Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051448104408

Date of advice: 14 November 2018

Ruling

Subject: Capital gains tax – equitable interests - transfer of assets to trust

Question 1:

Will any capital gains tax events occur under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) when the activities involved with the financial protection package are executed?

Answer:

Yes.

Question 2:

Will capital gains tax event E2 occur when the equitable interest in your assets are transferred into Trust Z using a Deed of Gift under section 104-60 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a director and secretary and sole shareholder of a company A.

Company A is the Trustee of Trust X and a superannuation fund.

You are a director and secretary and hold X shares in company B.

Company B is the Trustee for the Trust Y.

You are intending to enter into a financial package.

An entity issued an individualised financial protection package which included a number of documents from which the following information was sourced:

Information provided by the entity included the following information:

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 102-25

Subsection 102-25

Section 104-10

Subsection 104-55(2)

Subsection 104-55(5)

Subsection 104-60(1)

Subsection 104-60(2)

Subsection 104-60(3

Subsection 106-50 (1)

Subsection 108-5(1)

Subsection 108-5(2)

Section 960-100

Reasons for decision

It is stated that the scheme, being the implementation of the Asset Protection Plan, involves the following:

This ruling decision considers if any capital gains tax events will occur on the implementation of the scheme and does not consider whether any capital gain or capital loss will be made.

We have considered the following when determining whether any capital gains tax event/s will occur on the implementation of the scheme as follows:

Entities

Section 960-100 of the ITAA 1997 states that “entities” includes individuals and trusts.

The term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity.

Application to your situation

In this case, based on the information and documentation provided there are numerous entities being:

Based on the information and documentation provided the Deed of Gift will create additional trusts over each asset that you continue to legally own (individually or jointly), being the “gift trusts”, of which Trust Z will have the equitable entitlements and be the sole beneficiary.

Capital gain tax (CGT) asset

The term ‘CGT asset’ is defined in subsection 108-5(1) of the ITAA 1997 to be:

Subsection 108-5(2) of the ITAA 1997 states that CGT assets include:

CGT assets include:

Application to your situation

In this case, the items listed in the Schedule are all CGT assets, including the personal use assets. The individual interest of each owner in any jointly owned assets is the CGT asset for them. The equitable interest created in those assets as a result of the Equitable Mortgage will also be CGT assets as are the beneficial interests in Trust Z.

Ownership of CGT assets

Subsection 106-50 (1) of the ITAA 1997 treats an absolutely entitled beneficiary of a trust in respect of a CGT asset as the owner of that asset (instead of it being an asset of the trust) for capital gains purposes.

Granting a security, charge or encumbrance over a CGT asset does not cause a change to the ownership to it (section 106-60 of the ITAA 1997).

Application to your situation

You and the Trustees will retain legal ownership of all the assets but assign your equity to Trust Z. This act will create the ‘gift trusts’ mentioned above which will have the Trust Z as sole beneficiary.

Trust Z will be absolutely entitled to all of these assets as against you as trustee of the ‘gift trusts’ under the conditions outlined in Taxation Ruling TR 2004/D25 (about absolutely entitled beneficiaries for capital gains purposes).

Therefore, Trust Z will be treated as the owner of these assets for capital gains purposes once the Deed of Gift is executed.

CGT events

You make a capital gain or capital loss if, and only if, a CGT event happens. The gain or loss is made at the time of the CGT event.

CGT events include:

Disposal of a CGT asset

CGT event A1 occurs when you dispose of your ownership interest in a CGT asset to another entity (section 104-10 of the ITAA 1997).

Creating a trust over a CGT asset

Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Subsection 104-55(2) of the ITAA 1997 provides that the timing of the event occurs when the trust is created.

In order for CGT event E1 to happen, two requirements must be satisfied. These are:

Transferring a CGT asset to a trust

CGT event E2 happens if you transfer a CGT asset to an existing trust (subsection 104-60(1) of the ITAA 1997).

The time of the CGT event E2 is when the asset is transferred (subsection 104-60(2) of the ITAA 1997).

The taxpayer makes a capital gain if the capital proceeds from the transfer are more than the asset's cost base. The taxpayer makes a capital loss if the capital proceeds are less than the asset's reduced cost base (subsection 104-60(3) of the ITAA 1997).

Order for applying CGT events

The general rule is that, if more than one CGT event happens (except CGT events D1 and H2); you apply the one that is most specific to the taxpayer's situation (subsection 102-25 of the ITAA 1997).

There may be different tax outcomes for a taxpayer depending on which CGT event happens. CGT event E2 does not happen if the exception in subsection 104-60(5) of the ITAA 1997 applies. That exception looks to the connection between the transferor and transferee. There is no similar exception for CGT event A1. Also, CGT event A1 happens on the contract date whereas CGT event E2 happens when the ownership change occurs. This may affect the income year in which a capital gain or capital loss is taken to be made.

Although the transfer of an asset to an existing trust may also cause CGT event A1 to be triggered, CGT event E2 is ordinarily the more specific and the appropriate event to apply by virtue of section 102-25 of the ITAA 1997.

Application to your situation

In this case, under the scheme Trust Z will be created and you and the trustees will transfer the equitable interest in the CGT assets listed in the Schedule to it while retaining the legal ownership interests in those CGT assets.

CGT event E1 will not occur in this situation because the ‘gift trusts’ being created over the CGT assets by the Deed of Gift is not becoming the owner of those assets for capital gains purposes.

For capital gains purposes, the CGT assets are being transferred to an existing trust, Trust Z, which will result in a CGT event E2 occurring.

The transferring of the CGT assets to Trust Z will also result in a CGT event A1 occurring. However, in accordance with section 102-25 of the ITAA 1997, the most specific CGT event in this situation will be CGT event E2 because the parties/entities involved in scheme are connected and the dealings are not at arm’s length.

Conclusion

All of the items listed in the Schedule are CGT assets. Ownership of these assets will be transferred from you to the ‘gift trusts’ once the Deed of Gift is executed but for capital gains purposes, the new owner will be Trust Z as absolutely entitled beneficiary of each of the ‘gift trusts’ in respect of these assets.

While CGT event A1 and E2 will occur when the equitable interest in the CGT assets are transferred into Trust Z, the most relevant CGT event is CGT event E2.

You will make a capital gain if the capital proceeds from the transfer are more than the asset's cost base. You will make a capital loss if the capital proceeds are less than the asset's reduced cost base.

Note 1: The transfer of the assets to Trust Z will not be viewed as being an arms-length transaction and the capital proceeds received will be the market value of the assets in question when the CGT event occurs under the market value substitution rules contained in subsection 116-30(1) of the ITAA 1997.

Note 2: Many of the items listed in the Schedule are personal use assets. Any capital gain made on the transfer of the equitable interest in the personal assets will be disregarded if the first element of its cost base is less than $10,000.


Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).