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Edited version of your written advice
Authorisation Number: 1051241658656
Date of advice: 27 June 2017
Ruling
Subject: Division 7A Income Tax Assessment Act 1936
Question 1
Will sections 109XA(1) and 109XB of the Income Tax Assessment Act 1936 ('ITAA 1936') apply if:
● the trustee for the X1 trust makes a distribution to the trustee of the X trust, representing part of the sale proceeds received by the X1 trust on its disposal of various CGT assets; and
● the trustee for the X trust then pays the amount received as a trust distribution from the trustee for the X1 trust to two beneficiaries in full satisfaction of their unpaid beneficiary entitlements which arose in 19XX as a result of a revaluation of certain assets.
Answer
No, sections 109XA(1) and 109XB ITAA 1997 will not apply.
For section 109XB to apply, the requirements in section 109XA(1) need to be satisfied. Based on the current transaction, the requirement in paragraph 109XA(1)(b) that 'the payment is a discharge or a reduction in a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain', has not been met. The payment has been wholly sourced from a realised gain, meaning that sections 109XA(1) and 109XB do not apply.
Question 2
Will sections 109XA(1) and 109XB of the ITAA 1936 apply if:
(a) the trustee for the X1 trust makes a distribution of an amount to the trustee for the X trust, representing part of the sales proceeds received by the X1 trust on its disposal of various CGT assets; and
(i) the trustee for the X trust raises an amount from the following sources:
(ii) an amount from the funds received as a trust distribution from the trustee from the X1 trust, and
an amount being capital proceeds received by the trustee for the X trust on its disposal of the goodwill of the business it owned, and
the trustee for the X trust pays the amount to two beneficiaries in full satisfaction of their unpaid beneficiary entitlements which arose in 19XX as a result of a revaluation of certain assets
Answer
No, sections 109XA(1) and 109XB ITAA 1997 will not apply.
For section 109XB to apply, the requirements in section 109XA(1) need to be satisfied. Based on the current transaction, the requirement in paragraph 109XA(1)(b) that 'the payment is a discharge or a reduction in a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain', has not been met. The payment has been wholly sourced from a realised gain, meaning that sections 109XA(1) and 109XB do not apply.
This ruling applies for the following periods:
1/7/201X to 30/6/201Z
The scheme commences on:
1/7/201X
Relevant facts and circumstances
In 19XX, the X Trust:
(i) revalued certain assets to market value
(ii) created an asset revaluation reserve in its accounts, and credited the increase in market value of the assets to the reserve, and
(iii) distributed the credit balance of the asset revaluation reserve to two beneficiaries
In 201Y, the X Trust disposed of a business.
In 201Y, the trustee for the X1 Trust (an associated trust) disposed of various assets.
The X Trust wishes to pay out the Beneficiary Entitlements.
The X Trust proposes to pay the two trusts in full satisfaction of the Beneficiary Entitlements.
The X Trust is considering using funds from the following sources to pay out the Beneficiary Entitlements:
(i) Option one: funds sourced from a trust distribution to be received from the X1 trust, representing part of the sale proceeds received by the X1 trust on its disposal of various assets; or
(ii) Option two:
a. funds sourced from the proceeds received by the X trust from the disposal of the business; and
b. funds sourced from a trust distribution to be received from the X1 trust, representing part of the sale proceeds received by the X1 trust on its disposal of various assets
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 109XA and
Income Tax Assessment Act 1936 Section 109XB.
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