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Edited version of your written advice
Authorisation Number: 1012980693330
Date of advice: 4 March 2016
Ruling
Subject: Capital gains tax - trust - absolutely entitled beneficiary
Question:
Is any capital gain or capital loss you make due to the sale of property 'A', disregarded?
Answer:
No.
This ruling applies for the following periods:
Year ending 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts
You have provided the following document which forms part of and should be read in conjunction with this private ruling;
• A copy of deed of settlement - The 'B' Trust (Trust)
You were born prior to 20 September 1985
You are the principal beneficiary of the Trust.
The remainder beneficiary of the Trust was person B.
The trust was established prior to 20 September 1985.
Three of the principle clauses in the trust deed are as follows:
Clause 1 (i)
To pay the income from the Fund to the principal infant beneficiary until they shall attain the age of twenty-one years or sooner die.
Clause 1(ii)
Upon the principal infant beneficiary attaining the age of twenty-one years to hold the Fund and the income therefrom upon trust for the principal infant beneficiary absolutely and beneficially.
Clause 1 (v)
Should the principal infant beneficiary die before attaining the age of twenty-one years leaving no issue or though leaving issue leaving no issue who shall survive them and attain the age of twenty-one years then to hold the Fund upon Trust for such of the remaining infant beneficiaries who shall attain the age of twenty-one years and if more than one equally between them as tenants in common absolutely and beneficially.
The trustee of the trust acquired a property 'A' prior to 20 September 1985.
You attained the age of 21 after 20 September 1985.
Various trustees have been appointed to the trust and the current trustee is 'C'.
As at 20XX the assets of the trust consisted of:
• The trust property
• Cash; and
• debtors
Title to the property continued to be held by the trustee and the property was sold in 20XX.
Completion of the contract took place a short time later.
The trustee will complete all steps necessary to ensure that the trust is wound up.
Relevant legislative provisions:
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 104-85
Income Tax Assessment Act 1997 section 106-50
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997 section 115-25
Reasons for decision
In order to determine who is liable for capital gains tax (CGT) when the property was transferred to the purchaser, we need to consider the ownership of the property for CGT purposes.
In some cases, an individual may hold legal ownership in a property for another individual in trust. A beneficial owner is a person or entity who is beneficially entitled to the income and proceeds from the asset.
If the beneficial owner of a trust is absolutely entitled to a particular CGT asset as against a trustee, any act done by the trustee is treated as if it was carried out by the beneficiary.
The core principle underpinning the concept of absolute entitlement 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.
In order to determine how the CGT provisions apply when a CGT event happens to a CGT asset, we need to consider the acquisition date of the asset.
The acquisition date generally determined from the Table in subsection 109-5(2) of the Income Tax Assessment Act 1997. This Table states:
you acquire a CGT asset when you become absolutely entitled to it if you as a beneficiary under a trust become absolutely entitled to the CGT asset of the trust as against the trustee (disregarding any legal disability).
In your circumstances
An express trust was established with a trust deed prior to 20 September 1985.
The trust deed is clear in its intention, its subject matter and its objects.
Two of the principle clauses in the trust deed are as follows:
Clause 1 (i)
To pay the income from the Fund to the principal infant beneficiary until they shall attain the age of twenty-one years or sooner die.
Clause 1(ii)
Upon the principal infant beneficiary attaining the age of twenty-one years to hold the Fund and the income therefrom upon trust for the principal infant beneficiary absolutely and beneficially.
Clause 1 (v)
Should the principal infant beneficiary die before attaining the age of twenty-one years leaving no issue or though leaving issue leaving no issue who shall survive them and attain the age of twenty-one years then to hold the Fund upon Trust for such of the remaining infant beneficiaries who shall attain the age of twenty-one years and if more than one equally between them as tenants in common absolutely and beneficially.
You are the principal infant beneficiary (you).
The remaining infant beneficiary was Person B.
The insertion of the three clauses in the trust deed that clearly state that the trustee is to pay the income from the fund to you until you attain the age of 21 and for you to be entitled to the capital and income when you reach the age of 21 shows what the true intention of the trust was when it was established. The inclusion of remainder beneficiaries should you not attain 21 years is a critical factor. Where 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.
You became absolutely entitled to the assets of the trust when you turned 21 years old. At this time you had the ability to terminate the trust in respect of the assets in it.
These are the consequences for CGT purposes due to you becoming absolutely entitled to the assets of the trust as against the trustee:
• from this date, you are the owner of these assets
• your acquisition date for these assets is this date
• you make any capital gain or loss from the disposal of these assets
• any capital gain from the disposal of these assets will be a discount capital gain
Note: the previously issued private ruling mentioned by you is not relevant to the application of the CGT provisions to you. It was issued to a different entity in respect of a proposal that never eventuated and it was about a different aspect of the CGT provisions.
ATO View
Taxation Ruling 2004/D25
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