Edited version of private advice

Authorisation Number: 1051766955665

Date of advice: 14 October 2020

Ruling

Subject: Beneficiary absolutely entitled to trust assets

Question 1

Are you absolutely entitled, as against the trustee, to the assets of that trust for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Will CGT event A1 under section 104-10 of the ITAA 1997 be triggered when the CGT assets are transferred to you?

Answer 2

No

This ruling applies for the following periods:

01 July 2019 - 30 June 2020

01 July 2020 - 30 June 2021

The scheme commences on:

01 July 2019

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your tax agent advised that:

You were severely injured as a pedestrian in a hit and run accident on XXXX.

Your injuries included loss of vision, fractured skull, severe traumatic brain injury, upper and lower limb weakness.

You had legal capacity for many years after the accident, your health has continued to decline, and you have recently been assessed as lacking legal capacity.

Personal injury proceedings were commenced in the XXXX Supreme Court. Those proceedings were concluded in XXXX and damages awarded to you.

An amount of $XXXX was settled on trust for the benefit of yourself.

The original trustee was XXXX Company Limited which later changed its name to XXXX (Australia) Ltd ('XXXX Co'). Trust Co was later sold to XXXX Company Limited ('XXXX') in XXXX.

As per page 22 of the Trust Deed document, minor amendment was made to the trust Deed on XXXX to ensure that foreign persons could not benefit from the trust.

Proceedings were commenced in the Supreme Court to have the trustee replaced. By order dated XXXX, the Court ordered in paragraph 6 of the Order that XXXX Trustees Limited ('AET') be substituted as the trustee. The Note in paragraph 3 discloses that XXXX is the third defendant.

Further, as per paragraph 12 of the Order, the Court directed that XXXX should take all necessary steps to seek a private ruling from the ATO relating to the tax consequences that might arise from the transfer of ownership of the trust assets (currently under management by XXXX).

The XXXX Trust currently owns the following assets:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for XXXX.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Beneficiary absolutely entitled to Trust assets

Detailed reasoning

Question 1

Where a beneficiary is absolutely entitled to an asset held by a trustee section 106-50 of the ITAA 1997 provides that any 'act done by the trustee in relation to the asset' is treated as if it had been an act of the person absolutely entitled. As a result, if the act triggers a Capital Gains Tax (CGT) event, then the taxpayer will be the person subject to any CGT liability rather than the trustee.

Section 106-50 of ITAA 97 states that:

(1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

(2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee).

A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is:

·         absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and

·         able to direct the trustee how to deal with the asset.

For the purposes of determining if a beneficiary is absolutely entitlement, s106-50 of ITAA 97 disregards any legal disability.

Furthermore, paragraph 10 of Draft Taxation Ruling TR 2004/D25 income tax: capital gains states:

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.

The beneficiary has a vested, indefeasible and absolute interest in settled funds derived from the entitlements to damages for personal injuries you suffered and that the assets of the fund are held exclusively for your benefit. The trust fund was not jointly owned and that any other beneficiary has no rights or ability to call on the applicant's funds. Consequently, the applicant is absolutely entitled to the funds.

Therefore, the applicant is absolutely entitled to the assets as against the trustee of the trust and being entitled to require the trustee to deal with the assets as the beneficiary directs.

Question 2

Section 104-10 of the ITAA 1997states that CGT event A1 happens if you dispose of a CGT asset when a change of ownership occurs from you to another entity. However, a change of ownership does not occur if you stop being a legal owner of the asset but continue to be its beneficial owner.

Where the beneficiary is absolutely entitled, section 106-50 of the ITAA 1997 treats the trust asset as being owned by the beneficiary and not the trustee and actions taken by the trustee are taken to have been done by the beneficiary. Paragraph 144 of TR 2004/D5 further provides that no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

Therefore, the applicant is not subject to CGT when the property is transferred to them from the trust as section 104-10 of the ITAA 1997 does not apply as a change of ownership did not occur.

Application to your circumstances

Where the beneficiary is absolutely entitled, section 106-50 of the ITAA 1997 treats the trust asset as being owned by the beneficiary and not the trustee and actions taken by the trustee are taken to have been done by the beneficiary. Paragraph 144 of TR 2004/D5 further provides that no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

You have the totality of the beneficial interests in the Trust assets and automatically satisfy the requirement that your interest be vested in possession and indefeasible (paragraph 78 of TR 2004/D25). There is no known legal impediment (ignoring legal disability) to you obtaining immediate possession and enjoyment of the Trust assets (paragraph 78-79 of TR 2004/D5). Therefore, you are absolutely entitled to Trust assets as against the Trustee at all times.

As you are absolutely entitled as against the Trustee, you are the relevant taxpayer if a CGT event happens to the assets. CGT event A1 in section 104-10(1) of the ITAA 1997 will not occur for the trustee upon transferring the Trust assets to you as you are absolutely entitled as against the trustee at all times and as such, there is no change in beneficial ownership.

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