Edited version of private advice

Authorisation Number: 1052367909455

Date of advice: 18 June 2025

Ruling

Subject: CGT transfer trust asset - absolute entitlement

Question 1 - Absolute entitlement

When amendments were made to the Trust deed, will the relevant Beneficiary have absolute entitlementto the trust's asset for the purpose of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997?

Answer

No.

Question 2 - Capital Gains tax

If the beneficiary has absolute entitlement to the trust asset will a CGT event occur when the asset is transferred from the trust?

Answer

Not applicable.

Question 3 - Main residence exemption

When the trust asset is transferred to the beneficiary, are they eligible to apply the main residence exemption?

Answer

No.

This ruling applies for the following period:

DD MM YY

The scheme commenced on:

DD MM YY

Relevant facts and circumstances

The trust is a discretionary trust which was established on DD MM YY.

The Trust Deed of Settlement.

Dated DD MM YY.

The trust deed of settlement between the settlor and trustee's.

The settlor desires to provide a fund for distribution of property for the benefit of the eligible beneficiaries named and described in the deed.

The settlor and trustee have agreed that the property to be held on the trust hereinafter to be declared shall be held and impressed with the trusts and powers provided in the deed.

The settlor promises to pay the trustee the sum of $X intending that promise to be held by the trustee upon the trusts of this deed and the trustee has agreed to hold that promise accordingly.

Relevant Clauses.

2.1. Accounting periods.

Provides the accounting periods, vesting day, accumulation of net income and that it is not to be distributed to the eligible beneficiaries or any of them.

2.3. The appointer means successively;

   - Person 1.

   - Any person nominated in writing as appointer by any other appointer whether the person so nominated is appointed to act jointly with the appointer nominating him or in substitution for that appointer where notice of the nomination is given to the trustee.

   - The last appointer of a joint appointer.

2.5."Associate" in relation to a primary beneficiary means;

   - 2.5.1, The specified relatives of the primary beneficiary.

   - 2.5.2, The trustee in its capacity as trustee of any sub trust for the primary beneficiary or any specified relative thereof.

   - 2.5.3, The executors or administrators or other legal personal representatives of a deceased primary beneficiary.

   - 2.5.4, Any company in which the primary beneficiary or and specified relative thereof is an office or shareholder.

   - 2.5.5, Any person who is an associate of the primary beneficiary or specified relative within the meaning of subsection 82KH(1) of the assessment act.

2.9.

"Distribute" in relation to net income or corpus means to pay apply or set aside any property for the time being compromised in the net income or the corpus (as the case may be) to or for the benefit of the eligible beneficiaries or the one or more of them selected by the trustee and the expression "distributions" has a corresponding meaning;

2.10. Eligible beneficiaries or beneficiaries at any time means any one or more of.

   - 2.10.1, The primary beneficiary and

   - 2.10.2, The associates of the primary beneficiary.

Income of trust fund.

The trustee shall collect and receive and get in gross income and profits derived from time to time during each accounting period from dividends, interest, rents and other income and profits from the property of the trust fund.

The trustee shall pay out of the gross income of the trust fund all costs and outgoings including commissions, fees taxes (including land tax and income tax) management taxes and any other proper expenses in respect of the trust fund. But the expression does not include the settlor or the trustee or any excluded beneficiary at that time.

2.15. Primary beneficiary means

   - Person 1.

2.16. Property (except for the purpose of sub clause 2.23 includes cash investments and other assets and property whether real or personal legal or equitable and whether corporeal or incorporeal and without limiting the generality of the foregoing the expression also includes and legal or equitable chose in action and the goodwill of any business.

2.17. Security in relation to any property includes any mortgage bill of sale charge hypothecation or other encumbrance lien or charge fixed or floating legal equitable or otherwise over or in respect of that property.

2.18. "Set aside" in relation to a distribution of net income or corpus includes an irrevocable resolution of the trustee to hold and stand possessed of net income or corpus (as the case may be) therein referred to for or on behalf of the eligible beneficiaries in the amounts specified in the resolution freed from the trust's powers and provision of this deed as a fund separate and apart from the trust fund;

2.19. "The settlor.

2.20. Specified relative in relation to a primary beneficiary means any parent grandparent brother sister spouse widow widower child and grandchild of the primary beneficiary.

2.21. "Spouse includes de facto spouse.

5.1. Corpus distributions on vesting day.

Retain full provision for all costs disbursements commissions brokerage fess expenses claims and advertising costs and demands of any nature whatsoever incurred or anticipated by the trustee whether in relation to liquidation of the trust fund or otherwise;

   - distribute the cash proceeds then remaining amongst the eligible beneficiaries then living or in existence in the manner provided by clause 4.

6. Interim distributions.

Notwithstanding anything elsewhere contained in the deed the trustee in its absolute and uncontrolled discretion may at any time and from time to time before the vesting day distribute property compromising the whole or part of the corpus of the trust fund in excess of the immediate requirement of the trust at the time amongst the eligible beneficiaries or the some one or more of them exclusive of the other or others of them in the amounts or proportions that the trustees in its absolute and uncontrolled discretion thinks fit.

35. Variations of trust.

The trustee may at any time and from time to time by supplemental deed revoke resettle add to or vary (hereinafter called "the variations") the trust fund or some or all of the property compromised therein or any part or parts thereof that the trustee thinks fit and without limiting the generality of the forgoing the variations may;

   - 35.1, Create different trusts whereon the trust fund is held by the trustee;

   - 35.2, Subject and impress the trust fund and the property compromises therein or ay part or parts thereof to special powers of appointment and hybrid powers of appointment or either of them or any power of selections of persons eligible to receive property thereunder; or

   - 35.3, Relate to the administrative discretions and powers vested in the trustee.

   - 36.Notwithstanding the provisions of clause 35 no variation shall in any case:

   - 36.1 enable any interest in the property to vest in a person on a day later than vesting day;

   - 36.2 enable the exercise of any power of appointment over property after the vesting day; or

   - 36.3 affect the beneficial entitlement of any eligible beneficiary to any property or distribution thereof prior to making or effecting the variations.

37. This deed shall not be revoked added to or varied otherwise then as expressly herein provided.

Deed of appointment new trustee

On 10 May 1993, a deed of appointment of new trustee was created with the following changes:

   - Person 1 and person 2 retired as trustees of the trust.

   - The trustee company was appointed as the new sole trustee.

   - Person 1 is named in the trust deed as appointer of the trust.

   - Person 2 is the director of the trustee company.

   - Person 1 is the secretary of the trustee company.

The property

DD MM YY, the trustee purchased the property for the disclosed amount.

The property from date of purchase has been used for main residence purposes by person 1 and person 2.

Bank home loan statement was provided for the specified period and the named mortgagee was the trustee.

Amendments to the Trust deed

DD MM YY, the chosen lawyers made amendments to the trust deed on behalf of the trustee.

The following has been extracted from the amended deed:

   - The trust established by the trust deed between the trust and person 1, person 2 and settlor.

   - Amendment clause 35.

   - Recitals

      A. The trust was established by the execution of the trust deed.

      B. The trustee wishes to amend the trust deed.

2. Amendment

The trustee amends the trust deed in accordance with the amendment clause by:

   a) Deleting clause 2.5.1

   b) Deleting the words "or any specified relative" and "or specified relative" from clauses 2.5.2 to 2.5.5 inclusively;

   c) Deleting clause 2.20.

3. Effective date

   - All of the changes effected by this deed take effect on the deed date, or if no date is completed as the deed date, on the date on which the last party to sign this deed does so.

9. No resettlement

   - Regardless of any provision of this deed, this deed does not resettle and does not constitute a resettlement of the trust.

   - The amendments to the trust deed contained in this deed do not result in a resettlement of the trust and

   - The amendments made by this deed are deemed to have occurred after the deletion referred to in this clause.

   - Executed as a deed by the trustee and signed by sole director/ sole secretary person 1.

   - Trust deed requires amendment in order to provide for the effective operation of the trust.

Resolved

   - That the deed, if executed would be the benefit of the trust and the beneficiaries of the trust.

   - Person 2 declares:

   - They are the trustee or director of the corporate trustee of the trust.

   - The sole purpose of the deed accompanying this declaration is to amend the trust deed.

   - The transaction is not part of an arrangement terminating the trust.

   - Transfer duty has been paid on all trust acquisitions of which transfer duty is imposed for the trust transaction.

   - The trust is established and maintained as discretionary trust primarily for the benefit of the members of the family.

   - The person acquiring and or surrendering the trust interest compromised in the transaction (if any) is a member of the family who, or is a family company that, does not benefit in the capacity of trustee and

   - The transaction is not part of an arrangement to avoid the imposition of duty.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 118-110

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Issue 1 - Absolute entitlement

Summary

When the trust deed was amended in person 1 did not become absolutely entitled to the trust asset.

Statements provided by Trustee

Person 2 provided the following statements in relation to the amendment of the trust deed;

   • There is no intention to sell the property once this matter is resolved.

   • The advantage of the proposed transfer is, as the law suggests the property may be in personal names which provides discounted Rates.

   • State government 'land tax' has escalated considerably in the last few years which also provides an incentive to delete the trust which serves no purpose and adds considerable expense to ownership.

   • Annual land tax equates to a certain percentage of their annual pension.

      - "The large increase in land tax has prompted me to amend the trust deed with a view of winding up the trust."

      - "This would leave Person 1 as the primary beneficiary, and claiming 'absolute entitlement', to the property.

   • "Our accountant at the time suggested a trust as ownership. Not being versed in accounting matters, I accepted his recommendation at the time." They no longer use the accountant's services.

   • Information on this structure has been disclosed in previous applications.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring.

Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property.

Subsection 104-10(3) of the ITAA 1997 provides that you dispose of a CGT asset when you either enter into a contract for its disposal, or where no contract exists, when the change of ownership occurs.

Absolute entitlement

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 (TR 2004/D25), examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'.

The foundation that supports the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a secured and unbeatable interest in the entire trust asset, to call for that asset to be transferred to them or to be transferred to someone else at their direction.

Paragraph 23 TR 2004/D25 states that 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 be absolutely entitled to the asset. In such cases, absolute entitlement can only be established if the assets are fungible. A dwelling is not a fungible asset.

Paragraph 54 of TR 2004/D25 adds that the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it. The same goes for a single asset that is property.

Application to your circumstances

The trust deed was amended removing clause 2.5 to 2.5.5.

The deletion of clause 2.5.1 and the removal of the phrases 'or any specified relative' and ' or specified relative' from clauses 2.5.2 to 2.5.5 does not technically alter clause 2.5.3, which uses the phrase 'and specified relatives'. Given the definition of specified relative is also deleted, this creates a lack of clarity about the meaning of clause 2.5.3.

Even though the amendment removed specified relatives this did not provide person1 with absolute entitlement and ultimate control of the asset. The trust deed still allows other entities and associates of person 1 to control the asset therefore the amendment to the trust deed will not provide person 1 with absolute entitlement.

Issue 2 - Capital gains Tax

Summary

As the asset has not transferred from the trust to a beneficiary a CGT event has not occurred.

Detailed reasoning

Section 102-5 of the ITAA 1997 includes in assessable income any 'net capital gain' made by the taxpayer in an income year. Section 100-20 of the ITAA 1997 states that a taxpayer makes a capital gain (or loss) only if a 'CGT event' happens.

Division 104 of the ITAA 1997 sets out all the CGT events for which a taxpayer can make a capital gain or loss. If more than one event applies you use the one that is most specific to your circumstances.

Section 104-8 of the ITAA 1997 provides that 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 the beneficiary's interest, or part of it, in the trust capital. CGT event E7 can result in a capital gain arising for the trustee of a trust and/or for a beneficiary or beneficiaries in a trust.

The trustee of the trust makes a capital gainfrom CGT event E7 if the market value of the asset disposed of by it to the beneficiary is more than its cost base (subsection 104-85(3)) unless the asset was acquired before 20 September 1985 (subsection 104-85(4)).

Application to your circumstances

When an asset is transferred from the trust the trustee of the trust makes a capital gainfrom CGT event E7 if the market value of the asset disposed of by it to the beneficiary is more than its cost base.

Question 3 - Main residence exemption

Summary

The trust will not meet the requirements to disregard the capital gain or loss at time the asset is disposed of.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place, and you make a gain from the event.

CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else. Land and buildings are CGT assets.

CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part interest, in the trust capital (section 104-85 of the ITAA 1997).

Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property occurs, and this 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. If more than one event can happen, the one you use is the one that is the most specific to your situation (section 102-25 of the ITAA 1997). CGT event E7 is more specific to this situation.

Main residence exemption

Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling if:

   • you are an individual (paragraph 118-110(1)(a) of the ITAA 1997)

   • the dwelling was your main residence for the whole period it was owned

   • you have not used the dwelling to produce assessable income, and

   • any land on which the dwelling is situated on and adjacent to is two hectares or less.

Application to your circumstances

As the property is owned by a trust, and a trust is not an individual, you will not meet the requirements to apply the main residence exemption under section 118-110 of the ITAA 1997.

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