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Ruling

Subject: Beneficiary of a trust estate CGT Event E5

Question 1

Has CGT event E5 happened to the situation of the taxpayer in respect of this particular factual situation?

Answer

No.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

The taxpayer is a beneficiary of the Trust Estate ("the Trust") established under a deed.

A clause of the deed provides that upon a certain event happening, the date on which that event happens is called the "Vesting Date". That event happened during the 2012 income year.

The assets of the Trust include certain CGT assets.

There is no evidence of any agreement (outside the terms of the deed) concerning any entitlement of the taxpayer to a precise number of the CGT assets. Indeed there was no such agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-75(1)

Summary

The relevant clause of the deed stating the Vesting Date did not cause the taxpayer to become absolutely entitled as against the trustee to any of the relevant CGT assets of the Trust and as such CGT Event E5 did not happen to the situation of the taxpayer.

Detailed reasoning

The Vesting Date according to the Deed was upon the occurrence of a certain event. Because this event occurred during the 2012 income year, the particular date on which the event happened is the Vesting Date.

The Deed also stated that on the Vesting Date the beneficiaries would hold their entitlements as tenants-in-common in equal shares. As such, there being X relevant beneficiaries on the Vesting Date, the taxpayer had from that time a set% equitable interest in all of the nominated CGT assets still in the estate on Vesting Date.

Relevantly, subsection 104-75(1) of the Income Tax Assessment Act 1997, reads as follows:

CGT event E5 happens if a beneficiary becomes absolutely entitled to a *CGT asset of a trust … as against the trustee.

The taxpayer is a beneficiary of the Trust and the relevant assets are CGT assets of the Trust.

The determinative question then is whether the taxpayer, being a beneficiary with a shared interest in the relevant CGT assets, is absolutely entitled to one or more of those assets as against the trustee.

TR 2004/D25 is a Draft Taxation Ruling bearing the following title:

Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997

Though not part of the TR, the cover sheet provides the following information:

The Tax Office is consulting with Treasury in relation to absolute entitlement and in particular the problem areas of joint and multiple beneficiaries, and the trustee`s indemnity. TR 2004/D25 will not be finalised while this consultation is occurring. TR 2004/D25 will not be withdrawn and still represents the Tax Office view of the law.

At paragraph 10 of that TR is expressed the so-called "Core principle":

The core principle underpinning 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. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

The taxpayer has an interest in all the relevant CGT assets, but in respect of each CGT asset the other beneficiaries also have interests. Relevantly, paragraph 23 of the TR declares as follows:

If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

But paragraph 24 explains an exception:

There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

· the assets are fungible;

· the beneficiary is entitled against the trustee 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.

Though not formally part of the Ruling, paragraphs 121 to 126 serve to show the very high evidentiary standard, in respect of the final dot point, required of relevant parties who would seek to assert absolute entitlement in these kinds of circumstances:

121. The fact that a specific number of fungible assets of a single asset class are held for each beneficiary must be consistent with any trust instrument and be evidenced by a contemporaneous written record, made by the trustee, of the number held for each beneficiary. However, where there is a trust instrument, and its terms unambiguously indicate a specific number of assets are for each beneficiary, then the trust instrument will be sufficient evidence of the number held for each beneficiary.

122. The requirement that there be a record of allocation means that when the trustee deals with a recorded asset, whether by distribution or otherwise (or there is any other occurrence that has CGT consequences such as an adjustment to the assets' cost base) they will specify which beneficiary's assets were the subject of that dealing. That is, it will be clear which beneficiary's asset was the subject of the dealing.

123. The records must be in writing. There is no prescribed form in which they must be made. The only requirement is that they clearly state the number of assets of an asset class to which a particular beneficiary is entitled for their own benefit to the exclusion of the other beneficiaries and, if applicable, the CGT attributes of each such asset.

124. Because the relevant situation is one where there are both shared interests and the holding of a specific number of assets for each beneficiary, a written record of allocation by the trustee (or a clear unambiguous trust instrument) is required. The record serves as confirmation that the trust is administered on the basis that a specific number of assets are held for each beneficiary, rather than on the basis of the shared interests. In the absence of such evidence it is considered that absolute entitlement is not established, regardless of the terms of the trust instrument.

125. In the absence of a record of asset allocation it would be reasonable to conclude that shared interests in the trust assets, by their very nature, prevent absolute entitlement. For example, if there are three assets and three beneficiaries who the trust deed says are to share equally in the assets, no one beneficiary is absolutely entitled to an asset unless the trustee has also recorded an allocation.

126. As this record of allocation is the final requirement for absolute entitlement, the making of the record may, if all of the other requirements for absolute entitlement are established, cause the beneficiaries named in the record to become absolutely entitled to the number of assets that the record shows as theirs. If it does, then CGT event E5 in section 104-75 of the ITAA 1997 will happen. In some circumstances, this event will trigger a taxing point for both the trustees and the beneficiaries.

Note especially the "example" in paragraph 125. This indicates that the taxpayer will not have been absolutely entitled to any of the relevant CGT assets at the Vesting Date. If anything, the taxpayer is in a weaker position to assert absolute entitlement than one of the hypothetical beneficiaries in the "example" because the CGT assets in the estate on the Vesting Date were held in numbers that were not equally divisible by the number of beneficiaries, weakening any argument that entitlement to a particular number of CGT assets by each of the beneficiaries should fairly be inferred.

The taxpayer, being a "tenant-in-common beneficiary" in respect of CGT assets of the Trust (i.e. "there is more than one beneficiary with interests in the trust asset(s)") cannot call for any one or more of those assets to be transferred to him or at his direction because the entitlement is not to one or more entire assets. As such, the taxpayer is not absolutely entitled to one or more of those assets against the trustee. As such, CGT event E5 did not happen "to [this] situation" (see subsection102-25(1)).

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