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Edited version of your written advice
Authorisation Number: 1012819166013
Ruling
Subject: Transfer of shares
Question
Will a capital gains tax (CGT) event occur when you transfer the shares to your grandchildren?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You have purchased shares for your grandchildren "in trust for" them.
As each grandchild was born they were purchased a parcel of shares to the same number of shares as the eldest one.
You have dividends reinvested to grow their parcel.
You have never used any of the income from the shares yourself.
Your grandchildren are now over 18 so you want to transfer the shares so they are theirs alone.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 100-20(1)
Income Tax Assessment Act 1997 Subsection 104-10(2)
Income Tax Assessment Act 1997 Section 106-50
Reasons for decision
You only make a capital gain or capital loss if a CGT event happens to an asset that you own (subsection 100-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).
CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you maintain beneficial ownership.
Section 106-50 of the ITAA 1997 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), then the CGT provisions apply to an act done by the trustee in relation to the asset as if you had done it.
'Trust' is not defined in the Income Tax Assessment Act 1936 or ITAA 1997. French J in Harmer & Ors v. Federal Commissioner of Taxation (1989) 20 ATR 1461; 89 ATC 5180 stated that a trust 'is notably a definition of a relationship by reference to obligations'. He went on to state that the four essential elements of a trust are:
1. the trustee who holds a legal or equitable interest in the trust property
2. the trust property which must be property capable of being held on trust and which includes a chose in action
3. one or more beneficiaries other than the trustee and
4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.
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 (ignoring any legal disability) for the asset to be transferred to them or to be transferred at their direction. This means that the beneficiary and not the trustee will be liable for any capital gain or loss which arises in relation to the asset.
In your case, you purchased shares for your grandchildren "in trust for" them. The shares have been dividend reinvested and your grandchildren will be receiving the benefit of all of the dividends by way of the additional shares they will receive. You have never used any of the income from the shares.
The investment is therefore subject to a trust with you as the trustee and your grandchildren as the beneficiaries.
It is considered that your grandchildren are absolutely entitled to the shares and you were merely acting in a trustee capacity. Section 106-50 of the ITAA 1997 would apply to treat your grandchildren as the relevant taxpayers in relation to any CGT event that happens to the shares. Accordingly, when you transfer the shares to your relatives no CGT event will occur, as the beneficial owners of the shares will not change.
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