Edited version of private advice

Authorisation Number: 1051841862158

Date of advice: 21 May 2021

Ruling

Subject: Capital gains tax

Question 1

As a result of the Orders, do you acquire the Properties under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Are the proceeds from the sale of the Properties assessable to you under section 6-5 of the ITAA 1997, as a result of an 'isolated transaction' carried out for profit and commercial in character?

Answer

No

Question 3

Do you have a capital gain under section 100-45 as a result of CGT event A1 arising on the sale of the Properties?

Answer

No

Question 4

Do you have an income tax liability from the sale of the Properties under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 5

Do you have an obligation to lodge an income tax return in relation to the sale of the Properties under section 161 of the ITAA 36 for the 2019-20 income year?

Answer

No

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XXXX, the X Court of X, made orders pursuant to section 66G of the Conveyancing Act 1919 (NSW) appointing as trustees Person A and Person B ("the Trustees") for the sale of the land (the Properties).

On XXXX the orders were amended by consent.

The content of the Orders dated XXXX and amended orders dated XXXX form part of these facts and are collectively referred to as the Orders.

The parties to the Orders are (Parties):

•         Person C

•         Person D

•         Person E

•         Person F

•         Person G (Person G and the abovenamed parties are together the Plaintiffs)

•         Person H (the First Defendant)

•         Person I (the Second Defendant)

Order 5 of the Orders sets out the entitlement of the Parties to the sale proceeds of the Properties.

•         X% to Person H

•         X% to the Plaintiffs and the Second Defendant in such proportions as agreed between them, and

•         X% to be held on trust pending the solution of Person H's claim to those monies.

The Trustees were not part of the overall resolution process of the claim by Person H to X% of the monies: This was resolved between the Parties.

The Parties agreed between themselves and advised the Trustees on XXXX of the relevant proportions of the X% entitlement and any entitlement arising under the resolution of Person H's claim in respect of the X%.

In accordance with the Orders, the Trustees commenced the process to sell the Properties, including briefing and obtaining submissions from a number of real estate agents.

The Properties were purchased by nominees of all of the Parties bar Person H (together, the Purchasing Parties):

•         Trust A

•         Trust B

•         Trust C

•         Trust D

•         Trust E

•         Trust F

The Purchasing Parties made a number of offers to acquire the Properties. The Trustees also received a number of offers from a third party.

The Purchasing Parties made a joint offer equal to the highest offer received from the third party (but with better terms than the third party offer, resulting in a better outcome for all Parties) which was ultimately accepted by the Trustees.

The contract for sale of the Properties was entered into on XXXX, and settlement occurred on XXXX. That is, both events occurred in the XXXX income year.

The Trustees applied the proceeds in accordance with Clause 5 of the Orders or at the direction of the Parties, to settle various related liabilities in accordance with Clauses 8 and 9 of the Orders.

The Trustees' activities have been confined to those prescribed in the Orders, being primarily sale of the Properties and distribution of proceeds. Accordingly, the Trustees did not derive any other amounts (e.g. rent, interest or trading income) in relation to those activities.

At all relevant times the Parties have not been under any legal disability.

At all relevant times the Parties were Australian tax residents.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 161

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 100-45

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Subsection 109-5(2)

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Subsection 110-25(4)

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Subsection 110-55(2)

Income Tax Assessment Act 1997 Subsection 116-20(1)

Income Tax Assessment Act 1997 Subsection 116-30(2)

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Question 1

As a result of the Orders, do you acquire the Properties under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes, CGT event A1 is taken to have happened when the change in ownership occurred, which in this case is the time at which each of the Properties vested in you as a result of the court order.

Detailed reasoning

Section 109-5 sets out that you acquire a CGT asset when you become its owner.

The Orders state[1]:

1.    ... that Person A, solicitor, and Person B (the "Trustees") be appointed as trustees for the sale of the land ...

2.    Order that the Properties be vested in the Trustees subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on the statutory trust for sale under Division 6 of Part 4 of the Act.

3.    Order that the trustees are to sell all of the Properties ...

ATO Interpretative Decision ATO ID 2009/129 Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1? (ATO ID 2009/129) sets out the capital gains implications of land vesting in a statutory trustee for sale.

Relevantly ATO ID 2009/129 states:

On the making of the court order the whole of the co-owners' interests in the property vested in the trustees for the sale of the property; and the co-owners' interests were converted into personalty, that is, into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests.

In these circumstances it is considered that the making of the court order effects a disposal of the property from the co-owners to the trustees for sale by operation of law. Therefore, CGT event A1 happens.

In accordance with the view set out in ATO ID 2009/129, it is considered that the making of the court order effects a disposal of the Properties from the Parties to you, i.e. a CGT event A1 arises.

You are taken to a acquire the asset as a result of CGT event A1 happening when the disposal contact is entered into or, if none, when the disposing entity stops being the assets' owner (subsection 109-5(2)).

As there was no contract for the disposal of the Properties, CGT event A1 is taken to have happened when the change in ownership occurred, which in this case is the time at which each of the Properties vested in you as a result of the court order.

Question 2

Are the proceeds from the sale of the Properties assessable to you under section 6-5 of the ITAA 1997, as a result of an 'isolated transaction' carried out for profit and commercial in character?

Summary

No, the proceeds from the Properties are not ordinary income of the Trustees under section 6-5.

Detailed reasoning

Under section 6-5 your assessable income includes income according to ordinary concepts.

The Trustees' activities are confined to those prescribed in the Orders, being primarily the sale of the Properties and distribution of proceeds of those sales. Accordingly, the Trustees did not derive any other amounts (e.g. rent or trading income) from the Properties.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income sets out the Commissioner's view as to whether a profit from an isolated transaction is income according to ordinary concepts.

A profit from an isolated transaction is generally income when both of the following elements are present:

•         the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

•         the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

It is considered the Trustees' activities in carrying out the Orders do not have the indicia of carrying on a business, nor is there the requisite intention of the Trustees to make a profit or gain.

The proceeds from the Properties are thus not ordinary income of the Trustees under section 6-5.

Question 3

Do you have a capital gain under section 100-45 as a result of CGT event A1 arising on the sale of the Properties?

Summary

As the total of the first, second and third elements of your cost base in the Properties will equal the sale proceeds you received for the disposal of the Properties, you realise neither a capital gain, nor a capital loss, from the sale of the Properties.

Detailed reasoning

CGT event A1 happens if you dispose of a CGT asset, and the time of the event is when you enter into the contract for disposal or, if there is no contract, when the change of ownership occurs (section 104-10).

The settlement of the contract of sale of the Properties will effect a change of ownership of the Properties from you to the Purchasing Parties. However, for the purpose of CGT event A1, the disposal happens at the time the contract is entered into, that is, during the 2019-20 income year.

Under section 100-45 you have a capital gain if your capital proceeds exceed your cost base, and a capital loss if your reduced cost base exceeds your capital proceeds.

Under the general cost base and reduced cost base rules in subsections 110-25(2) and 110-55(2) of the ITAA 1997, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of the property given (or required to be given) in respect of acquiring it.

The second element of your cost base and reduced cost base are the incidental costs you incurred to acquire the asset, including agent fees, costs of settlement, transfer duty, costs of advertising and marketing to find a seller and valuations (section 110-35 and subsection 110-55(2))

The third element of your cost base is the costs of owning the CGT asset, including costs of maintenance, insurance, rates and land tax (subsection 110-25(4).

Under subsection 116-20(1) your capital proceeds from a CGT event are the money and the market value of any other property you have received or are entitled to receive in respect of the CGT event.

Under subsection 116-30(2) your capital proceeds are replaced with the market value of the CGT asset if they are more or less than the market value of the asset and you and the entity that acquired the asset did not deal with each other at arm's length.

The Purchasing Parties made a number of offers to acquire the Properties. The Trustees also received a number of offers from a third party.

The Purchasing Parties made an offer equal to the highest offer received from the third party (albeit with better terms, resulting in a better outcome for all Parties) which was ultimately accepted by the Trustees.

Accordingly, the Commissioner accepts that you disposed of the Properties for their market value, and the total capital proceeds you received in respect of those disposals are equal to the sale price of the Properties stipulated under the contract.

Order 5 of the Orders states:

Order that the proceeds of the sale of the Properties following the payment of all mortgages and other encumbrances affecting the title to the Properties, the commission and other expenses of the real estate agent, the legal expenses of the Trustees in respect of the sale, the costs payable pursuant to Orders 8 and 9, below, and any other legitimate expenses of the Trustees, including but not limited to all rates, strata fees, taxes, insurances and other outgoings of the Property, be distributed to the parties...

The Parties advised the Trustees of the relevant proportions of the X% entitlement and of any entitlement arising under the resolution of the claim in respect of the X% as agreed between them on XXXX.

At the time of the Orders you did not pay anything or give any property to acquire the Properties but, as a result of the Orders, you did have an obligation to pay the proceeds of the sale of the Properties, less specified amounts, to the Parties pursuant to order 5 of the Orders.

Accordingly, the first element of your cost base in each of the Properties is the amount you are required by the Orders to pay to the Parties from their sale, that is, the net proceeds from the sale of the Properties.

Costs payable out of the proceeds of sale pursuant to Order 8 include remuneration of the Trustees for performing the duties imposed on them pursuant to the Orders and, pursuant to Order 9, reasonable costs of the Plaintiffs and the Defendants of the proceedings, as agreed or assessed.

Pursuant to order 6 of the Orders, any of the Parties or their nominees are entitled to purchase the Properties by setting off that party's (or Parties') entitlement to the proceeds against the money bid or offered.

Thus, the consideration payable by any of the Parties for the purchase of one or more of the Properties, and the Parties' costs of the proceedings pursuant to Order 9, are able to be offset by the Trustees against payment of each Party's entitlement: These offsets are not a reduction of an entitlement payable, nor a cost incurred, by the Trustees, and thus these offsets do not reduce either the capital proceeds received by the Trustees for, or the cost base in the hands of the Trustees of, the Properties.

It is considered that any costs deducted from the sale price in arriving at the net proceeds for the sale of the Properties, as detailed under clause 5 of the Orders, will form part of the Trustee's cost base of the relevant Properties, as follows:

•         Expenses of a real estate agent commissions and costs of transfer will be included in the second element of the cost base

•         Other legitimate expenses of the Trustees, including but not limited to all rates, strata fees, taxes, insurances and other outgoings of the Property, will be included in the third element of the cost base

•         A reasonable rate of remuneration for the Trustees for performing the duties imposed upon them pursuant to the Orders will be included in either the second or third element of the cost base.

As the total of the first, second and third elements of your cost base in the Properties will equal the sale proceeds you received for the disposal of the Properties, you realise neither a capital gain, nor a capital loss, from the sale of the Properties.

Question 4

Do you have an income tax liability arising from the sale of the Properties under sections 98, 99 or 99A of the ITAA 1936?

Summary

No, sections 98, 99 and 99A do not apply as you have derived no net income in the relevant year.

Detailed reasoning

Sections 98, 99 and 99A only apply where there is net income of the trust estate.

As per questions 2 and 3, you have no net income from the sale of the Properties. Your activities have been confined to those prescribed in the Orders, being primarily the sale of the Properties and distribution of proceeds. You did not derive any other amounts (e.g. rent, trading or interest income) from the Properties.

Sections 98, 99 and 99A do not apply as you have derived no net income in the relevant year.

Question 5

Do you have an obligation to lodge an income tax return in relation to the sale of the Properties under section 161 of the ITAA 36 for the 20XX-XX income year?

Summary

As you have not derived any income, thus you are not required to lodge an income tax return for the XXXX income year.

Detailed reasoning

Under subsection 161(1) of the ITAA 1936 every person must lodge a return if required by the Commissioner as notified via legislative instrument.

Under Table E of the Legislative Instrument Notice of Requirement to Lodge a Return for the Income Year Ended 30 June 2020, a trustee has an obligation to lodge a tax return if they have derived income, including capital gains, during the income year. As you have not derived any income, thus you are not required to lodge an income tax return for the XXXX income year.

However, in the event that you as Trustees have derived other income in relation to the Properties and their disposal, such as rental or interest income, then you will have an obligation to lodge a trust tax return under section 161 of the ITAA 1936 in respect of that other income.

[1] The "Act" referred to here is the Conveyancing Act 1919 (NSW), the orders being made under section 66G in relation to the vesting of land, held in co-ownership, in court appointed trustees for the purpose of the court-ordered sale of that property.

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