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Authorisation Number: 1051291720112

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Date of advice: 25 October 2017

Ruling

Subject: CGT - Shares - Acquisition date - Held by Bare Trust

Question 1:

Did any of CGT events A1, E5 or E7 happen upon the transfer of legal title to an interest in the shares to you?

Answer:

Yes.

Question 2:

Did you acquire your interest in each of the shares before 20 September 1985?

Answer:

No.

Question 3:

Is the first element of your cost base of your spouse’s interest in each of the shares calculated as its market value on the date they passed away?

Answer:

No.

Question 4:

Will the distribution to you from the pre-CGT capital profits reserve by the Company be taxed as a dividend under sections 44 and 47 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No.

Question 5:

Will the distribution to you from the remainder of the Company profits be taxed as a dividend under sections 44 and 47 of the ITAA 1936?

Answer:

No.

Question 6:

Will the remainder of the distribution to you be taxed as a dividend under sections 44 and 47 of the ITAA 1936?

Answer:

No.

Question 7:

Will the distribution you receive be treated as capital proceeds pursuant to CGT event C2?

Answer:

Yes.

Question 8:

Will CGT event K6 be triggered by the liquidation?

Answer:

No.

This ruling applies for the following periods:

2015-16 income year

2016-17 income year

2017-18 income year

The scheme commences on:

1 July 198X

Relevant facts and circumstances

The Company was incorporated before 1985. The company has always had about 100 ordinary shares on issue.

At the time of incorporation, the sole shareholders of the Company were two trustees, who each held legal title to half of the shares on issue in the Company.

The trustees are related to the six beneficiaries. At all times, the trustees each held their shares in the Company on trust for each of the three couples.

There are six essentially identical documents dated before 1985 acknowledging that the trustees held the Shares on the following trusts:

● Trustee A – on behalf of your spouse and you

● Trustee A – on behalf of one other couple

● Trustee A – on behalf of the other couple

● Trustee B – on behalf of your spouse and you

● Trustee B – on behalf of one other couple

● Trustee B – on behalf of the other couple

The relevant part of each acknowledgement reads as follows:

With reference to the xxxx ordinary shares in yyyyyyy Pty Ltd (herein called “the Share”) which at your request I hold in my name I CONFIRM that the purchase money for the said share is to be provided by you out of your own monies AND I ALSO CONFIRM AND DECLARE that:

1. I hold the said share and all dividends to accrue upon or in respect of it upon trust for you and I agree to transfer, pay and deal with the said share and such dividends in such manner as you shall from time to time in writing direct.

2. I will at you request attend all meetings of shareholders or otherwise which I shall be entitled to attend by virtue of being the holder of the said share and will vote at every meeting in such manner as you shall have previously directed in writing and in default of and subject to any such direction, at my discretion and further, I will, if so required by you execute all proxies, powers of attorney, or other documents which shall be necessary or proper to enable you to vote at any such meetings in my place.

3. You may at your absolute discretion at any time by registered deed or deeds do either or both of the following things, that is to say:

a. Remove me as trustee of the said share with or without assigning any reason for so doing,

b. Appoint a new or additional trustee or trustees of the said share.

4. I hereby nominate, constitute and appoint you to be my lawful attorney for me and in my name and as and for me to act to sell and/or transfer the said share to any person, firm or company and to procure the terms of this instrument or any one or more of them to be observed and properly carried into effect and for those purposes to sign, execute and do all such documents, deeds and things as may be reasonably requisite or necessary and I hereby undertake to ratify and confirm all that you may do or purport to do in exercise of the foregoing powers or any of them.

The arrangement was structured with the trustees holding legal title to all of the share capital in the Company because at the time the Company was incorporated:

● Both trustees were residents of Australia for tax purposes, and

● The couples were foreign residents.

The trustees did not contribute financially to the Company – neither trustee used their own funds to subscribe for shares in the Company, nor did they contribute to the Company’s acquisition of the Investment Properties.

About 2010, the trustees transferred legal title to all of the shares in the Company to:

● Your spouse and you jointly

● One other couple jointly, and

● The other couple jointly.

The share transfers were stamped.

About 2015, your spouse passed away. As your spouse and you held the Shares as joint tenants, their interest in the Shares automatically passed to you upon this death.

Until recently, the Company owned two Investment Properties:

● A property which was acquired by the Company before 1985 and is therefore a pre-CGT asset, and

● A property which was acquired after 1985 and is a post-CGT asset.

The Company sold the first property during the 2015-16 income year.

The Company also intends to sell the second property.

Following the sale of both Investment Properties, the Company will be wound up. It is expected that the Company will be wound up within 18 months of any payment made by the liquidator of the Company (the distribution).

The Company’s financial statements for the 2015-16 financial year show the following amounts standing to the Equity Accounts:

● Issued & paid up capital xx.xx

● Capital profits reserve xxx,xxx.xx

● Retained profits xxx,xxx.xx

● Total Equity xxx,xxx.xx

Assumption

For the purpose of this ruling, the Company will be wound up within 18 months of any payment made by the liquidator of the Company.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 44,

Income Tax Assessment Act 1936 Section 47 and

Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision

Question 1

Summary

Both CGT event A1 and E7 happened upon the transfer of legal title to an interest in the shares to you. CGT event E7 is more specific to your situation

Detailed reasoning

CGT event A1 happens if there is a disposal of a CGT asset; that is a transfer of the CGT asset from one entity to another entity.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a trust asset as against the trustee. Generally, the trustee would be expected to continue to be the legal owner of the asset.

CGT event E7 happens if the trustee of a trust disposes of a trust asset to a beneficiary in satisfaction of the beneficiary’s interest in the trust capital.

CGT event E5 will not happen due to the transfer of legal title to an interest in the shares to you as you became a legal owner at this time.

Both CGT event A1 and E7 will happen if the transfer of legal ownership in about 2010 is treated as a disposal for capital gains purposes.

CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a particular form of disposal from a trust to a beneficiary. CGT event E7 is more specific to your situation.

Disposal defined

Disposal is a defined term for capital gains purposes and occurs when there is a transfer of ownership of a CGT asset from one entity to another entity. The disposal can relate to only part of the CGT asset owned by the vendor or the vendor can dispose of interests to multiple buyers.

Generally, there is a disposal of a CGT asset whenever there is a change to the legal owner. There is an exception if the legal owner is holding the asset on trust for a beneficiary who is absolutely entitled to the asset as against the trustee and the change is transferring legal ownership to that beneficiary. The exception applies because the absolutely entitled beneficiary is already considered to be the owner of the asset for capital gains purposes.

Absolutely entitled beneficiaries – the Commissioner’s view

The Commissioner’s view about the meaning of the words ‘absolutely entitled to a CGT asset as against the trustee of a trust’ is contained in Draft Taxation Ruling TR 2004/D25 and refined in the Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242.

Paragraphs 9 and 10 of Draft Taxation Ruling TR 2004/D25 state:

9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust.

10. 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.

Further, paragraphs 21 to 25 of Draft Taxation Ruling TR 2004/D25 state:

One beneficiary with all the interests in a trust asset

21. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

22. Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions 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 (see Explanation paragraphs 76 to 79).

More than one beneficiary with interests in a trust asset

23. 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.

24. 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.

25. Because 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. See Explanation paragraphs 80-126

The explanation to Draft Taxation Ruling TR 2004/D25 begins at paragraph 29 and begins a discussion of the key factors at paragraph 69.

Paragraphs 80 to 82 of Draft Taxation Ruling TR 2004/D25 state:

More than one beneficiary with interests in a trust asset

80. It is evident from the preceding discussion that a beneficiary will have difficulty in establishing that they are absolutely entitled to a trust asset for CGT purposes if one or more other beneficiaries also have an interest in the asset. In the UK capital gains legislation, this problem is addressed, at least in part, by making direct reference to 'two or more persons who are or would be jointly so entitled'. There is no such reference in the Australian CGT provisions and the circumstances in which such a beneficiary may be considered absolutely entitled under those provisions are therefore very limited.

81. The fact that under the rule in Saunders v. Vautier multiple beneficiaries may together terminate the trust is of no assistance to such beneficiaries wanting to establish absolute entitlement for the purposes of the Australian CGT provisions. As already discussed, those provisions require a single beneficiary to be absolutely entitled to the whole of a trust asset, whereas the entitlement of a beneficiary who shares their interest with others will generally be to a share of each trust asset.

82. It is also true that equity may permit a beneficiary who has an interest in trust assets along with one or more others to have that interest satisfied by a distribution to the beneficiary of entire assets (provided the assets are readily divisible and the distribution can be made without prejudice to the other beneficiaries). While a beneficiary's ability to have their interest satisfied is necessary in order to establish absolute entitlement for CGT purposes, it is not, of itself, sufficient. This is because it is not possible for the beneficiary, prior to the distribution or sale, to show that they are entitled to any particular assets.

Further, paragraphs 84 to 87 of Draft Taxation Ruling TR 2004/D25 state:

84. A beneficiary with a vested and indefeasible interest in trust assets where one or more others also have an interest in those assets will nonetheless be considered absolutely entitled to a specific number of the trust's assets if the three factors listed below are also present.

85. First, the assets must be fungible, at least to the extent to which a person would reasonably be expected to be indifferent to the replacement of any one asset with another.

86. Secondly, it must be the case that equity would permit the beneficiary to have their interest in all those assets satisfied by a distribution or allocation in their favour of a specific number of them.

87. Thirdly, there must be 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 a specific number of the trust's assets.

And, paragraph 107 of Draft Taxation Ruling TR 2004/D25 states:

107. So where there is, on trust, a group of fungible assets (an asset class) and the assets are conveniently divisible between the beneficiaries, and there is no prejudice to other interest holders, a beneficiary may be able to demand a certain number of those assets in satisfaction of their partial interest in each and every asset within that class.

And finally, paragraph 117 of Draft Taxation Ruling TR 2004/D25 states:

117. As discussed, the ability of a beneficiary to demand a number of trust assets in satisfaction of their interest, and the obligation of the trustee to meet that demand, is necessary, but not sufficient, to establish absolute entitlement for CGT purposes. There must also be a clear understanding on the part of all the relevant parties that, despite the shared interests, a specific number of assets of a clearly defined asset class are held for each beneficiary to the exclusion of the other beneficiaries.

Your situation

In your case, your spouse and you were jointly entitled to all of the shares that were legally owned by the trustees for your benefit. You were not personally entitled to any of these shares.

Further, the trustees transferred the shares to your spouse and you jointly. None of the shares were transferred to you personally.

As a result, you were never a beneficiary who held all of the interests in these shares and there was never a time while the trustees were the legal owners that your spouse didn’t have an interest in each of the shares.

Also, you took no action as suggested in paragraph 107 to have certain shares allocated to your benefit. Consequently, the conditions identified for absolute entitlement in paragraphs 87 and 117 do not exist.

For the reasons given above, you were not absolutely entitled to any of the shares or to an interest in any of the shares prior to them being transferred to your spouse and you and there is no other mechanism to treat you as an owner of shares legally owned by the trustees before that date.

Therefore, the transfer of legal title that occurred about 2010 is a disposal for capital gains purposes as the owners before that time were the trustees and your spouse and you became the joint owners of the shares from that date. Both CGT event A1 and E7 happen as a result of this disposal.

Question 2

Summary

You did not acquire your interest in each of the shares before 20 September 1985.

Detailed reasoning

This question considers the capital gains consequences in relation to the legal interest in each of the shares that you obtained in about 2010.

The trustees held the legal title to these shares on trust for your spouse and you until they were transferred to your spouse and you. You were not an absolutely entitled beneficiary in respect of any of these shares while the trustees were the legal owners for the reasons outlined above.

For capital gains purposes, the shares were owned by the trustees on trust until the shares were transferred to your spouse and you jointly.

For the reasons outlined above, CGT event E7 happened due to the transfer and you acquired your interest on this date at their market value (calculated as at the transfer date). You hold your interest in the shares as post-CGT assets.

Note: Any capital gain or loss you made due to your interest in these trusts ending is disregarded because you held these interests as pre-CGT assets.

Question 3

Summary

The first element of the cost base of your spouse’s interest in each of the shares is not calculated as its market value on the date they passed away.

Detailed reasoning

This question considers the capital gains consequences in relation to the legal interest in each of the shares that you obtained when your spouse passed away.

You acquired your spouse’s interest in each of the shares on the date they passed away.

You would acquire your spouse’s interest in each of the shares at its market value on the date they passed away if your spouse held these interests as pre-CGT assets.

You would acquire your spouse’s interest in each of the shares at your spouse’s cost base on the date they passed away if they held these interests as post-CGT assets.

Did your spouse hold their interests in the shares as pre-CGT assets?

This is the same issue as posed in Question 2 and receives the same response for the same reason.

Your spouse was not an absolutely entitled beneficiary in respect of their interest in the shares. They have only obtained a legal interest in these shares in about 2010.

Consequently, your spouse only acquired their interests in the shares for capital gains purposes on in about 2010 as there is no mechanism to treat them as owner before this date. Your spouse held their interests in the shares as post-CGT assets.

Therefore, the first element of the cost base of your spouse’s interest in the shares for you is your spouse’s cost base calculated as at the date they passed away.

Question 4

Summary

The distribution to you from the pre-CGT capital profits reserve by the Company will not be taxed as a dividend under sections 44 and 47 of the Income Tax Assessment Act 1936 (ITAA 1936).

Detailed reasoning

Section 44 of the ITAA 1936 includes dividends you receive in your assessable income if they are paid by a company out of profits derived by it from any source.

Subsection 47(1) of the ITAA 1936 defines the profits derived by a company in relation to distributions by liquidators as being a reference to income derived by the company (whether before or during the liquidation).

Subsection 47(1A) of the ITAA 1936 includes the following amounts within the definition of income for this purpose:

● Amounts (other than net capital gains) included in the company’s assessable income, and

● Net capital gains (calculated in a modified way).

The Commissioner accepts the application of the Archer Brothers principle to distributions by liquidators. The principle is that if a liquidator appropriates (or ‘sources’) a particular fund of profit or income in making a distribution (or part of a distribution), that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the ITAA 1936. (See Taxation Determination TD 95/10)

The Pre-CGT Amount did not arise from a receipt that was income in nature. Nor does it relate to a receipt that was assessable to the Company (as a net capital gain or otherwise). It will be distributed to the shareholders (including you) as part of the liquidation of the Company.

Therefore, your share of the Pre-CGT Amount Distribution will not be assessable to you as a dividend under sections 44 and 47 of the ITAA 1936.

Question 5

Summary

The distribution to you from the remainder of the Company profits will be taxed as a dividend under sections 44 and 47 of the ITAA 1936.

Detailed reasoning

This question follows on from Question 3 and considers the distribution of the remainder of the Company profits.

The remainder of the Company profits represent the ordinary income amounts earned by the Company that are yet to be distributed to shareholders. It will be distributed to the shareholders (including you) as part of the liquidation of the Company.

Therefore, your share of the distribution of the remainder of the Company profits will be assessable to you as a dividend under sections 44 and 47 of the ITAA 1936.

Question 6

Summary

The remainder of the distribution to you will not be taxed as a dividend under sections 44 and 47 of the ITAA 1936.

Detailed reasoning

This question also follows on from Question 4 and considers the remainder of the distribution which is only the amounts identified as Issued & Paid up Capital in the Company’s financial statements.

These amounts will not constitute income derived by the Company under section 47 of the ITAA 1936 and therefore not be taxed as a dividend.

Question 7

Summary

The distribution you receive will be treated as capital proceeds pursuant to CGT event C2.

Detailed reasoning

CGT event C2 will happen when the shares are cancelled.

Capital proceeds is the total of the money and other property you receive or that is receivable in respect of the shares being cancelled.

The whole of the distribution is a payment that you will receive due to the cancellation of the shares.

Therefore, the whole of the distribution is treated as capital proceeds for capital gains purposes. (See Taxation Determination TD 2001/27)

CGT event G1 will not happen due to the distribution as the company will cease to exist within 18 months of the payment being made.

Note: section 118-20 of the Income Tax Assessment Act 1997 ensures that no part of the final liquidator’s distribution is taxed as both a dividend and as a capital gain by reducing the amount of the capital gain.

Question 8

Summary

CGT event K6 will not be triggered by the liquidation.

Detailed reasoning

CGT event K6 is an integrity measure designed to close a potential avenue for avoidance of tax.

It only applies if another CGT event happens to shares you owned if you acquired the shares before 20 September 1985.

CGT event K6 will not apply in your case because you acquired your interests in the shares after this date.

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