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Edited version of private advice

Authorisation Number: 1012678608372

Ruling

Subject: Specific entitlement to a capital gain

Question 1

Will the Tax Exempt Entity be treated as entitled to receive 100% of the net financial benefit (within the meaning of subsection 115-228(1) of the Income Tax Assessment Act 1997 (ITAA 1997)) that is referable to the capital gain that will be made by the Trust?

Answer

Yes

Question 2

If the Tax Exempt Entity is specifically entitled to 100% of the capital gain which will be made by the Trust, will the Tax Exempt Entity be treated as having derived for income tax purposes the whole of that capital gain?

Answer

Yes

Question 3

If the Tax Exempt Entity is specifically entitled to 100% of the capital gain which will be made by the Trust, and not presently entitled to any of that capital gain, does that mean that both section 100AA and section 100AB of the Income Tax Assessment Act 1936 (ITAA 1936) can not apply to the Tax Exempt Entity's specific entitlement?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2015

The scheme commences on:

The date on which the Trust's trustee passes the resolution to make the in-specie distribution of the Asset to the Tax Exempt Entity.

Relevant facts and circumstances

The Tax Exempt Entity has been endorsed to be exempt from income tax.

The Trust is a discretionary trust which was established by a Deed of Settlement (the Deed), and it currently owns the Asset as a capital asset.

The trustee of the Trust proposes to vary the Deed so that any realised capital gains are treated as capital of the Trust and not distributable income of the Trust.

Upon the Deed being varied, the Tax Exempt Entity will be added as a beneficiary of the Trust and the Trust's trustee will then transfer the Asset to the Tax Exempt Entity as an in-specie distribution as follows:

(a) The Asset will be revalued to its market value, with the amount of the revaluation increment (Revaluation Amount) recognised as corpus of the Trust.

(b) The Trust's trustee will pass a resolution to make an in-specie distribution of the Asset to the Tax Exempt Entity.

(c) The Trust's trustee will pass resolutions ensuring that the capital gain realised in respect of the Asset is not distributable income of the Trust.

(d) The capital distribution to the Tax Exempt Entity will comprise the Revaluation Amount plus an amount equal to the Asset's CGT cost base, and will be distributed to the Tax Exempt Entity on the basis that the entitlement to capital is satisfied by the in-specie distribution of the Asset.

(e) The Tax Exempt Entity will be duly notified of its entitlement once the resolutions are passed by the Trust's trustee.

(f) The Asset will be transferred from the Trust to the Tax Exempt Entity in satisfaction of the Tax Exempt Entity's capital entitlement.

Assumption

The Trust will, in accordance with paragraph (c) of the definition of 'share of net financial benefit' in subsection 115-228(1) of the ITAA 1997, record the amount the Tax Exempt Entity is reasonably expected to receive, in its character as an amount referable to the capital gain, in its accounts or records within 2 months after the end of the income year ended 30 June 2015.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 100AA

Income Tax Assessment Act 1936 Section 100AB

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Section 115-200

Income Tax Assessment Act 1997 Section 115-227

Income Tax Assessment Act 1997 Subsection 115-228(1)

Income Tax Assessment Act 1997 Subsection 974-160(1)

Reasons for decision

Summary

The Tax Exempt Entity will be treated as being entitled to receive 100% of the net financial benefit (within the meaning of subsection 115-228(1) of the ITAA 1997) that is referrable to the capital gain which will be made by the Trust on the transfer of the Asset to the Tax Exempt Entity.

Detailed reasoning

If a trust makes a capital gain, section 115-228 of the ITAA 1997 sets out the amount (if any) of that gain to which a beneficiary of the trust is treated as being specifically entitled.

The Trust will make a capital gain (equal to the difference between the market value and CGT cost base of the Asset) pursuant to CGT event E5 under section 104-75 of the ITAA 1997, when the Trust's trustee passes the resolution to make the in-specie distribution of the Asset to the Tax Exempt Entity and thus making the Tax Exempt Entity absolutely entitled to the Land.

Applying the formula in subsection 115-228(1) of the ITAA 1997, to be specifically entitled to an amount of a capital gain made by the Trust, the Tax Exempt Entity must identify its 'share of the net financial benefit'. This is relevantly defined to mean the amount equal to the 'financial benefit' (i.e. the Asset at its market value, as this term is relevantly defined in subsection 974-160(1) of the ITAA 1997 to include anything of economic value) that, in accordance with the terms of the trust:

(a) the beneficiary can be reasonably expected to receive

(b) is referable to the capital gain, and

(c) is recorded, in its character as an amount referable to the capital gain, in the accounts or records of the trust within 2 months after the end of the income year.

With respect to the financial benefit that the Tax Exempt Entity can be reasonably expected to receive that is referrable to the capital gain made by the Trust, Paragraphs 27 and 28 of Taxation Determination TD 2012/11 relevantly state:

The combined effect of the Deed being varied as well the resolution to be passed by the Trust's trustee to make the in-specie distribution of the Asset to the Tax Exempt Entity, is that the Tax Exempt Entity will have a reasonable expectation of receiving the financial benefit of the Asset at its market value that is referable to the capital gain made by the Trust, meaning that the Commissioner accepts that paragraphs (a) and (b) of the definition of 'share of net financial benefit' in subsection 115-228(1) of the ITAA 1997 will be satisfied.

In conclusion, provided it is recorded in the Trust's accounts or records (as per paragraph (c) of the definition of 'share of net financial benefit' in subsection 115-228(1) of the ITAA 1997), the Commissioner accepts that the Tax Exempt Entity will be treated as being entitled to receive 100% of the net financial benefit.

Question 2

Summary

As the Tax Exempt Entity will be specifically entitled to 100% of the capital gain which will be made by the Trust, the Tax Exempt Entity will be treated as having derived for income tax purposes the whole of the capital gain made by the Trust.

Detailed reasoning

Section 115-200 of the ITAA 1997 provides that the provisions with Subdivision 115-C of the ITAA 1997 treat parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts.

Section 115-227 of the ITAA 1997 relevantly provides that a beneficiary's share of a capital gain for the purposes of Subdivision 115-C of the ITAA 1997 as the sum of:

(a) the amount of the capital gain to which the beneficiary is specifically entitled, and

(b) if there is an amount of the capital gain to which no beneficiary is specifically entitled - that amount multiplied by the entity's adjusted Division 6 percentage of the trust's income.

As the Tax Exempt Entity is entitled to receive 100% of the net financial benefit referable to the capital gain made by the Trust, it is specifically entitled to 100% of that capital gain under subsection 115-228(1) of the ITAA 1997.

This means that the Tax Exempt Entity has a 100% share of the capital gain made by the Trust under section 115-227 of the ITAA 1997.

In conclusion, the Tax Exempt Entity will be treated as having derived for income tax purposes the whole of the capital gain made by the Trust.

Question 3

Summary

As the Tax Exempt Entity is specifically entitled to 100% of the capital gain which will be made by the Trust, and not presently entitled to any of that capital gain, that means that neither section 100AA nor section 100AB of the ITAA 1936 can apply to the Tax Exempt Entity's specific entitlement.

Detailed reasoning

For:

• subsection 100AA(3) of the ITAA 1936 to apply to treat an exempt entity as not being presently entitled to an amount of a trust's distributable income, subsection 100AA(1) of the ITAA 1936 requires that exempt entity to be presently entitled to that amount of the trust's distributable income, and

• subsection 100AB(2) of the ITAA 1936 to apply to treat an exempt entity as not being presently entitled to an amount of a trust's distributable income, subsection 100AB(1) of the ITAA 1936 requires that exempt entity to be presently entitled to that amount of the trust's distributable income.

With respect to the capital gain which will be made by the Trust, the Tax Exempt Entity will not be presently entitled to any amount of that capital gain as the Deed will exclude capital gains from its distributable income.

In conclusion, neither section 100AA nor section 100AB of the ITAA 1936 can apply to the Tax Exempt Entity's 100% specific entitlement to the capital gain which will be made by the Trust.

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