITAA 1997).

However, a capital gain or capital loss the remainder beneficiary makes is disregarded if they acquired the trust interest (other than by way of an assignment from another entity) for no expenditure (subsection 104-85(6) of the ITAA 1997). In this case, any capital gain or capital loss the remainder beneficiary makes will be disregarded, because they did not acquire their trust interest by way of assignment, and did not incur any expenditure to acquire it.

The first element of the cost base and reduced cost base of the remainder interest in the land acquired by the remainder beneficiary will be based on its market value (at the time CGT event E7 happened): paragraph 112-20(1)(a) of the ITAA 1997. This will depend on a number of factors, including the market value of the land and the life expectancy of the life tenant.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 104-85
   subsection 104-85(2)
   subsection 104-85(3)
   subsection 104-85(5)
   subsection 104-85(6)
   paragraph 112-20(1)(a)
   section 112-30

Related Public Rulings (including Determinations)
Taxation Ruling IT 2561

Related ATO Interpretative Decisions
ATO ID 2003/108
ATO ID 2003/470
ATO ID 2003/1117

Keywords
Capital gains
Capital gains tax
CGT cost base
CGT events
CGT events E1-E9 - trusts
Life interests
Trustees
Trusts

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  12 December 2003

ISSN: 1445-2782