Edited version of your written advice

Authorisation Number: 1051251353259

Date of advice: 17 July 2017

Ruling

Subject: Capital gains tax

Question 1

Did capital gains tax (CGT) event A1 trigger in relation to the land upon appointment of the trustees for sale?

Answer

Yes

Question 2

If yes to Question 1, can any capital gain or capital loss resulting from the A1 event that occurred upon appointment of the trustees for sale be disregarded?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Before 20 September 1985, you purchased land as tenants in common as to one half with B and C (B & C) as tenants in common to the other half as follows:

you (50%);

B (25%);

C (25%).

You and C are siblings.

The land was not used to produce income, until B retired in 20XX.

In 20XX, a dispute arose between you and B & C with respect to the land.

In 20XX, the B & C applied to the Court under section 66G of the Conveyancing Act 1919 (NSW) (Conveyancing Act) for orders appointing a trustee for sale.

On XX August 20XX, Y and Z were appointed as trustees for sale by the Court.

In a Judgment/Order (the Court Order) dated XX September 20XX, the Court declared in part:

7. That the plaintiffs [B & C] be at liberty to purchase the Property (including at auction) on whatever terms or basis the Trustees determine the Property should be sold, and on the basis that the plaintiffs are not required to pay any deposit and that the plaintiffs be entitled to set off against the purchase price their full entitlement of the proceeds of sale of the Property….

8. That the defendant (you) be at liberty to purchase the Property (including at auction) on whatever terms or basis the Trustees determine the Property should be sold, and on the basis that the defendant is not required to pay any deposit and that the defendant be entitled to set off against the purchase price his full entitlement of the proceeds of sale of the Property….

On XX October 20XX, the land went up for auction.

There were 3 active bidders:

● B & C;

● You (whom the agent stated was attending to purchase the other half of the property which you did not own on behalf of the related parties F, G and H); and

● an unrelated third party.

You were the successful bidder.

The covering letter from auctioneers noted that “the purchaser is an existing owner on title with half share. Contract price reflects half share of full $X purchase price. Zero deposit payable as per Court orders”.

Settlement occurred on XX January 20XX.

Section 51 of the special conditions of the Contract for Sale noted that the land would be transferred into the names of the Trustees for sale pursuant to section 66G of the Conveyancing Act.

At settlement the Trustees provided you with an executed transfer of the land with you as the legal owner of all the land and the certificate of title to the land. Stamp duty was payable on only 50% of the value of the land under section 56A of the Duties Act 1997 (NSW) (Duties Act).

Prior to settlement, you obtained a ruling from the Office of State Revenue (OSR) that you were the apparent purchaser of the half interest you purchased at auction for and on behalf of F, G and H under section 55 of the Duties Act and the OSR had accordingly stamped a transfer from the taxpayer to F, G and H with nominal duty.

After lodgement a new certificate of title for the land was issued noting the following ownership interests: you (50%), F (25%), G (12.5%) and H (12.5%) as tenants in common.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Conveyancing Act 1919 (NSW) section 66G

Duties Act 1997 (NSW) section 56A

Reasons for decision

Change of ownership

Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is any kind of property or a legal or equitable right that is not property. It also includes any part or interest that may be held in a CGT asset.

The 50% interest in the land acquired by you was a CGT asset. As the land was acquired by you and B & C as tenants in common, you both acquired an undivided interest in the land.

Pursuant to subsection 104-10(1) and 104-10(2) of the ITAA 1997:

CGT event A1 happens if you *dispose of a *CGT asset.

You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Pursuant to paragraph 66G(7) of the Conveyancing Act:

Where property becomes subject to such statutory trust for sale:

….

(b) in any case land shall be deemed to be converted upon the appointment of trustees for sale unless the court otherwise directs.

As stated in Bunnings Group Ltd v Asden Developments Pty Ltd & Ors [2013] QCA 347 (regarding similar Queensland provisions to section 66G of the Conveyancing Act):

Upon the appointment of statutory trustees for sale of land held in co-ownership, the legal and beneficial ownership of the land is vested in the statutory trustees, and the co-owners’ interests in the land are converted into interests in the proceeds of its sale. The trustees hold the land on the statutory trust in s 37A – that is, upon trust to sell the land and to stand possessed of the net proceeds of sale ―upon such trusts, and subject to such powers and provisions as maybe requisite for giving effect to the rights of the co-owners.

Indeed, in your submission, you acknowledged that:

The general rule followed by the courts is that the effect of an order under section 66G vesting property in trustees for sale is to convert the co-owners’ interest in the property into an interest in the proceeds of sale.

Thus, in accordance with the common law and the ATO view as stated in ATO Interpretative Decision 2009/129 (ATO ID 2009/129), CGT event A1 happened on the transfer of beneficial ownership of the land from you and B & C to the trustees for sale.

However, as the 50% interest in the land was acquired by you before 20 September 1985, any capital gain or loss from the disposal of this interest would be disregarded.

Right to proceeds from sale

Following the transfer of the legal and beneficial ownership of the land to the trustees for sale, you acquired a right to 50% of the proceeds from the sale of the land.

At the time of the creation of the trust for sale, you also acquired a right to compel due performance of the trust.

'Unless the court otherwise directs’

However, you have highlighted the phrase '…unless the court otherwise directs’ in paragraph 66G(7)(b) of the Conveyancing Act. In providing your interpretation of this phrase, you contend that:

ID 2009/129 specifically acknowledges, however, that the general rule is subject to the court otherwise directing, referring to the Queensland equivalent of section 66G(7)(b) of the NSW Conveyancing Act.

The second sentence of section 104-10(2) is specific:

a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner

In the present case, there was a change of legal ownership on the date of appointment of statutory trustees for sale, but:

● Both co-owners continued as beneficial and equitable co-owners up to the moment of exchange of contracts immediately following sale at auction because at any time prior to that point they could jointly and unanimously have exercised their rights under the rule in Saunders v Vautier to have the legal title transferred back to them; and

● At the moment of purchase of the Land at auction, you reconverted your interest in the Land to its original legal state.

You have stated that the doctrine of reconversion:

..has been summarised by the authorities referred to in ID 2009/129 thusly:

if property directed to be converted comes into the hands of an absolute owner in its unconverted state, such owner may elect to take the property in its actual state and thus put an end to the conversion…if real estate were directed to be sold and the proceeds to be paid to a particular person or to particular that person or those persons could call upon the trustee to convey the realty in its actual state instead of selling and the property would then be reconverted…..where a beneficiary has received the property into his own hands it is said to be at “home”, and once it is “at home” the notional conversion is ended and the property belongs to the owner, as realty or personalty according to its actual state in his hands. The reconversion then occurs by operation of law without any election. See Meagher Gummow and Lehane’s Equity Doctrines and Remedies (Fourth Edition) para 38-105 at pp 1087-1088. See also Fifth Edition para 35-045 at page 1049. (emphasis added)

You have further stated that:

Although the conversion of the property is said to have occurred on the appointment of the trustees for sale, it is a conditional conversion at that time, because you and B & C acting together could at any time between the appointments of each of the Trustees up until the moment of sale of the Land reconvert the property back to their original interests by invoking the rule in Saunders v Vautier to require the Trustees to transfer the property back to them. They retained a beneficial interest in the Land up until the moment of its sale.

Thus, it is necessary to consider the application of the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 (Saunders v Vautier) to your circumstances.

Saunders v Vautier and reconversion

Where there has been a conversion in the manner outlined above, it may be possible for a 'reconversion’ to occur. It is stated on page 1088 [para 38-105] of Meagher, Gummow and Lehane, Equitable Doctrines and Remedies, Fourth edition (Meagher, Lehane and Leeming) Butterworths, Lexis Nexis, 2002 (Meagher, 2002):

…if real estate were directed to be sold and the proceeds to be paid to a particular person or to particular persons that person or those persons could call upon the trustee to convey the realty in its actual state instead of selling and the property would then be reconverted : Re Daveron [1893] 3 Ch 421

As stated in paragraph [35-045] of Meagher, Gummow and Lehane’s Equity Doctrines and Remedies 5^th Edition (Lexis Nexis Butterworths) (JD Heydon, MJ Leeming, PG Turner):

If a will or trust directs land to be converted, then the person entitled to the money after the 'actual’ conversion may elect to take the subject matter in its unconverted form, as land….

The election frees the trustee of the trustee’s duty to make the actual conversion. Indeed, it determines the trustee’s power to convert (sell or invest). So therefore does the notional conversion itself. The beneficiary may take the property in its unconverted form . 'Or, to put it quite shortly’, says Chitty J, 'where the testator intended that several persons should take a gift in money, they may all concur in saying, “we will not take it in money, but we will take it in land”’. The doctrine antedates the doctrine associated with Saunders v Vautier, but the rationale, conditions for the application, and consequences for the application, of each are nearly identical. Kitto Taylor and Owen JJ said that reconversion 'is in essence the principle of Saunders v Vautier’ at work.

However, in order for the rule in Saunders v Vautier to apply, certain conditions must be met. The beneficiary or beneficiaries:

● must be sui juris (of full age and not under a legal disability); and

● have absolute entitlement.

In the case of multiple beneficiaries, they must also make a unanimous decision to apply the rule.

Under the heading: 'Who may elect so as to effect a reconversion?’, Meagher, 2002 states at page 1088 [para 38-110] that:

(a) An Absolute owner may elect.

(b) Tenants in common may elect….But in the case of land directed to be sold and the proceeds divided, the owner of an undivided share cannot elect to take his share as land, for this would prejudice the sale of the remainder: Holloway v Radcliffe (1857) 23 Beav 163; 53 ER 64 (38-110, page 1088)

Thus, as stated in Draft Taxation Ruling TR 2004/D25:

97. A beneficiary with a vested and indefeasible interest in trust property will be entitled to have that interest satisfied (though, as discussed, this right is not by itself sufficient to establish absolute entitlement). The general rule is set out in Snell's Principles of Equity 30th edn, Sweet & Maxwell, London, 2000 at p 266:

The general rule is that a person who is indefeasibly entitled to a share in divisible property is entitled to have his share transferred to him, unless there is some good reason to the contrary, as where division in specie of trust property would give one beneficiary a disproportionate advantage. The general rule applies even if the property is held on trust for sale with a power to postpone sale and the transfer would diminish the value of the other shares. It is otherwise if it is land that is thus held.

….

103. Even where division is possible, difficulties will arise if the asset cannot be divided without prejudice to the other beneficiaries. In Manfred v. Maddrell and Others (1950) 51 SR NSW 95 Sugerman J said at p 97:

Thus, where real estate is held on trust for sale and division of the proceeds, one of several beneficiaries has no right to a transfer of his undivided share, because the remaining undivided shares will not fetch their full proportion of the proceeds of sale of the entire estate and so the other beneficiaries are prejudiced. A mortgage debt is not conveniently divisible into shares. Other forms of personal property, which, without attempting an exhaustive or conclusive definition, may be broadly described as fungibles or things which possess all the relevant characteristics of fungibles, do not present the same difficulties, for example, shares in companies or government securities.

104. Even if the asset can be physically divided without prejudice, the asset received by each beneficiary will be a different asset from that which was originally in the trust. Therefore, absolute entitlement can also not be established in these circumstances because the CGT provisions require absolute entitlement to a CGT asset of the trust.

Thus, where there are multiple beneficiaries, a single beneficiary cannot unilaterally call for the satisfaction of their interest by applying the rule in Saunders v Vautier. Further, even if the beneficiaries are unanimous in their decision, this does not guarantee that the trustee will act in accordance with their direction.

In Application of Richard Albarran; Harb v Harb [2010] NSWSC 1251 (Harb), two parties whose land was being held under a trust for sale together '…requested in writing to the trustee that the trustee be withdrawn and the contract terminated…’ (para 7). It was stated at paragraph 14 in Harb that:

….s 66H specifically provides for the circumstances in which the wishes of beneficiaries are to be given effect in the context of the statutory trust for sale and statutory trust for partition under s 66G. The requirement that it imposes is one to give effect to the wishes of the beneficiaries or the majority of them by value "so far as consistent with the general interests of the trust". Thus, if the wishes of the beneficiaries are inconsistent with the general interests of the trust, the trustee is not obliged to give effect to those wishes….That the beneficiaries are opposed unanimously, as opposed to by majority, to the sale, as in the present case, would only be relevant if the beneficiaries would unanimously direct (as opposed to permit) a departure from the strict terms of the trust were applicable – which, for the reasons I have already given, I do not think is the case. (emphasis added)

However, it is also noted at paragraph 20 in Harb that:

The trust upon which a s 66G trustee holds land is one to sell the land. The trustee is bound to give effect to that trust, unless removed by the Court. It may well be that, had the Harbs sought termination of the appointment of the trustee prior to his effecting a sale, the Court would have acceded to their application….

In your case, there is no judicial support for the view that you retained a beneficial interest in any part of the land at all times from the court order to your acquisition of the 100% interest in the land through the auction.

Case law authority does not suggest that you and B & C would have retained a beneficial interest in the land following the court order.

Case law decisions clearly establish that:

● You and B & C no longer held a legal or beneficial interest in the land from the time of the court order;

● from this date, you and B & C only held a right to proceeds from the sale of the land and due administration of the trust; and

● any 'reconversion’ of the beneficiaries interest in the proceeds of sale to an interest in the land could only have occurred both:

● prior to the sale; and

● with the agreement of all beneficiaries.

Thus, prior to the auction, and as discussed in the decision in Harb, you and B & C could have sought to apply the rule in Saunders and Vautier. You and B & C were sui juris, together you and B & C had absolute entitlement to the proceeds of the sale, and could have made a unanimous decision to seek a 'reconversion’. However, this did not occur.

There was no 'unanimous decision’ by you and B & C to 'reconvert’ your right to the proceeds from the sale by calling upon the trustee to 'convey the realty in its actual state instead of selling’. Consequently, the trustee was not freed from the '…duty to make the actual conversion’, being the conversion of the right to land into the right to money through sale, in this case by auction. Consequently, there was no 'reconversion’.

In any case, as noted in Harb, the trustee is not always bound to follow the instructions of a beneficiary or beneficiaries in a trust for sale '…if the wishes of the beneficiaries are inconsistent with the general interests of the trust.’ Therefore, even if you and B & C had sought a reconversion (which did not occur), it would not necessarily have followed that the trustees would have concurred with you and B & C’s 'wishes’.

Further, as per the rule in Saunders v Vautier, you could not unilaterally seek the termination of the trust, or the 'reconversion’ of your right to the proceeds of sale to an interest in the land itself.

Rather than the rule in Saunders v Vautier being applied, you simply acquired, at auction, a 100% interest in the whole of the land in which, prior to the court order, you had owned a 50% interest.

You could not have your half interest in the land 'reconverted’ post-auction by applying the rule in Saunders v Vautier. Therefore, the reacquisition cannot be considered a 'reconversion’ in the manner in which that the term is understood at common law.

Right to purchase at auction

In the Court Order dated DDMMYY, the Supreme Court of NSW declared in part:

8. That the defendant (you) be at liberty to purchase the Property (including at auction) on whatever terms or basis the Trustees determine the Property should be sold, and on the basis that the defendant is not required to pay any deposit and that the defendant be entitled to set off against the purchase price their full entitlement of the proceeds of sale of the Property….

Order 7 made a similar provision for B & C.

You have contended that:

Orders 7 and 8 are in effect a direction by the court permitting each of the co-owners to retain their beneficial interest in the property by allowing them to bid at auction on terms which recognise the interest and thus to reconvert their interest by operation of law.

However, this order does not provide any basis for concluding:

● that you retained a beneficial ownership in the property from the date of the Court Order to the date of acquisition of the 100% interest in the land; or that

● the Court recognised that you had any existing interest in the land (rather than the proceeds from the sale of the land) while the land was held in the trust for sale .

Order 8 simply gave you the right to:

● purchase the property at auction; and

● offset your entitlement to the proceeds from the sale of the land against the acquisition price determined at auction.

Had you not bid for the property at auction, you would simply have received a cash payment in satisfaction of your right to a share of these proceeds of sale. You would not have been said to have disposed of a beneficial and legal ownership in part of the land.

Duty payable

You have noted that you were not required to pay duty in relation to 50% of the land you acquired at auction.

Section 56A of the Duties Act states that:

(1) This section applies if dutiable property that is vested in a person as trustee of a statutory trust as a consequence of the making of an order under section 66G of the Conveyancing Act 1919 is transferred or agreed to be transferred by the trustee to one or more of the beneficial owners of the dutiable property.

(2) The dutiable value of the dutiable property that is the subject of the transfer or agreement is to be calculated by deducting from the unencumbered value of the dutiable property or the consideration for the transfer or agreement, whichever is the greater, the proportion of that amount that is the same as the proportion of the purchaser’s beneficial interest in the dutiable property immediately before the transfer or agreement.

However, the treatment of the property for the purpose of duty has no bearing on the CGT treatment of the same property.

Application to your circumstances

Your (and B & C’s) legal and beneficial ownership of a pre-CGT asset (the land) was transferred to the trustees on XX September 20XX.

CGT event A1 happened at the time of the transfer. However, as the interest in the land was acquired by you (and B & C) before 20 September 1985, any capital gain or loss from the transfer of this land is disregarded.

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