Edited version of your written advice

Authorisation Number: 1051228785132

Date of advice: 25 May 2017

Ruling

Subject: CGT - absolute entitlement - bare trust

Question 1

Will you be considered to have acquired an interest in the property on the original acquisition date by the Trustee?

Answer

No.

This ruling applies for the following periods:

The year ending 30 June 2017.

The year ending 30 June 2018.

The scheme commences on:

15 December 2016.

Relevant facts and circumstances

You are one of several beneficiaries to a bare trust.

All beneficiaries are members of one of two families.

Company A is the Trustee of the bare trust.

Each beneficiary will provide funds for their share in the property to the Trustee.

Recently, a contract was entered into to purchase the property.

A Declaration of Trust states that the Trustee has entered into a contract to purchase the property from the vendor.

Settlement is yet to occur.

Two dwellings will be constructed on the property before subdividing the property into two separate titles, with each family to receive one of the resulting subdivided blocks each.

The Declaration of Trust provides:

● The Trustee declares that the Trustee holds the property upon trust for the owners as tenants in common in the following shares:

● As to 1 of a total of 2 equal shares upon trust for Family A jointly; and

● As to 1 of a total of 2 equal shares upon trust for Family B jointly.

● The owners in turn declare the following:

● Family A hold their:

(i) 50% interest in lot 1 of the proposed plan of subdivision of the Parent Title as legal and beneficial owner; and

(ii) 50% interest in lot 2 of the proposed plan of subdivision of the Parent Title on trust for Family B.

● Family B hold their:

(i) 50% interest in Lot 2 of the proposed plan of subdivision of the Parents Title as legal and beneficial owner; and

(ii) 50% interest in Lot 1 of the proposed plan of subdivision of the Parent Title on trust for Family A.

● Nothing in this deed entitles the Trustee to beneficial ownership of the property or to deprive the owners of the right of beneficial ownership (including the right of possession) of the property.

● Nothing in this deed entitles Family A to the beneficial ownership of Lot 2 in the proposed plan of subdivision of the Parent Title.

● Nothing in this deed entitles Family B to the beneficial ownership of Lot 1 in the proposed plan of subdivision of the Parent Title.

● The Trustee acknowledges and agrees that it will only deal with the property or any subdivision derived from the property as directed by the owners and will transfer the property or any subdivision derived from the property to the owners if and when requested to do so by the owners.

● The Trustee will not incur liability or be responsible by reason of the Trustee acting on, or carrying out, an instruction or direction given in accordance with the above clause provided that the instruction or direction is given by the owners unanimously.

● Upon the subdivision of the property being registered, the parties agree that:

● Lot 1 of the proposed plan of subdivision of the Parent Title is to be transferred to Family A absolutely; and

● Lot 2 of the proposed plan of subdivision of the Parent Title is to be transferred to Family B absolutely.

● The owners must punctually:

● Pay all calls and other demand which the Trustee may be or become liable to pay in respect of the property;

● Pay all costs and expenses incurred in relation to the subdivision of the property;

● Pay all costs and expenses incurred by the Trustee in relation to the subdivision of the property;

● The owners jointly and severally indemnify the Trustee against any loss suffered as a result of any actions or claims arising out of the Trustee acting as Trustee of the property in accordance with this deed.

● The power to remove the Trustee and appoint a new trustee is vested in the owners.

● Upon the resignation or removal of the Trustee, the Trustee must do all things reasonably required by the owners to vest titles to the property or any subdivision thereof in the owners or a new trustee as the owners may require.

● The Trustee must, at the request of the owners, make available to the owners the documents of title which may have come into the hands of the Trustee by virtue of the Trustee being registered as the registered proprietor of property pursuant to this deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

Summary

As you are not absolutely entitled to an interest in the property, you will not be considered to have acquired an interest in the property on the original acquisition date by the Trustee.

Detailed reasoning

Absolute entitlement

Section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, any act done by the trustee in relation to the asset is treated as if it were done by the beneficiary.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 provides that generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. 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.

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.

Where the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them, however land is rarely fungible as each parcel is unique.

Application to your situation

In this case, you will not be considered to have acquired an interest in the property on the original acquisition date by the Trustee. Despite the conditions provided in the Declaration of Trust, we do not consider that absolute entitlement can be established as the assets are not fungible. You will not become absolutely entitled to Lot 2, one of the subdivided blocks (either alone or along with your family). A capital gain or capital loss will be made by the legal owner of the property at such a time when a CGT event occurs.

Further information

CGT event E7

CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part interest, in the trust capital: section 104-85 of the ITAA 1997. Either or both the trustee and the beneficiary of the trust may make a gain or loss.

A beneficiary makes a capital gain under CGT event E7 if the market value of the interest it acquires is more than the cost base of their interest in the trust. A beneficiary makes a capital loss if the market value of the interest is less than the reduced cost base of their interest in the trust.

CGT event E7 will occur when the trust transfers the subdivided block to you.

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