Edited version of private advice

Authorisation Number: 1051702850436

Date of advice: 24 July 2020

Ruling

Subject: Capital gains tax - transfer of assets held in trust

Question

Is the Trust (or taxpayer) considered to be the owner of the Property for capital gains tax (CGT) purposes?

Answer

Yes

This ruling applies for the following period

Income year ended 30 June 2021

The scheme commences on:

1 July 1993

Relevant facts and circumstances

The Property was purchased in the name of Company A (the Trustee) as trustee for the Trust on XX August 19XX for a purchase price of $XXX,XXX.XX.

The property was purchased at auction and was attended by Beneficiary A of the Trust

The Trust was created with a Deed of Settlement (Trust Deed) signed on XX August 19XX.

The size of the Property's land is approximately XXX square metres.

The Property purchase was funded using a contribution of $XXX,XXX.XX from Beneficiary A's personal savings and $XX,XXX.XX from funds borrowed through a mortgage loan.

The mortgage loan was paid in its entirety and discharged by 20XX. There is no paperwork relating to the mortgage loan.

The Property was placed in the Trust for security purposes after Beneficiary A received advice to do so at the relevant time.

The Trust Deed establishes that the primary beneficiaries are all the children of Beneficiary A now living or born after the day of making the Deed but prior to the Vesting Day in the proportion of tenants in common and in equal shares.

The Trust Deed establishes additional members of the class of general beneficiaries being Beneficiary A and the wife of Beneficiary A.

Clause 1.1. (e) of the Trust Deed provides:

"the Trust Fund" means the said settled sum being a sum paid or about to be paid by the Settlor to the Trustees upon the execution hereof all monies investments and property paid or transferred to and accepted by the Trustees as additions to the Trust Fund the accumulations of income hereinafter directed or empowered to be made all accretions to the Trust Fund and the investments and property from time to time representing the said money investment property accumulations and accretions or any part or parts thereof respectively;

Clause 6 (e) of the Trust Deed provides:

allow any beneficiary to occupy have custody of or use any immovable property or chattels for the time being forming part of the Trust Fund on such terms or conditions as to inventories repair replacement insurance outgoings or otherwise at all as the Trustees shall think fit and so that no Trustee shall be liable for any loss or damage which may occur to any property so forming part of the Trust Fund during or by reason of any such occupation custody or use except insofar as such loss or damage shall be occasioned by the conscious and wilful default or neglect of such Trustee.

Clause 7 (f) of the Trust Deed provides:

to hold use purchase construct demolish maintain repair renovate reconstruct develop improve sell transfer convey surrender let lease exchange take and grant options or rights in alienate mortgage pledge reconvey release or discharge or otherwise deal with any real or personal property and in particular with shares debentures or securities...

Clause 7 (n) of the Trust Deed provides:

to appropriate without obtaining any of the consents required by statute or otherwise by law any part or parts of the Trust Fund either in the actual condition or state of investment thereof or by setting apart or crediting in the books or accounts of the trust any sum or sums in or towards the satisfaction of any share or shares whether vested or contingent to which any person or persons is or may be entitled in the Trust Fund and for that purpose to make or cause to be made a valuation or valuations of the Trust Fund or any part or parts thereof or of any interest therein as the Trustees may deem necessary either themselves or by such person or persons whether duly qualified or not as they may appoint and in such manner and at such respective times as the Trustees consider just and proper and every valuation and every appropriation made by the Trustees shall bind all persons interested whether in the shares to which the appropriation is made or in any other shares or otherwise interested in the Trust Fund notwithstanding that such persons may not be in existence or may be infants lunatics or defectives or cannot be found or ascertained at the time of such appropriation or that the Trustees or any one or more of the Trustees for the time being or any person who is Director or Shareholder of the Trustee making the appropriation are or may be beneficially interested either directly or indirectly in the property appropriated or may benefit either directly or indirectly as a result of the exercise by the Trustees of the power of approval as aforesaid;

Clause 7 (o) of the Trust Deed provides:

to determine whether any real or personal property or any increase or decrease in amount number or value of any property or holdings of property or any receipts or payments from or in connection with any real or personal property shall be treated as and credited or debited to capital or to income and generally to determine all matters as to which any doubt difficulty or question may arise under or in relation to the execution of the trusts and powers of this settlement and every determination of the Trustees in relation to any of the matters aforesaid whether made upon a question formally or actually raised or implied in any of the acts or proceedings of the Trustees in relation to the Trust Fund shall bind all parties interested therein and shall not be objected to or questioned on any ground whatsoever;

Clause 7 (x) of the Trust Deed provides:

To permit any asset of the Trust to be held or registered in the name of any nominee of the Trustees and to deposit securities to the deeds and other documents belonging or related to the Trust Fund with any bank or Solicitor, with the consent of the Guardian (if any).

Clause 8 of the Trust Deed provides:

NOTWITHSTANDING anything herein to the contrary or otherwise contained the Trustees shall have power at their absolute discretion to sell transfer hire lease or dispose of any real or personal property of the Trust Fund or to lend or advance any monies to the Trustees in their personal capacity or in their capacity as trustees of other trust funds or otherwise howsoever or to any company or partnership whatsoever notwithstanding that the Trustees are or any of them is a shareholder or director or member or partner of such company or partnership or to a wife husband child or children of the Trustees or any of them absolutely AND to buy transfer acquire hire or lease any real or personal property or to borrow any monies from the Trustee or any of them in their personal capacity or in their capacity as Trustees of other Trust Funds or otherwise howsoever or from any company or partnership whatsoever notwithstand or member or partner of such company or partnership or from the husband or wife or child or children of the Trustees or any of them AND to carry on or carry out any profit making undertaking or scheme in partnership with the Trustees or any of them in their personal capacity or in their capacity as Trustees of other trust funds or otherwise howsoever or with any company or partnership whatsoever notwithstanding that the Trustees or any of them is a shareholder or director or member or partner of such company or partnership or with the husband or wife or child or children of the Trustees or any of them AND generally to deal with the Trustees or any of them in their personal capacity in all respects as if there were two separate persons to the dealings AND without limiting the generality of anything herein contained the Trustees shall have such power at their absolute discretion and whether or not the Trustees have notice that the Appointor (if any) intends to appoint additional or other Trustees of the Trust Fund to sell to themselves in their capacity as Trustees of other trust funds either for cash or upon terms any assets being shares or a joint or undivided interest in property where other shares in the same company or companies or other joint or undivided interest in the same property are held by the Trustees in such other capacity as aforesaid AND to divide assets in specie between the Trust Fund and such other trust funds in such manner as the Trustees shall think fit.

Beneficiary A divorced from the spouse.

The Property was considered matrimonial property prior to the divorce in 19XX.

The Property was not transferred to Beneficiary A or Beneficiary A's spouse during the divorce. The Property remained in the Trust as part of a consented settlement agreement.

The Property has always been in the Trust's financial statements with holding costs and repairs being capitalised every year in the accounts.

Beneficiary A has solely made payment of all outgoings of the Property from the date of purchase including the payment of council rates, water rates, home improvements, repairs and maintenance and insurance. These payments have been credited to Beneficiary A's beneficiary loan account.

The Property has been used as the principal place of residence of Beneficiary A from the date of purchase.

Beneficiary A now wishes to transfer the legal title of the Property into their sole personal name.

Assumption

For the purpose of this ruling, it is assumed that the transfer will occur during the period of the ruling

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 106-50

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. All assets acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. The Property is a CGT asset.

Section 104-10 of the ITAA 1997 describes the most common CGT event, being CGT event A1. A CGT event A1 happens if there is a disposal of a CGT asset.

Under section 104-85 of the ITAA 1997 a CGT event E7 happens if a trustee of a trust disposes of a trust asset to a beneficiary in satisfaction of the beneficiary's interest (or part of it) in the trust capital. The timing of the event is when the disposal occurs (section 104-85(2)).

Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property to Beneficiary A is treated as a disposal for CGT purposes. CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. CGT event E7 is more specific to this situation.

Subsection 104-10(2) defines a disposal as:

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.

When considering the disposal of an interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. Generally, the owner of the property is the entity(s) registered on the certificate of title, but it is possible for legal ownership to differ from beneficial ownership. In this case, the Trustee as trustee for the Trust is the legal owner of the property.

Generally, where there is a transfer in the legal ownership of a CGT asset, a CGT event occurs. However, there is an exception where a CGT event will not arise. The exception is where 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 by section 106-50 of the ITAA 1997.

Section 106-50 of the ITAA 1997 and CGT event E5 in section 104-75 of the ITAA 1997 are the main provisions to which the concept of absolute entitlement is relevant. These provisions apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability).

These 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.

Draft Taxation Ruling TR 2004/D25 (Draft TR 2004/D25) discusses the concept of 'absolute entitlement' and states, at paragraph 10, that:

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 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).

If there is more than one beneficiary with an interest 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.

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.

Land is rarely fungible because each parcel of land is unique (paragraph 94 of draft TR 2004/D25). Real estate is traded based on the actual sale price, not the sale price per unit. This is because the value of one part of the land may, for example have better views and access to the main street than another part of the land and therefore be worth more. Unlike fungible commodities, parcels of real estate do not have equal value.

Conclusion

You propose the transfer of the legal title of the Property into Beneficiary A's personal name should be exempt from any CGT because the trustee has only acted as an apparent purchaser, when in fact, the real purchase was, is and always has been Beneficiary A.

In considering your proposal we examined the following:

·        The act of Beneficiary A transferring the Property to the Trust and the action of the Trustee accepting the Property as additions to the Trust Fund means the Property is an asset belonging to the Trust as per Clause 1.1 (e) of the Trust Deed.

·        You cite clause 7 (x) of the Trust Deed to support your proposal. Whilst Beneficiary A may be a nominee, the action foreshadowed in the clause was not undertaken. This clause does not provide Beneficiary A with a vested and indefeasible interest in the whole of the property. It does not authorise Beneficiary A alone to call for the Property to be transferred to them or be transferred at their sole direction.

·        You mentioned that the Trustee has held the Property on trust for Beneficiary A since 19XX. However, the Trust Deed indicates other beneficiaries who may benefit from the distribution of trust income and/or property by the Trustee. The Trust is a discretionary trust. As the Trustee can exercise its discretion as to a particular asset, the beneficiaries are not absolutely entitled to the Property.

·        You indicated Beneficiary A has solely made payment of all outgoings of the Property from the date of purchase. As the expenses were credited to Beneficiary A's beneficiary loan account, Beneficiary A was effectively reimbursed by the Trust.

·        There are no documents confirming Beneficiary A's personal contribution to fund the property purchase. No evidence was provided to confirm the name of the borrower on the mortgage loan and no details were provided of who made the mortgage loan repayments.

·        Since the date of purchase, approximately XX years ago the legal title of the Property has not changed despite the divorce and the payout of the mortgage loan.

·        The Property is not a fungible asset. Therefore, the circumstance where a beneficiary can be considered absolutely entitled to a specific number of trust assets for CGT purposes in paragraph 24 of Draft TR 2004/D25 does not apply.

For the reasons outlined above, we will not conclude that Beneficiary A is absolutely entitled to the Property as against the Trustee. The beneficiaries are equally entitled to the property of the Trust.

Therefore, the Trust is the current owner of the Property for capital gains purposes and CGT event E7 will happen if the Trustee transfers the legal title of the Property to Beneficiary A.

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