Edited version of private ruling

Authorisation Number: 1011396825554

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Ruling

Capital gains tax and transfer of title

Question

Does the transfer of legal title in units of a unit trust give rise to a Capital Gains Tax (CGT) event?

Answer

No.

This ruling applies for the following period/s:

Financial year ended 30 June 2011

The scheme commences on:

1 January 2010

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.

The Trust is a discretionary trust.

Some time ago, the Trust acquired a number of units in a unit trust and through a second deed (the Deed), created a bare trust over a portion of those units which were to be held for a specific beneficiary (the Beneficiary).

The terms of the Deed included;

That the units are payable to the Beneficiary.

The trust would transfer the units when either the life of the asset ceases and proceeds are dispersed to all investors or earlier by mutual agreement; and

That the Beneficiary would be entitled to income distributions in respect of those assets.

There is a clear, written understanding that the units are and always were for the benefit of the Beneficiary to the exclusion of all other beneficiaries.

The Beneficiary has been returning income distributions relating to the units subject to the bare trust in their personal income tax return.

The Trust and the Beneficiary wish to transfer legal ownership of the units from the trustee to the Beneficiary.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-75 of the Income Tax Assessment Act 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

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 first 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 www.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-avoidance rule for income tax.

Reasons for decision

Summary

The units became an absolute entitlement to the Beneficiary when the Deed was executed. Therefore a transfer of legal title to the Beneficiary now does not give rise to a CGT event as the Beneficiary remains the beneficial owner.

Detailed reasoning

Is the beneficiary absolutely entitled?

The Commissioners view regarding absolute entitlement is detailed in Draft Taxation Ruling TR 2004/D25 entitled "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".

The underlying principle established in TR 2004/D25 is CGT event E5 under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) happens when a beneficiary becomes absolutely entitled to a CGT asset of a trust.

At paragraph 10, the Commissioner notes the core principle of the phrase 'absolutely entitled' as:

'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. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions.'

He then discusses the rule from the case of Saunders v. Vautier (1841) 4 Beav 115 at paragraph 11:

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.

Paragraphs 24 and 25 of TR 2004/D25 discuss the situation where a beneficiary may be absolutely entitled to part of the trust assets.

'24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

· the assets are fungible;

· the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

· there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them.

In this case, the units held in trust for the Beneficiary are fungible meaning they can be easily separated.

To determine whether the Beneficiary is entitled against the trustee to have his interest in the units satisfied by a distribution or allocation in their favour, Saunders v Vautier establishes a core rule of equity which provides that, if all of the beneficiaries in the trust are of adult age and under no disability, the beneficiaries may require the trustee to transfer the legal estate to them and thereby terminate the trust.

The concept of absolute entitlement' was also addressed in Kafataris & Anor v DFC of T (2008) 73 ATR 531 (Kafataris). In that case, the Court was required to consider whether the applicant was absolutely entitled to the asset in question as against the trustee. The Court noted the comments of Walton J in Stephenson (HM Inspector of Taxes) v Barclays Bank Trust Co Limited (1975) 1 All ER 625 (Barclays), which considered the meaning of the expression "absolutely entitled as against the trustee" under the predecessor of s 46(1), namely, s 22(5) of the Finance Act 1965 (UK):

"Now it is trite law that the persons who between them hold the entirety of the beneficial interest's particular trust fund are as a body entitled to direct the trustees how that trust fund is to be dealt with, and this is obviously the legal territory from which that definition derives."

This provides authority to the principle that in circumstances where a person holds the entirety of the beneficial interests in a particular trust asset, they are entitled to direct the trustee how that trust fund is to be dealt with.

Further, the Court in Kafataris also noted the comments of Higgins J in Public Curator of Queensland v Union Trustee Company of Australia Ltd (1922) 31 CLR 66:

"Those who are solely and absolutely entitled to receive money from trustees are entitled to ignore the specific mode and time of payment directed by the testator, to "break the trust", as it is called, and to claim immediate payment without the delay and formalities prescribed by the will (Saunders v Vautier (1841) 4 Beav. 115; Cr & Ph., 240, Harbin v Masterman (1894) 2 Ch. 184; (1895) A.C. 186, and other cases)."

In this case, the Beneficiary by way of the Deed beneficially owns a specific number of the Trusts holding in the unit trust. While the Deed requires mutual agreement between the parties, the Beneficiary is the sole beneficiary of those units and additionally the relevant parties make clear their understanding that the Beneficiary is solely entitled to those units. Hence, the Beneficiary became absolutely entitled to the specific number of units when the Deed was executed and therefore CGT Event E5 happened at that time.

Does legal transfer of the units trigger a CGT Event?

The relevant CGT event under the circumstances is CGT Event A1. CGT Event A1 is explained in Section 104-10 of the ITAA 1997.

Paragraph 104-10(1) of the ITAA 1997 states that CGT Event A1 happens if you dispose of a CGT asset. The units are CGT assets and the transfer of title can be considered a disposal of those assets.

However, paragraph 104-10(2) specifically states that a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Thus there must be a change in beneficial ownership for CGT Event A1 to happen.

As the Beneficiary has been absolutely entitled to the units since execution of the Deed, transfer of the units represents a change in legal ownership but not beneficial ownership. Therefore CGT Event A1 does not happen.