Edited version of private advice

Authorisation Number: 1052097396615

Date of advice: 1 May 2023

Ruling

Subject: Absolute entitlement

Question 1

Will the Trustee make a capital gain pursuant to subsection 100-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the legal title to property of the trust is transferred to the sole Beneficiary?

Answer

No.

Question 2

Will the Beneficiary of the trust make a capital gain pursuant to subsection 100-20(1) of the ITAA 1997 when it receives the legal title in the property of the trust from the Trustee?

Answer

No.

This private ruling applies for the following period:

Income year ended 30 June 202x

The scheme commence on:

1 July 202x

Relevant facts and circumstances

The trust deed provides that the Trustee shall hold the Trust Estate solely upon trust for the Beneficiary.

The trust deed also provides that the Trustee must at the request and cost of the Beneficiary transfer any Trust Estate it holds on trust for the Beneficiary to the Beneficiary or otherwise deal with the Trust Estate as the Beneficiary directs. Nothing in the deed entitles the Trustee to beneficial ownership of any Trust Estate nor does it deprive the Beneficiary of the rights and beneficial ownership of the Trust Estate.

The Beneficiary has requested the transfer of the Trust Estate to itself as the beneficial owner.

Relevant legislative provisions

Income Tax assessment Act 1997 subsection 100-20(1)

Income Tax assessment Act 1997 section 106-50

Reasons for decision

Question 1

Summary

The Trustee will not make a capital gain pursuant to subsection 100-20(1) of the ITAA 1997 as the trustee of the trust when the legal title to property of the trust is transferred to the Beneficiary as the sole beneficiary.

Detailed reasoning

Subsection 100-20(1) of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens.

Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the ITAA 1997 provides that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary. That is, the absolutely entitled beneficiary is treated as the owner of the CGT asset, instead of it being an asset of the trust.

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997: sets out the Commissioner's preliminary view in relation to the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' and explains the circumstances where the beneficiary is considered to possess such an entitlement. Although this ruling is in draft form, it represents the Tax Office view of the law.

TR 2004/D25 applies the core principle of absolute entitlement as provided by Saunders v. Vautier (1841) 4 Beav 115; (1841) 49 ER 282 in the application of the CGT rules. Under the rule in Saunders v. Vautier, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it.

Paragraph 10 of TR 2004/D25 applies the rule of Saunders v. Vautier in the context of the CGT provisions. In particular, 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.

Paragraphs 21 and 22 of TR 2004/D25 state that, for the purposes of the CGT provisions, where a single beneficiary has all the interests in a trust asset, that beneficiary is considered to be absolutely entitled to that asset as against the trustee where 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.

In this situation, a trust was created when the trust deed was entered into between the Trustee and the sole Beneficiary. The relevant terms of the trust deed are:

•         The Trustee shall hold any trust estate solely upon trust for the Beneficiary.

•         The Trustee must at the request and cost of the Beneficiary, transfer any Trust Estate it holds on trust to the Beneficiary or otherwise deal with the trust estate as the Beneficiary directs.

As the Beneficiary is the sole beneficiary of the trust and has the ability to call for the Trust Estate to be transferred to it or at its direction under the trust deed, it is considered that the Beneficiary is absolutely entitled to the Trust Estate as against the trustee.

Accordingly, section 106-50 of the ITAA 1997 will apply so that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary. Consequently, when the Trustee transfers the legal title to property of the trust to the Beneficiary, no CGT event will happen as the Beneficiary is considered to be the beneficial owner of the Trust Estate both before and after the transfer.

This view is supported by paragraph 144 of TR 2004/D25 which states:

144. Also, 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.

Subsection 100-20(1) of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens. As no CGT event will happen when the Trustee transfers the legal title to property of the trust to the Beneficiary, the Trustee will not make a capital gain at this time.

Question 2

Summary

The Beneficiary will not make a capital gain pursuant to subsection 100-20(1) of the ITAA 1997 when it receives the legal title in the property of the trust from the Trustee.

Detailed reasoning

As provided in question one, no CGT event will happen when the Trustee transfers the legal title to property of the trust to the Beneficiary as the Beneficiary is considered to be the beneficial owner of the trust property both before and after the transfer in accordance with section 106-50 of the ITAA 1997.

Consequently, as no CGT event will happen when the Trustee transfers the legal title to property of the trust to the Beneficiary, the Beneficiary will also not make a capital gain at this time.

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