Edited version of your written advice

Authorisation Number: 1012851269213

Date of advice: 30 July 2015

Ruling

Subject: Capital Gains Tax

Question 1

Is the Estate a fixed trust for the purposes of section 272-5 of the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will a CGT event E5 occur to the shares which are not conveniently divisible?

Answer

No.

Question 3

Will a CGT event E5 occur to the shares which are conveniently divisible?

Answer

Yes.

Question 4

Does section 855-40 of the ITAA 1997 apply to disregard the capital gain of the ASX to which the non-resident beneficiary is absolutely entitled?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

The Deceased died on XXXX.

The Will of the deceased created a life interest in favour of their relative in respect of the residue of the Deceased's estate.

A was the survivor of those mentioned relatives.

A died on the XXXX.

As per the Will of the deceased, upon the death of A, the residue of the Estate was left to their relatives in equal shares, B and C.

At the time of A's death, both their relatives (the remainder beneficiaries) were foreign residents for income tax purposes.

All the assets presently held in the Deceased's Estate were purchased after the death of the deceased and after 19 September 1985.

The assets presently held in the Deceased's Estate comprise shares in companies listed on the ASX.

The shares are not taxable Australian property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 272-5(1) of Schedule 2F

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)

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 115-228

Income Tax Assessment Act 1936 Subsection 272-651) of Schedule 2F

Income Tax Assessment Act 1997 Section 855-40

Income Tax Assessment Act 1997 Subsection 855-40(2)

Income Tax Assessment Act 1997 Subsection 855-40(3)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1

Under section 995-1 of the ITAA 1997, a 'fixed trust' is defined as:

A trust is a fixed trust if entities have *fixed entitlements to all the income and capital of the trust.

'Fixed entitlement' is explained in section 995-1 of the ITAA 1997 as:

An entity has a fixed entitlement to a share of the income or capital of a company, partnership or trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in trust as:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

In this case, the remainder beneficiaries have fixed entitlements to all the income and capital of the trust. Consequently, the trust is a fixed trust for the purposes of section 272-65 of Schedule 2F of the ITAA 1936.

Question 2

Section 104-75 of the ITAA 1997 provides that CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Draft Taxation ruling TR 2004/D25 states:

8. The main CGT provisions to which the concept of absolute entitlement is relevant apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability): see section 106-50 and CGT event E5 in section 104-75.

9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5, neither is the CGT asset to which the relevant provisions refer.

And further at paragraphs 23 and 24,

23. 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.

24. 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.

In this case, where there are an odd number of shares in the one company there is one asset which is not fungible. The share that is left over is not fungible and therefore the beneficiaries are not absolutely entitled to that share and CGT event E5 will not occur to that share.

Question 3

As per subsection 104-75(3) of the ITAA 1997 the trustee makes a capital gain if the market value of the asset at the time of the event is more than its cost base.

The beneficiary makes a capital gain if the market value of the asset at the time of the event is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset (subsection 104-75(5) of the ITAA 1997).

However, a capital gain the beneficiary makes is disregarded if the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure (subsection 104-75(6) of the ITAA 1997).

In this case,

• the Trust was not a trust to which Division 128 applies as the assets of the Trust were acquired after the date of death of the Deceased;

• the Remainder Beneficiaries became absolutely entitled to the shares of the estate, which are conveniently divisible, upon the passing of A as they had a vested and indefeasible interest at that time; and

• the Remainder Beneficiaries acquired the CGT assets that is the interest for no expenditure.

Therefore, CGT event E5 happened in regard to the ASX shares that are easily divisible, on A's date of death.

Further, the capital gain the beneficiaries made is disregarded under subsection 104-75(6) of the ITAA 1997 and the Trustee of the Trust made a capital gain under subsection 104-75(3) of the ITAA 1997.

Section 115-228 of the ITAA 1997 states that a beneficiary of a trust estate can be 'specifically entitled' to an amount of a capital gain made by the trust estate if the beneficiary has received or can be reasonably expected to receive an amount referable to the gain under the terms of the trust.

ATO ID 2013/33 Income Tax - Capital gains tax: specifically entitled provides that where a trustee of a trust makes a capital gain by reason of CGT event E5, the beneficiary can be specifically entitled to the gain under Section 115-228 of the ITAA 1997.

In this case, it has already been established that the Trustee of the Trust made a capital gain by reason of CGT event E5 and the Remainder Beneficiaries will receive an amount in relation to the capital gain under the terms of the trust.

Therefore, the Remainder Beneficiaries are specifically entitled under Section 115-228 of the ITAA 1997 and the capital gain is able to be distributed by the Trustee to the Remainder Beneficiaries.

Question 4

Section 855-40 of the ITAA 1997 deals with the tax treatment of capital gains and losses made by foreign residents through fixed trusts.

Subsection 855-40(2) of the ITAA 1997 provides that a person who is a foreign resident may disregard a capital gain made where the CGT event happens to a CGT asset of a fixed trust that is not 'taxable Australian property'.

Further, subsection 855-40(3) of the ITAA 1997 specifies that the trustee of a fixed trust is not liable to pay tax on a capital gain that is disregarded for a beneficiary under subsection (2).

In this case:

• the Remainder Beneficiaries are foreign resident;

• the Trust is a fixed trust; and

• the Trustee of the Trust has stated that the CGT assets of the Trust, the shares, are not taxable Australian property.

Therefore, section 855-40 of the ITAA 1997 applies so that the capital gain made by the non-resident Remainder Beneficiaries from the CGT assets, which are conveniently divisible, of the fixed trust is disregarded and the Trustee is not liable to pay tax on the gain.

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