Edited version of private advice

Authorisation Number: 1052241383015

Date of advice: 18 April 2024

Ruling

Subject: CGT - transfer legal title

Question

Will CGT event E5 occur upon the transfer of legal title to the Property to the Beneficiaries(as tenants in common)?

Answer

No.

Question 2

Will CGT event E7 occur upon the transfer of legal title to the Property to the Beneficiaries (as tenants in common)?

Answer

Yes.

Question 3

Will Capital Gains Tax (CGT) event A1 happen to the Trustee upon the transfer of legal title to the Property to the Beneficiaries (as tenants in common)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Trust was established with a corporate trustee in XXXX. The beneficiaries are A and B in equal shares.

The Trust was established, acquiring a property on behalf of the beneficiaries.

The corporate trustee for the Trust, entered into a contract in the XXXX income year to purchase the Property.

The Trust Deed dated XX XXX XXXX provides the following:

The Trustee agrees that it will:

a)            hold the Trust Fund and the Income of the Trust Fund on behalf of the Beneficiary absolutely;

b)            at all times perform, observe and comply with the directions of the Beneficiary in relation to the Trust Fund and the Income of the Trust Fund; and

c)            transfer to the Beneficiary for its sole and absolute benefit the Trust Fund if directed to do so by the Beneficiary.

The Power to apply capital to Beneficiary:

Until the Vesting Day the Trustee must apply, distribute or set aside the Capital of the Trust Fund or any part of it if directed by the Beneficiary for the benefit of the Beneficiary either in cash or by way of an in specie distribution of assets of the Trust Fund and otherwise upon such terms and conditions as the Beneficiary may in its absolute discretion direct.

Power to distribute in specie:

In any total or partial distribution or appropriation from time to time of the trust fund, the Trustee may, with the prior written consent of the Beneficiary, distribute in specie, or partly in specie and partly in cash, and to appropriate and partition any real or personal property forming part of the trust fund to the Beneficiary.

A and B, and their dependents moved into the Property following Settlement and have resided there since that time.

A and B are the shareholders and directors of the Trustee.

The Trustee is the holder of the mortgage on the Property and A and B are the guarantors.

The Property has always been and continues to be occupied by A and B as their primary place of residence since acquisition. The Trustee was granted the land tax home exemption by the State Revenue Office on this basis.

The deposit to purchase the Property, together with the costs of ownership have been funded by A and B since purchase.

The Property has been renovated over the last XX years, paid for by A and B.

The Trustee proposes the transfer of the legal title to the Property to A and B as tenants in common.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 Subdivision 104-E

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 subsection 104-85(6)

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

CGT event E5

A CGT event E5 happens if a beneficiary becomes 'absolutely entitled' to a CGT asset of a trust as against the trustee (section 104-75 of the ITAA 1997).

Section 106-50 of the ITAA 1997 provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, any act done by the trustee in relation to the asset is treated as if it were done by the beneficiary.

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 (TR 2004/D25) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

Commencing at paragraph 23, TR 2004/D25 explains where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. Assets are fungible if each asset matches the same description such that one asset can be replaced with another, or if they are of the same type.

Land is rarely fungible because each parcel is unique (paragraph 94 of 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 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.

In your case, there are two beneficiaries equally entitled to the Property of the trust, and the Property is not a fungible asset. Accordingly, the beneficiaries of the trust cannot be absolutely entitled to the Property of the trust as against the trustee.

Subsequently, as the requirements for absolute entitlement within the context of the CGT provisions cannot be satisfied, CGT event E5 will not occur.

CGT event E7 (A1)

Subsection 102-25(1) of the ITAA 1997 provides that if more than one CGT event can apply in a particular situation, the event you use is the one that is most specific to your situation.

Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. 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.

Subdivision 104-E of the ITAA 1997 contains the CGT provisions which deal specifically with situations (or CGT events) involving trusts.

CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of a beneficiary's interest, or part of it (emphasis added), in the trust capital (section 104-85 of the ITAA 1997).

In this case, the Trustee of the trust is going to transfer legal title to the Property to the Beneficiaries of the Trust. Therefore, CGT event E7, as opposed to CGT event A1, is the most specific in this situation as it involves an asset of a trust devolving to a beneficiary.

CGT event A1 would be considered the most specific event if the Trustee was to dispose of the property to an unrelated party at arm's length, for example.

The time of CGT event E7 is when the disposal occurs.

If an asset is acquired by a trust beneficiary as a result of CGT event E7, it is acquired by the beneficiary at the time of that CGT event.

A trustee of a trust makes a capital gain from CGT event E7 if the market value of the asset at the time of the disposal is more than its cost base.

A beneficiary makes a capital gain from CGT event E7 if the market value of the asset at the time of the disposal is more than the cost base of the beneficiary's interest in trust capital. If that market value is less than the reduced cost base of that interest, a capital loss is made.

A capital gain or loss made from CGT event E7 by a beneficiary is disregarded if:

•         the trust interest was acquired for no expenditure (except where it was assigned from another entity)

•         the trust interest was acquired before 20 September 1985, or

•         the gain or loss made by the trustee was disregarded under the main residence exemption, for example due to being a special disability trust (subsection 104-85(6)).

In this case, the Trust is not a unit trust or a deceased estate to which Division 128 applies. Therefore, the exceptions with respect to CGT event E7 do not apply.

The Trust submits:

•         CGT event E7 will not happen as the Property will not be transferred to the Beneficiaries in satisfaction of their interest in the trust capital because:

o   the transfer will not be undertaken as part of vesting the Trust,

o   the Beneficiaries will continue to be beneficiaries of the Trust, and

•         As the Beneficiaries will remain beneficiaries of the Trust, they will continue to hold the beneficial interest in the capital of the trust (even though the Property will no longer be an asset of the Trust).

However, it is not relevant that the transfer of the legal title will not be undertaken as part of vesting. It is the proposed decision of the Trustee to transfer the asset to the beneficiaries and the subsequent transfer of the legal title that is relevant.

Likewise, the fact that the beneficiaries will continue to be beneficiaries of the Trust is not a relevant consideration for CGT event E7. It is the disposal of an asset of the Trust in satisfaction of a beneficiary's interest, or part of it (emphasis added), in the trust capital. In these circumstances, part of the trust capital will be disposed of i.e., the Property.

Therefore, the proposed transfer of the legal title of the Property will result in the Beneficiaries acquiring the Property in satisfaction of part of their interests in the capital of the Trust and as a result, CGT event E7 will happen to the Trustee at that time.

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