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Ruling

Subject: CGT event E5

Question 1

Does a CGT Event E5 occur in respect of the assets of the Trust on the date that the sole beneficiary attains the age of X years, but not before (subject to any court decision, before that date, that rules the beneficiary is or has become absolutely entitled to the Trust assets and has the ability to call for the asset to be transferred to them)?

Answer

Yes.

Question 2

When the CGT Event E5 occurs, will the Trustee and not the beneficiary be required to account for any capital gains or losses?

Answer

Yes.

Question 3

Can any capital gains arising as a result of the CGT Event E5 be offset against the Trust's carried forward capital losses?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

01 July 2019

Relevant facts and circumstances

The deceased died leaving a will.

The will provided for equal division of the estate among the deceased's children when they attain the age of X years.

If the deceased's children do not attain the age of X years and have no children of their own attain the age of X years then their share of the estate will be divided equally amongst the deceased's remaining children.

All but one of the deceased's children have attained the age of X years and received their share of the estate.

The deceased's youngest is X years of age and has not received any share of the estate at this stage.

A separate trust was established under the will for the deceased's youngest child.

The trust initially consisted of cash only; however over time you have purchased various assets for the trust.

The trust had carried forward losses of $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-15

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 subsection 104-75(3)

Income Tax Assessment Act 1997 subsection 104-75(5)

Income Tax Assessment Act 1997 subsection 104-75(6)

Reasons for decision

Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Absolutely entitled

A CGT event E5 happens if a beneficiary becomes 'absolutely entitled' to a CGT asset of a trust as against the trustee (section 104-75).

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 (Draft Taxation Ruling TR 2004/D25).

In your case, the beneficiary is not absolutely entitled to the assets of the trust prior to attaining the age of X years.

This is because the beneficiary's interest in the estate will be defeated if they do not attain the age of X years and have no children of their own attain the age of X years. However, once the beneficiary attains the age of X years their interest in the trust cannot be defeated. It is at this point that the beneficiary becomes 'absolutely entitled'.

Accordingly a CGT event E5 will occur when the beneficiary attains the age of X years, but not before (subject to any court decision, before that date, that rules the beneficiary is or has become absolutely entitled to the Trust assets and has the ability to call for the asset to be transferred to them).

CGT event E5 - capital gain

Generally both the trustee and the beneficiary would make a capital gain or loss as a result of a CGT event E5 happening (subsections 104-75(3) and (5)). However, any capital gain or loss made by the beneficiary would be disregarded if the beneficiary acquired their interest in the trust for no expenditure (subsection 104-75(6)).

In your case, the trust was established under the will for the deceased's youngest child. As such the beneficiary has not paid anything for their interest in the trust.

Accordingly, any capital gains or losses arising as a result of the occurrence of a CGT event E5 are disregarded for the beneficiary; however any such capital gains will still be taxable in the hands of the trustee.

Carried forward capital losses

A capital loss incurred on the disposal of a CGT asset can be offset against capital gains from the disposal of other CGT assets or the losses can be carried forward indefinitely to offset against future capital gains (section 102-15).

However, a capital loss cannot be offset against other assessable income of a revenue nature such as rental income, interest income or dividends. In addition, losses incurred by a trust, unlike losses incurred by a partnership, remain trapped in a trust and are not allowed to be distributed to beneficiaries (Doherty v. FCT (1933) 48 CLR 1; 2 ATD 272).

In your case, the trust has carried forward capital losses of $X.

Accordingly if you have any capital gains, arising as a result of the CGT Event E5, they can be offset against the trust's carried forward capital losses; however you are not allowed to distribute any of your capital losses to the beneficiary of the trust.

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