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Ruling

Subject: Capital gains tax

The answers provided in this ruling are limited to the matters raised in the ruling application. There may be other matters that need to be considered including the application of section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997), capital gains tax (CGT) event K6.

Question 1

Is B Co absolutely entitled to the share registered in Individual D's name (W Co share 1) in accordance with section 106-50 of the ITAA 1997 and if so, in its capacity as trustee for M Trust?

Answer

Yes.

Question 2

If the answer to both of the issues raised by Question 1 is yes, would on a change of ownership of the W Co share 1, B Co in its capacity as trustee for M Trust, be exempt from any capital gain arising from that change of ownership pursuant to paragraph 104-10(5)(a) of the ITAA 1997?

Answer

Yes.

Question 3

If there is a change in ownership of the W Co share that B Co holds on trust for M Trust (that was established by a deed of settlement dated prior to 20 September 1985) (WWH share 2), does paragraph 104-10(5)(a) of the ITAA 1997 apply to disregard any capital gain made by B Co as trustee for M Trust?

Answer

Yes.

The scheme commences on:

The scheme is in contemplation.

Relevant facts and circumstances

C Co

C Co was incorporated in Australia. The C Co shares were owned by Individual E as bare trustee for Individual D.

W Co, B Co and M Trust

W Co and B Co were incorporated in Australia. Individual D and Individual E acquired the W Co and B Co shares before 20 September 1985.

M Trust was established by a deed of settlement under which B Co was to act as trustee.

Transfer of W Co shares

Individual E transferred their share in W Co to Individual D and Individual D transferred their share in W Co to B Co before 20 September 1985.

Individual D declared a trust over their W Co share (transferred from Individual E) in favour of B Co. Individual D and B Co signed a Declaration of Trust before 20 September 1985.

Evidence has been provided that indicates that Individual D's intention, in his capacity as trustee of the M Trust, was that the share would be held for the benefit of M Trust.

The corporate structure in early 1985 indicates that B Co, as trustee for M Trust, owns all of W Co which in turn owns a percentage of the shares in C Co.

W Co's income tax return for the relevant year indicates that the shareholders for W Co were B Co and Individual D (held in trust for B Co).

Shares in C Co transferred to W Co

Before 30 June 1985 a percentage of the shares in C Co were transferred to W Co from Individual D. The remaining shares were transferred to Individual G.

After 20 September 1985 Individual D bought back the C Co shares from Individual G and held them on trust for W Co.

After 20 September 1985 Individual E transferred their share in B Co to Individual D. Individual D was issued with further ordinary shares.

Recording of W Co shares in Balance Sheet of M Trust

The balance sheets of M Trust in certain years record as a non-current asset an investment of a nominal amount representing the shares owned by M Trust. In certain other years the investment of a nominal amount is expressly stated to relate to the shares held in W Co.

Annual Company Returns for W Co

Evidence has been provided which indicates:

· The recording in the annual company returns of Individual E as the legal owner of W Co shares was incorrect and that it should have recorded B Co as trustee of M Trust the owner of that share.

· The recording of Individual D and B Co as the beneficial owners of the shares was incorrect. The supplementary form should have shown that Individual D held their share as bare trustee for B Co in its capacity as trustee for M Trust and that B Co held its share as trustee for M Trust.

· The annual return incorrectly stated that Individual D was the beneficial owner of the share and that it should have recorded that they held the share as bare trustee for B Co as trustee for M Trust.

· The recent annual returns show the shareholding as B Co as trustee for M Trust and Individual D as trustee for M Trust (i.e. B Co as trustee for M Trust).

Other information

Individual D has been the legal owner of the W Co 1 share since before 20 September 1985 and has held that share for the sole benefit of the M Trust.

Since before 20 September 1985 the shareholders and members of W Co were B Co as trustee for M Trust as to one ordinary share (i.e. W Co share 2), and Individual D as bare trustee for B Co in its capacity as trustee for M Trust as to the W Co share 1.

Since before 20 September 1985 there have been no changes in the legal and beneficial ownership of the shareholdings in W Co.

There have been no further changes in the legal and beneficial ownership of W Co share 1 or W Co share 2 since before 20 September 1985.

Since before 20 September 1985, B Co has always held, and continues to hold W Co share 2 in its capacity as trustee for the M Trust.

B Co has always acted as trustee of M Trust.

B Co as trustee of M Trust has administered the trust for the benefit of members of the relevant individuals and has not, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, effected:

· before the start of the 1998-99 income year a change of 50% or more in the underlying interests in the trust assets; or

· after the 1998-99 income year, changes in ultimate owners such that majority underlying interests were not had by ultimate owners who had majority underlying interests in trust assets immediately before 20 September 1985.

Relevant legislative provisions

Income Tax Assessment Act 1936 former subsection 160ZZS(1)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 Division 149.

Reasons for decision

Question 1

Summary

B Co is absolutely entitled to W Co share 1 (registered in Individual D's name) in accordance with section 106-50 of the ITAA 1997 in its capacity as trustee for M Trust.

Detailed reasoning

Section 106-50 of the ITAA 1997 states that:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability) this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

W Co share 1 is the relevant CGT asset for section 106-50 of the ITAA 1997. The issue to be determined is whether B Co (in its capacity as trustee for M Trust) is absolutely entitled to this CGT asset as against Individual D (the trustee) such that Parts 3-1 and 3-3 of the ITAA 1997 will apply to an act done by Individual D in relation to the share as if B Co (in its capacity as trustee of M Trust) had done it.

The Commissioner's position in relation to the meaning of 'absolutely entitled to a CGT asset as against a trustee' is set out in Draft Taxation Ruling TR 2004/D25 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 ITAA 1997.

Paragraph 10 of TR 2004/D25 outlines the core principle of the concept of absolute entitlement for the purposes of the CGT provisions and states that it 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.'

The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset (paragraph 20 of TR 2004/D25). Paragraph 21 of TR 2004/D25 provides that a beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset.

Individual D declared a trust over their share (W Co share 1) in favour of B Co. Individual D and B Co signed a Declaration of Trust with B Co being the sole beneficiary of Individual D's trust. The Declaration of Trust states that Individual D holds the share upon trust for B Co.

A beneficiary will be absolutely entitled to the CGT asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction (paragraph 22 of TR 2004/D25).

Given that B Co can demand transfer of the trust property as it directs and is the sole beneficiary and has all the interests in the trust asset; it is absolutely entitled to W Co share 1 as against Individual D for the purposes of section 106-50 of the ITAA 1997.

Question 2

Summary

A capital gain made under CGT event A1 by B Co in its capacity as trustee for M Trust on a change in ownership of the W Co share 1 will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997.

Detailed reasoning

Paragraph 104-10(5)(a) of the ITAA 1997 applies to disregard any capital gain or capital loss from the happening of CGT event A1 where the asset that was the subject of the change of ownership was acquired before 20 September 1985.

Given B Co as trustee of M Trust became absolutely entitled to W Co share 1 as against Individual D subsequent to Individual D acquiring the share but prior to 20 September 1985, item E5 in the table in section 109-5 of the ITAA 1997 provides that B Co as trustee of M Trust acquired the share prior to 20 September 1985.

However, section 149-10 of the ITAA 1997 provides that a CGT asset that an entity owns is a pre-CGT asset if it:

· was last acquired by the entity before 20 September 1985; and

· the entity was not, immediately before the start of the 1998-99 income year, taken under former subsection 160ZZS(1) of the ITAA 1936 to have acquired the asset on or after 20 September 1985; and

· the asset has not stopped being a pre-CGT asset of the entity because of Division 149 of the ITAA 1997.

Taxation Ruling IT 2340 Income Tax: Capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date discusses the application of former section 160ZZS of the ITAA 1997 to discretionary trusts in the following terms;

5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed…

Based on the information provided about the administration of the trust for the benefit of the relevant individuals, the share has not stopped, by virtue of former subsection 160ZZS(1) of the ITAA 1936 or Division 149 of the ITAA 1997, being a pre-CGT asset.

Consequently, upon CGT A1 happening in respect of W Co share 1 a capital gain made by B Co as trustee of M Trust by operation of section 106-50 of the ITAA 1997 will be disregarded by operation of paragraph 104-10(5)(a) of the ITAA 1997.

Question 3

Summary

Paragraph 104-10(5)(a) of the ITAA 1997 will apply to disregard a capital gain made under CGT event A1 by B Co as trustee for M Trust on a change of ownership of W Co share 2.

Detailed reasoning

Paragraph 104-10(5)(a) of the ITAA 1997 applies to disregard a capital gain or capital loss from the happening of CGT event A1 where the asset that was the subject of the change of ownership was acquired before 20 September 1985.

Prior to 20 September 1985 Individual D transferred their share in W Co to B Co. The information provided, when taken together, supports a finding that when the share was transferred to B Co it was in its capacity as trustee for the M Trust and not for B Co in its own capacity. Therefore based on this and the fact that there has been no change in ownership, the share has not stopped by virtue of former subsection 160ZZS(1) of the ITAA 1936 or Division 149 of the ITAA 1997 being a pre-CGT asset.

It follows that paragraph 104-10(5)(a) of the ITAA 1997 will apply to disregard a capital gain made under CGT event A1 if there is now a change in ownership of that share.

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