Edited version of private ruling

Authorisation Number: 1011809364137

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Ruling

Subject: Return Lodgement

Question 1

Is the scheme (receiver appointed) required to lodge tax returns?

Answer

Yes.

Question 2

Is the company (in liquidation) required to lodge tax returns?

Answer

No.

Question 3

If the scheme (receiver appointed) is required to lodge a tax return are they required to declare a nil capital gain or loss on the sale of the land?

Answer

No.

Question 4

If the answer to question 1 is yes, is the scheme required to allocate deductible expenses against interest income?

Answer

Yes.

Question 5

If the receiver does not have to declare a capital gain or loss from the sale of the land do they have to declare the gross capital proceeds on its disposal as the capital gain in the trust return?

Answer

No.

Question 6

If the receiver is required to lodge an income tax return and the answer to question 3 is no, can the beneficiaries claim a tax offset for the amounts withheld as no-TFN withholding relating to the interest derived in the bank account if there is income of the trust?

Answer

No.

Question 7

If the receiver is required to lodge an income tax return and there is no capital gain disclosed, can the trustees claim the tax offset for amounts withheld as no-TFN withholding relating to interest derived?

Answer

Yes.

This ruling applies for the following period:

1 July 2007 - 30 June 2008

The scheme commences on:

1 July 2006

Relevant facts and circumstances

Facts have been provided on a commercial in confidence basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 161(1),

Income Tax Assessment Act 1936 Subsection 95A(2),

Income Tax Assessment Act 1936 Section 6(1),

Income Tax Assessment Act 1936 Section 95,

Income Tax Assessment Act 1936 Section 97,

Income Tax Assessment Act 1936 Section 99A,

Income Tax Assessment Act 1997 Subsection 109-5(1),

Income Tax Assessment Act 1997 Subsection 109-5(2),

Income Tax Assessment Act 1997 Section 104-55,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 102-5(1),

Taxation Administration Act 1953 Schedule 1 Subsection 18-15(1),

Taxation Administration Act 1953 Schedule 1 Subsection 18-25(2) and

Taxation Administration Act 1953 Schedule 1 Subsection 18-25(6).

Reasons for decision

Questions 1 & 2

Summary

The receiver is required to lodge tax returns.

Detailed reasoning

Subsection 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states that every person must, if required by the Commissioner of Australia Gazette, provide a return for years of income.

Practice statement PS LA 2000/2 states that the delegate of the Commissioner has granted an exemption from lodging a tax return if you are a transparent trust.

A transparent trust is a trust in which the beneficiary of the trust estate has an absolute, indefeasible entitlement to the capital and the income of the trust.

Draft Taxation Ruling TR 2004/D25 at paragraph 10 states;

The core principle under pinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

For an entity to be absolutely entitled to an asset they must first have a vested and indefeasible interest in the entire trust asset and must also be able to direct the trustee to transfer the asset.

The Scheme

A previous private ruling was issued stating that the scheme was not liable to pay tax in respect of the proceeds of the sale of the land. Central to this ruling was the determination that the beneficiaries of the trust were deemed to be presently entitled to the proceeds of this sale under subsection 95A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) because they has a vested and indefeasible interest in the proceeds of the sale.

Given that the beneficiaries have a vested and indefeasible interest in the asset of the trust, if (in accordance with the principle found in TR 2004/D25) the beneficiaries of the trust have the ability call for the asset to be transferred, then the beneficiaries will have an absolute and indefeasible entitlement to the scheme's only asset, making the scheme a transparent trust and not required to lodge a tax return.

The difficulty in this situation is that there are a number of beneficiaries that may benefit from the trust. Paragraphs 23 - 25 of TR 2004/D25 discuss absolute entitlement where there is more than one beneficiary. It states that usually it will not be possible for any one beneficiary to call for an asset to be transferred because their entitlement is not to the entire asset. There is a particular circumstance where multiple beneficiaries can be considered absolutely entitled to an asset. This is where;

· The assets are fungible;

· The beneficiaries are entitled to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

· There is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

Applying the scheme's circumstances to each these elements leads to the following conclusions;

· The asset of the scheme is cash and as such is a fungible asset.

· All of the beneficiaries hold certain amounts of partnership entitlements in the scheme as specified by the partnership agreement.

· There is however no clear understanding on the part of all relevant parties that the beneficiary is entitled to that specific number of the trust's assets.

Under these circumstances the beneficiaries of the scheme are not absolutely entitled to the proceeds and the income of the trust. The scheme is therefore not a transparent trust for the purposes of PS LA 2000/2 and must lodge a tax return.

The Company

A private ruling was issued stating that the company was not liable to pay tax in respect of the sale proceeds relating to the sale of the land. This ruling was based on the decision that the scheme as beneficiary of a constructive trust was presently entitled to the income from the sale of the land.

The court order authorised and directed that company enter into a contract with the sale of the land on behalf of the scheme and to pay the proceeds to the scheme. As such the receivers of the scheme were entitled to the proceeds from the sale of the land and not the company.

The company was a transparent trust in relation to the land that it held constructively for the scheme. As this is the only asset of the company, the company is not required to lodge a tax return for this transaction.

Question 3

Summary

The receiver is not required to declare a nil capital gain or loss on the sale of the land in the income tax return.

Detailed reasoning

Under the definition of trustee in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) unless contrary intention appears a Receiver is considered a trustee for taxation purposes. When the receivers for the scheme were appointed by order of the court they also became trustees for taxation purposes of the scheme. This does not necessarily mean however, that the land formed part of the corpus of this trust.

For the property to form a part of the corpus of the trust, it must be acquired on behalf of the scheme in some way by the receivers.

Acquisition rules

Under subsection 109-5(1) of the ITAA 1997 you generally acquire an asset when you become its owner.

Subsection 109-5(2) of the ITAA 1997 provides specific rules for the circumstances in which you acquire a CGT asset.

E1 event

You can acquire an asset if an E1 event occurs. An E1 event happens if you create a trust over a CGT asset by declaration or settlement. You acquire the asset when the trust is created.

The Commissioner considers that when a trust is created by an order of the court, CGT event E1 has no application. This is because the court created the trust rather than "you" by declaration or settlement. As an E1 event did not occur at the time the receiver was appointed therefore the scheme did not acquire the asset in this way.

A1 event

You can acquire an asset if an A1 event occurs. An A1 event occurs when an entity disposes of an asset to you. A disposal occurs if a change of ownership of the CGT asset happens.

Receivers were appointed by the court to wind up the scheme. These orders continue to order the liquidators of the company to take possession of the land and to complete the sale of the land.

According to Butt, P., Land Law (4^th edition) 2001 at paragraph 502, there is a distinction between possession and ownership. He states that essentially possession is a question of fact independent of legal rules. Ownership on the other hand is the creation of law.

According to the orders of the court the receivers of the scheme were as a matter of fact given possession of the land. The receivers, as a matter of law, were never given ownership of the land. Their role was to take control and possession of the land and arrange the sale of the land. The court then needed to issue further orders that effected a change of ownership between the company and a third party.

As there was no change of ownership in favour of the receivers in the land at anytime when the receivers had possession of the land the receivers never acquired the land under CGT event A1.

No other acquisition rules under sections 109-5 and 109-10 apply to the receivers' situation.

The receivers never acquired the land on behalf of the trust, the land therefore did not form a part of the trust corpus. Any event that occurred as a result of the sale did not occur in relation to the receivers of the scheme. Accordingly, the receivers are not required to record a capital gain or loss on the disposal of the land.

NB. The situation is distinguished from the receipt by the receiver of the proceeds of the sale. These proceeds do form a part of the trust corpus as the receivers take ownership of proceeds subject to the court orders and the fiduciary duties owed to the beneficiaries of the trust.

This is in accordance with the Court's findings in Harmer v Federal Commissioner of Taxation 91 ATC 5000 where money held in an account by a solicitor subject to Court orders was considered to be held in trust, for taxation purposes, by the solicitor.

Application to your circumstances

For an A1 event to occur to the receiver of the scheme they must first have acquired ownership of land. As ownership was never transferred to the receivers an A1 event did not occur to them when the land was sold.

Question 4

Summary

The receiver can allocate deductible expenses against interest income.

Detailed reasoning

Section 95(1) of the ITAA 1936 defines net income, in relation to a trust estate, as

the total assessable income of the trust calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions except deductions under Schedule 2G and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.

According to subsection 102-5(1) of the ITAA 1997 your assessable income includes your net capital gain for the income year. To calculate the trust's net income you must first calculate the trust's assessable income this will include any capital gain. Allowable deductions are then subtracted from this income.

However as indicated above there was no capital gain event related to the sale of the land for scheme that would be included in the income of the trust. Therefore allowable expenses that relate to the income of the trust can be offset.

Question 5

Summary

The receiver does not include the capital proceeds in the income tax return.

Detailed reasoning

As explained at question 3 and in accordance with the previous rulings there is no CGT event that applies to the sale of the land for the receivers. The assessable income from the sale of the land is to be included in the partners' returns in proportion to their entitled distribution.

Questions 6 & 7

Summary

The receiver can claim the tax offset for amounts withheld as no-TFN withholding.

Detailed reasoning

Division 18 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) applies to crediting withheld amounts against liability for income tax. Section 18-15 states that an entity is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the entity during an income year if an assessment has been made of the income tax payable, or an assessment has been made that no income tax is payable by the entity for the income year. Section 18-25 applies to credits where the recipient if a trust. If the income of the trust is assessed under section 97 of the ITAA 1936 then the beneficiaries are entitled to the no-TFN withheld credit under subsection 18-25(2) of the TAA 1953. However if the trust is assessed under section 99 or 99A of the ITAA 1936 then the trustee of the trust is entitled to the credit under subsection 18-25(6) of the TAA 1953.

Application to your circumstances

The receiver of the scheme is not assessable on the assessable income from the sale of the land as discussed above however they hold the proceeds of the sale on trust until the court determines which partners in the scheme are entitled to those proceeds and in what proportion if any at all. As such the trustees have retained the funds and the monies have earned interest income from which the no-TFN amounts have been deducted. As the trustees have not distributed the amounts of income generated by the bank investment then the trust will be assessed under section 99A of the ITAA 1936. Therefore the scheme is entitled to claim the credits for the no-TFN amounts withheld under subsection 18-25(6) of the TAA 1953.

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