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Edited version of your written advice
Authorisation Number: 1012747476737
Ruling
Subject: Trust distribution
Question and Answer
1. Are the Beneficiaries absolutely entitled to the Trust Property?
No
2. Will you make a capital gain upon CGT event C2 happening to your interest in the Trust in 2015?
No
3. Will any capital gain arising on CGT event C2 happening to your interest in the Trust be a discount capital gain under Division 115 of the ITAA 1997?
Not Applicable
This ruling applies for the following period(s)
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commences on
1 July 2014
Relevant facts and circumstances
You are the beneficiary of a trust.
The trust was established by your remote relative.
Your parent was entitled to the net income of the trust during their life.
Your parent passed away, you then became entitled to a portion of the capital and income of the trust.
The capital of the Trust is Y shares in the Company.
The only income of the trust is and has been dividends from the Y shares in the Company.
The Company holds as its assets an investment portfolio of listed shares.
You do not want to keep your interest in the Trust. You want to be paid the value of the capital and trust income in cash.
The trust
Your interest in the trust arose upon you reaching age.
Your interests were subject to the interest of your parent until their death.
The trustee proposes wind up of the Trust.
The company
The shares are pre-CGT and the cost base of each of the "D" class shares is $x, which means the cost base of the Y shares is $Yx.
The company sold one third of its investment portfolio.
The Company will pay CGT on the sale of a portion investment portfolio from funds in escrow.
On or after 1 July 2015, the company will cancel the Y shares that the Trust holds.
As the Y shares will have no value other than their subscription price at this time, the capital proceeds received by the Trust will be $Yx.
Immediately after this time, the Trustee will wind up the Trust.
Relevant legislative provisions
Section 109D(1) of the Income Tax Assessment Act 1936
Section 104-25 of the Income Tax Assessment Act 1997
Section 104-35 of the Income Tax Assessment Act 1997
Section 104-230 of the Income Tax Assessment Act 1997
Section 116-30 of the Income Tax Assessment Act 1997
Reasons for decision
Absolute entitlement
Absolute entitlement trusts have beneficiaries who are absolutely entitled to the income and capital of the trust. Absolute entitlement' is not defined in the Taxation Acts. The Commissioner's position on absolute entitlement is outlined in Taxation Ruling TR 2004/D25 which includes the following pertinent statements:
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 most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.
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.
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 of the trust's assets.
Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them.
The trust assets are shares which by nature are the same class yet have been segregated into different classes in order to distinguish ownership. Shares are characteristically fungible assets.
You as beneficiary have been allocated an interest in Z shares. In view of this arrangement, the Commissioner goes on to say at paragraph 169 of the same ruling, "Notwithstanding that shares may be fungible and that each beneficiary may be able to demand an interest be satisfied by a distribution in specie of a number of shares to them, neither beneficiary is absolutely entitled". The reason is that under the trust the settlor will treat each beneficiary as having an interest in each share. Absolute entitlement therefore can only be fulfilled under an agreement. Therefore the individuals in the trust will not be absolutely entitled.
CGT event C2
As a beneficiary having acquired your interest as a result of the creation of the Trust, you acquired you interest in the trust for nil cost. When you receive no capital proceeds from a CGT event you are usually taken to have received the market value of the CGT asset that is subject of the event (section 116-30(1) of the ITAA 1997) in your case the trust will have no assets, no retained profits and therefore a market value of nil. Your capital proceeds and cost base are nil so you have not made a capital gain or loss.
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