Edited version of your written advice

Authorisation Number: 1013134536663

Date of advice: 21 December 2016

Ruling

Question 1

At the time when the conditions for CGT event A1 are satisfied on the disposal of the property, was D absolutely entitled to the property as against L Pty Ltd such that the property was treated as being D's asset for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) in accordance with section 106-50 of the ITAA 1997?

Answer

Yes.

Question 2

If the answer to Question 1 is no, at the time that CGT event A1 occurred, was the property held by L Pty Ltd as trustee for D and was D specifically entitled to the capital gain made by the company from the disposal of the property in accordance with section 115-228 of the ITAA 1997 such that:

a. D was assessed on the capital gain under section 115-215 of the ITAA 1997; and

b. The trustee is not liable to pay tax on any amount of the capital gain under section 99 or 99A of the Income Tax Assessment Act 1936?

Answer

It is not necessary to answer this question as the answer to Question 1 is yes.

This ruling applies for the following period:

1 July 201X to 30 June 201X

Relevant facts and circumstances

● L Pty Ltd (the company) was incorporated on xxxx.

● D and their spouse have been the only directors of the company since xxxx.

● On xxxx the company entered into a contract to purchase the property with completion to take place on xxxx.

● Stamp duty was paid by the company for the purchase of the property.

● The company entered into the land contract to purchase the property by mistake and instead D had intended to purchase the property personally.

● One of the reasons for this was so that D could deduct the interest expenses for the loan for the property against their other income.

● As such, on or about xxxx, and prior to completion of the land contract, the company executed a declaration of trust in favour of D.

● A copy of the declaration of trust cannot be located.

● However, the declaration of trust was a dutiable transaction and duty was required to be paid by D.

● D paid the deposit and incidentals for the purchase of the property.

● He also contributed other monies for the purchase.

● The company obtained a bank loan used to pay the balance of the purchase price as the bank required the company, as the purchaser on title, to be the borrower for the loan.

● However, D made all loan repayments personally.

● There are five contemporaneous letters (sighted) supporting the existence of the declaration of trust.

● The company has never operated and has never lodged any tax returns as it has at no stage derived any assessable income.

● This is consistent with the company holding the property on trust for D and not for its own benefit.

● The circumstances and the contemporaneous documents indicate that the property was held by the company for D pursuant to what is commonly referred to as a “bare trust”, that is a trust under which the trustee holds property without any interest therein, other than by reason of holding the title to the property as trustee, or some other trust where the only duties of the company was to transfer the property to D at their demand.

● From xxxx to xxxx, the property was rented out and the rental income was included in D's assessable income.

● All interest expenses were paid by D and they claimed deductions for such expenses.

● From xxxx to xxxx, the property was used solely as a holiday house.

● A contract for the sale of the property was entered into on xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 115-215.

Income Tax Assessment Act 1997 Section 115-228.

Income Tax Assessment Act 1936 Section 99.

Income Tax Assessment Act 1936 Section 99A.

Reasons for decision

A capital gain or capital loss may result if a CGT event happens to a CGT asset in which a person has an ownership interest.

CGT event A1 in section 104-10 of the ITAA 1997 happens if a person disposes of their ownership interest in a CGT asset.

Section 106-50 of the ITAA 1997 states that for the purposes of Part 3-1 and Part 3-3, from just after the time a person becomes absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as that person's asset (instead of being an asset of the trust).

A beneficiary that is absolutely entitled to a CGT asset as against the trustee will be the relevant taxpayer if a CGT event happens to the asset. This is the effect of section 106-50 of the ITAA1997 which provides that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset. See paragraphs 141 to 144 of Draft Taxation Ruling TR 2004/D25.

Was D absolutely entitled to the property as against the company?

You state that on or about DD MM YY, and prior to completion of the land contract for the purchase of the property, the company executed a declaration of trust in favour of D.

However, a copy of the declaration of trust cannot be located and has not been sighted.

Notwithstanding this, the contemporaneous documentation indicates that in DD Mm YY the company declared a trust over the property in favour of D.

We are therefore satisfied that on or about DD MM YY the company did in fact declare a trust over the property in favour of D in the following terms:

1. D was the sole beneficiary; and

2. The trust was a bare trust.

3. There were no impediments to D obtaining immediate possession and enjoyment of the property.

The question then is whether D is absolutely entitled to the property as against the company within the meaning of section 106-50 of the ITAA 1997.

The Commissioner's views as to what constitutes an “absolute entitlement as against the trustee” for the purposes of Part 3-1 and Part 3-3 are set out in Draft Taxation Ruling TR 2004/D25.

At paragraphs 46 and 47 of TR 2004/D25 the Commissioner states:

46. In other words a beneficiary will be absolutely entitled to trust property if there is no other person with an interest in that property. Lord Davey said in Wharton v. Masterman [1895] AC 186 at 198; [1895-9] All ER 687 at 691:

The principle is this: that where there is an absolute vested gift made payable at a future event, with direction to accumulate the income in the meantime, and pay it with the principal, the court will not enforce the trust for accumulation in which no person has any interest but the legatee, or (in other words) the court holds that a legatee may put an end to an accumulation which is exclusively for his benefit … There is no condition precedent to happen or to be performed in order to perfect the title of the legatees, and there is no other person who has any interest in the execution of the trust for the accumulation, or who can complain of its non-execution.

47. It should be noted that the principle is concerned with whether a beneficiary has the ability to terminate the trust in respect of the asset, and not whether the beneficiary actually terminates the trust, or even whether they seek to terminate it.

At paragraphs 78 and 79 of TR 2004/D25 the Commissioner sets out his views as to absolute entitlement in the context of a trust that has a sole beneficiary:

78. Because a sole beneficiary in respect of an asset has the totality of the beneficial interests in the asset, they automatically satisfy the requirement (discussed in paragraph 73) that their interest in the asset be vested in possession and indefeasible. Therefore a sole beneficiary in respect of a trust asset will be absolutely entitled to that asset as against the trustee if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

79. A sole beneficiary will be entitled to terminate the trust in respect of an asset provided there are no legal impediments to the beneficiary's obtaining immediate possession and enjoyment of the asset. A direction by the settlor of the trust that the beneficiary's enjoyment of an asset be delayed is not an effective impediment. Of greater standing are legislative impediments such as those which prevent the distribution of retirement savings assets prior to retirement and which it is considered the courts would enforce.

As noted above, the trust on which the company held the property for D is a bare trust. A bare trust encompasses a trustee who has no discretion, only nominal legal control of the property, and one duty, namely to convey it on demand. Absolute entitlement to the assets of a trust is more likely to arise for beneficiaries of bare trusts than for beneficiaries of trusts for which the trustee has active duties.

As D was entitled to call for the company to transfer the property to them, D was absolutely entitled to the property as against the company from the time the company made the declaration of the trust on or about DD MM YY. The property is then treated as being D's asset for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997 in accordance with section 106-50 of the ITAA 1997.

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