1011544628967 | Legal database

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Edited version of private ruling

Authorisation Number: 1011544628967

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Ruling

Does the transfer of a pre-capital gains tax (CGT) property to the remaining sole beneficiary of a trust trigger a potential CGT liability for the beneficiary?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Relevant facts and circumstances

The trust was established some years ago.

The trust owns a property which was acquired prior to September 1985.

The trustee wishes to wind up the trust.

The trustee wishes to distribute the pre CGT property to the remaining general beneficiary, as part of the process of winding up the trust.

The beneficiary will not incur any expenditure on the transfer of the property from the trustee to the beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-10

Income Tax Assessment Act 1997 104-85(5)

Income Tax Assessment Act 1997 104-75(5)

Income Tax Assessment Act 1997 104-75(6)

Income Tax Assessment Act 1997 104-85(2)

Income Tax Assessment Act 1997 112-20(1)

Reasons for decision

Subsection 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT event A1 happens if you dispose of a CGT asset.

Subsection 104-85(5) of the ITAA 1997 states that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

In this case, as there will be a disposal of the property from the trustee to the beneficiary both CGT event A1 and CGT event E7 are applicable in this case. However, as the property is to be transferred to the beneficiary as part of the winding up of the trust, CGT event E7 is more specific to your situation. CGT event E7 will therefore be examined to determine how the capital gains provisions apply to the beneficiary.

A beneficiary makes a capital gain from CGT event E7 under subsection 104-75(5) of the ITAA 1997 if the market value of the asset at the time of the disposal is more than the cost base of the beneficiary's interest in trust capital. If that market value is less than the reduced cost base of that interest, a capital loss is made.

However, in accordance with subsection 104-75(6) of the ITAA 1997, a capital gain or capital loss made from CGT event E7 by a beneficiary is ignored if the trust interest was acquired for no expenditure (except where it was assigned from another entity) or was acquired before 20 September 1985.

It is noted that the beneficiary is not incurring any expenditure to acquire the property from the trustee. Therefore, in the event there is a difference between the market value of the property at the time CGT event E7 happens, and the cost base or reduced cost base of your interest in the property, any capital gain or loss made by the beneficiary is disregarded under subsection 104-75(6) of the ITAA 1997.

Subsection 104-85(2) of the ITAA 1997 states that the time of the event is when the disposal occurs. If an asset is acquired by a trust beneficiary as a result of CGT event E7, it is acquired at the time of that CGT event.

In the current case, a pre-CGT asset is to be disposed of by the trustee by transferring the asset to the remaining beneficiary. As the CGT event E7 will occur at the time of this disposal which is in this case after 20 September 1985, the beneficiary has acquired the asset after 20 September 1985. The pre-CGT status of the asset is therefore not maintained and any subsequent disposal of the property by the beneficiary may therefore be subject to CGT.

In accordance with the market value substitution rule in subsection 112-20(1) of the ITAA 1997, as the beneficiary did not incur any expenditure to acquire the property, the first element of the cost base on the acquisition of the property from the trustee will be the market value of the asset at the time of acquisition.

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