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Edited version of your written advice
Authorisation Number: 1013106518619
Date of advice: 17 October 2016
Ruling
Subject: Capital gains tax and absolute entitlement
Question 1
Was the Individual absolutely entitled to the property?
Answer
Yes
Question 2
If the answer to question 1 is yes, did CGT event E5 under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) happen?
Answer
Yes
Question 3
If the answer to Question 2 is yes, can the Commissioner make an original assessment for the 2XXX income year for the Trustee after the limited period specified in item 1 in the table in subsection 171A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) has expired?
Answer
No
This ruling applies for the following period:
1 July 20XX to 30 June 20XY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Trustee became the owner of the property.
A Declaration of Trust was executed to declare the Trustee hold the property on behalf of the Individual. This was made pursuant to the Arrangement made between the Individual's family and the Trustee.
The Trustee has no beneficial interest in the property and the property will be transferred to the Individual upon attaining 21 years of age.
Under the Arrangement, the Individual's family member will reside in the property with the Individual until they turn 21 years old. The Individual and their family member will reach an agreement for them to continue occupancy after the Individual reaches 21 years of age.
The Trustee does not have an original assessment for the 2XXX income year.
Relevant legislative provisions
Section 104-75 of the Income Tax Assessment Act 1997
Section 106-50 of the Income Tax Assessment Act 1997
Subsection 171A of the Income Tax Assessment Act 1936
Reasons for decision
Absolute entitlement
Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Part 3-1 and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.
Draft Taxation Ruling TR 2004/D25 discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its trustee. This causes CGT Event E5 to happen. The timing of CGT Event E5 is when the beneficiary becomes absolutely entitled to the asset under subsection 104-75(2) of the ITAA 1997.
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.
The interest must not be able to be defeated by the actions of any person or the occurrence of an event. For example in paragraph 75 of TR 2004/D25, if assets are held on trust for X should X attain the age of 25, but if X does not attain 25, then the assets are to pass to Y. This demonstrates that X's interest will be defeated if they do not attain 25.
In this case, a Declaration of Trust was executed over a property for the sole benefit of the Individual. When the Individual turns 21 years old, legal title will transfer to them. The Arrangement does not provide scope for the Individual's interest in the property to be defeated by another person's action or an event occurring.
The Individual became absolutely entitled to the property when the Declaration of Trust was executed, causing CGT event E5 to happen.
Upon the transfer of legal title of the property to the Individual from the Trustee, no CGT event happens.
Capital gain or loss from CGT Event E5
The Trustee can make a capital gain or loss from CGT Event E5. This would have been included in 2XXX income tax return.
The Commissioner is unable to make an original assessment for the 2XXX income year for the Trustee as the limited period under subsection 171A of the ITAA 1936 has expired. ATO ID 2012/51 provides similar circumstances to this application. It considers when the Commissioner cannot make an original assessment for a nil year.
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