Edited version of private ruling

Authorisation Number: 1011656794598

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Ruling

Subject: Capital gains tax (CGT) - Acquisition of real property by Statutory Trust

1. Did you acquire a CGT asset as a result of the operation of the item in the Table in subsection 109-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) relating to CGT event E2?

No.

2. Does the cost base of the CGT asset you acquired include its market value calculated as at the acquisition date?

No.

3. Will you realise a capital gain as a result of the sale of the CGT asset by auction?

No.

4. Will you be required to pay tax under subsection 98(3) of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to part of the interest income received in connection with the sale of the property and the investment of the proceeds?

No.

This ruling applies for the following period<s>:

2009-10 income year

2010-11 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The property was vested in yourselves as a result of an order of the Supreme Court of a State.

The order was made under the State Conveyancing Act as a result of an application made under that Act.

There were three owners of the property at the time that it was vested in you.

These people are the beneficiaries of the trust. Since the date of the Court order, one has passed away.

Two were Australian residents for income tax purposes and so is the deceased estate.

The third beneficiary is a foreign resident for income tax purposes.

Around the time of the vesting of the property in yourselves, an indicative valuation of the property was obtained from a real estate agent. This value was placed on the property in preparation for the auction.

The property was listed for auction and was successfully sold at auction during the 2009-10 income year for more than the reserve. Settlement was due to occur after 30 June 2010.

Settlement actually occurred a couple of weeks later and the purchaser was required to pay interest as a result of the delayed settlement.

You didn't earn any income in respect of the statutory trust created by the Court order during the 2009-10 income year (however, the exchange of contracts meant that a CGT event happened in that year).

It is intended that the net sale proceeds will be invested for the benefit of the beneficiaries until such time as certainty is obtained as to the correct tax treatment of the sale of the property. The investing of the proceeds will result in further interest income being derived by you during the 2010-11 income year.

For the purpose of this ruling, you make the investment as stated above.

Certain documents are to be read with, and form part of the description of the scheme for the purpose of this ruling including:

· The Court order

· The settlement statement

· Certain letters from the solicitor and the real estate agent.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 103-15

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Division 112

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1936 Subsection 98(3)

Income Tax Assessment Act 1936 Subsection 128A(3)

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Section 128D.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

You did not acquire a CGT asset as a result of the operation of the Item in the Table in subsection 109-5(2) of the ITAA 1997 relating to CGT event E2.

Instead, you acquired the property as a result of the operation of the Item in the Table in subsection 109-5(2) of the ITAA 1997 relating to CGT event A1.

Detailed reasoning

Subsection 109-5(1) of the ITAA 1997 states that in general, you acquire a CGT asset when you become its owner, however, subsection 109-5(2) provides specific acquisition rules if the acquisition is as a result of a CGT event happening.

As a result, it must first be determined whether the acquisition is as a result of a CGT event happening and, if so, which CGT event.

Determining the relevant CGT event

Section 102-25 of the ITAA 1997 provides the rules for determining which CGT event happens. It also requires the most specific event to be used if more than one happens.

The Court order caused a change of ownership in circumstances where three CGT events need to be considered:

· CGT event A1 about changes of ownership

· CGT event E1 about creating a trust over an asset, and

· CGT event E2 about transferring an asset to a trust.

CGT event A1 happens if the ownership of a CGT asset changes from one entity to another entity. CGT event A1 happened due to the Court order.

CGT event E1 happens if the former owner of a CGT asset creates a trust over the asset by declaration or settlement.

CGT event E1 did not happen because the trust was not created by any of the former owners - it was the Court order that created the trust.

CGT event E2 happens if the former owner transfers a CGT asset to an existing trust.

CGT event E2 did not happen because the trust didn't exist before the transfer took place - it was not an existing trust.

As CGT event A1 is the only CGT event that happened, the Item related to CGT event A1 is used when determining your acquisition date.

The Item related to CGT event A1 (case 1) states that you acquire a CGT asset when the disposal contract is entered into or, if none, when the former owner stops being the owner.

The Court order is not a contract, therefore, you acquired the property when the change of ownership took effect.

Note: CGT event A1 (case 2) does not apply because this wasn't a compulsory acquisition for capital gains purposes.

Question 2

Summary

The cost base of the CGT asset you acquired does not include its market value calculated as at the acquisition date.

Detailed reasoning

The cost base of a CGT asset consists of five elements.

Generally, the first element is the total of:

· the money you paid, or are required to pay, in respect of acquiring it, and

· the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out at the time of the acquisition).

However, if certain conditions are met, the cost base is modified by substituting a different amount as an element of the cost base (generally, the first element).

Does a cost base modification apply?

Modifications are generally made to the cost base of a CGT asset for four reasons:

· Subdivision 112-A of the ITAA 1997 - general modifications

· Subdivision 112-B of the ITAA 1997 - special rules related to the manner of the acquisition

· Subdivision 112-C of the ITAA 1997 - replacement asset roll-overs

· Subdivision 112-D of the ITAA 1997 - same asset roll-overs.

We have considered each of these categories and concluded that none of these modifications apply to your acquisition of the property.

Specifically, the first element of the cost base of the property is not its market value calculated as at the date of the Court order because you are not acquiring it as a result of CGT event E2 happening.

Calculating the first element of the cost base of the property

Section 103-15 of the ITAA 1997 states that the capital gains provisions apply to you as if you are required to pay money or give other property even if:

· you do not have to pay or give it until a later time, or

· the money is payable by instalments.

You undertook an obligation to pay the net proceeds from the sale of the property to the beneficiaries as former owners of the property. Obviously, this payment was not to be made until you had sold the property and received the proceeds from its sale.

Therefore, the first element of the cost base of the property is the amount of the net proceeds from its subsequent sale.

Question 3

Summary

You don't realise a capital gain as a result of the sale of the CGT asset by auction as the cost base and capital proceeds will both be the same amount.

Detailed reasoning

You only make a capital gain from CGT event A1 if the capital proceeds exceed the asset's cost base.

The capital proceeds are the total of:

· the money you have received, or are entitled to receive, in respect of the event happening, and

· the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out at the time of the event).

The amount of the capital proceeds from the sale is the gross sale proceeds before expenses. The penalty interest is not part of the capital proceeds. The cost base of the property consists of five elements that also total this amount.

For the reasons given above, the first element of the cost base of the property is the net proceeds from its sale. The difference between the gross proceeds and the net proceeds is included in the cost base of the property as second element expenditure (to the extent they relate to the selling of the property) or third element expenditure (to the extent they relate to holding the property, for example rates).

As the cost base of the property equals the capita proceeds, you don't make a capital gain from the sale.

Question 4

Summary

You will not be required to pay tax under subsection 98(3) of the ITAA 1936 in relation to any part of the interest income received in connection with the sale of the property and the investment of the proceeds; however, you will be required to pay withholding tax.

Detailed reasoning

Persons who are not residents of Australia for income tax purposes are generally subject to withholding tax on the interest income they derive from Australia. Withholding tax, which is deducted at the time a payment is made to the foreign resident, represents their final liability to tax in Australia.

Foreign resident beneficiaries who are presently entitled to interest included in the income of a trust estate are treated as deriving it when the present entitlement arises.

The beneficiary is subject to withholding tax even if the trust estate has no net income or has incurred a loss, for income tax purposes, for the income year.

The trustee who is paid interest income to which the foreign resident is presently entitled is obliged to deduct withholding tax and pay the tax to the Commissioner within 21 days after the end of the month in which the income was derived.

Amounts that are subject to withholding tax are not included in the beneficiary's assessable income and you as trustee are not subject to tax on them under subsection 98(3) of the ITAA 1936 either.

Subsection 98(3) of the ITAA 1936 will not apply to you in respect of the distributions to the other two beneficiaries as they are residents of Australia.

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