Edited version of private ruling

Authorisation Number: 1011634913426

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Ruling

Subject: Capital Gains Tax - absolute entitlement - legal disability - income tax liability

Question 1

Is the sole beneficiary of the Trust 'absolutely entitled' to the trust's CGT assets as against the trustee for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does a CGT event happen for the trustee upon transfer of trust capital, where the beneficiary elects to have an in-specie transfer of the trust CGT assets when the beneficiary reaches majority, under Division 104 of the ITAA 1997?

Answer

No

Question 3

Does a CGT event happen for the beneficiary, where the beneficiary elects to have an in-specie transfer of the trust CGT assets when the beneficiary reaches majority, under Division 104 of the ITAA 1997?

Answer

No

Question 4

Will the trustee be assessed on the net income of the trust, for each income year where the sole beneficiary is under legal disability, under subsection 98(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 5

If a CGT event happening to a capital asset of the trust that results in a net capital gain, where the beneficiary is under legal disability, will that net capital gain be included in the assessable income of the trust?

Answer

No

Question 6

If a CGT event happening to a capital asset of the trust that results in a net capital gain, where the beneficiary is under legal disability, will that capital gain be included in the assessable income of the beneficiary?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences:

1 July 2007

Relevant facts and circumstances

The deceased owned a property, a share portfolio and other personal belongings.

The date of residue for the Deceased Estate was set in 200X. The residue of the estate and shares were distributed equally among beneficiaries who were minors at the time of distribution.

A Trust was created to hold assets those assets distributed from the estate for the benefit of one of those beneficiaries until such time as the beneficiary attains the age of 18.

The corpus of the Trust was made up of cash and shares.

The trustee has used the trust capital to invest and acquire several additional CGT assets to maximise wealth for the benefit of the beneficiary.

The beneficiary has been shown presently entitled in the trust tax return to all income, distributed capital gains and realised capital gains throughout the life of the Trust.

The trustee is able to apply such powers until the beneficiary attains the age of 18, when the trust will be wound up.

Relevant legislative provisions

Income tax Assessment Act 1936 Division 6

Income tax Assessment Act 1936 Section 95

Income tax Assessment Act 1936 Section 98

Income tax Assessment Act 1936 Subsection 98(1)

Income tax Assessment Act 1936 Subsection 99

Income tax Assessment Act 1936 Subsection 99(A)

Income tax Assessment Act 1997 Part 3-1

Income tax Assessment Act 1997 Part 3-3

Income tax Assessment Act 1997 Division 104

Income tax Assessment Act 1997 Section 104-75

Income tax Assessment Act 1997 Subsection 104-75(1)

Income tax Assessment Act 1997 Subsection 104-75(2)

Income tax Assessment Act 1997 Section 106-50

Income tax Assessment Act 1997 Division 128.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Detailed reasoning

General discussion of the law

Asset treated as belonging to absolutely entitled beneficiary

Under section 106-50 of the ITAA 1997, once a beneficiary of a trust becomes absolutely entitled to an asset as against the trustee, the CGT provisions apply as if the asset were vested in the beneficiary, and as if any acts of the trustee were acts of the beneficiary.

For example, the subsequent actual distribution of the asset to the beneficiary would not have any CGT consequences and a sale of the asset by the trustee to a third party would be treated as a sale by the beneficiary.

Absolute entitlement

Sections 104-75 and 106-50 operate with respect to the concept of absolute entitlement and apply separately to each beneficiary and asset of the trust. They also require absolute entitlement to the whole of a CGT asset of the trust.

Draft Taxation Ruling TR 2004/D25 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.

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.

Paragraph 19 of TR 2004/D25 provides that where the beneficiary cannot give the trustee a good discharge for any asset transferred to them because they are suffering a legal disability (for example infancy or insanity), this does not prevent the beneficiary being absolutely entitled. Absolute entitlement for CGT purposes is determined ignoring any legal disability.

Paragraph 21 and 22 of TR 2004/D25 states 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.

Application of the law

As the beneficiary is the sole beneficiary of the trust, it is considered that they possess a vested and indefeasible interest in the entire trust asset.

The trustee has treated the beneficiary as presently entitled to income and capital, including distributed and realised capital gains.

In accordance with paragraph 10 of TR 2004/D25, absolute entitlement in respect of 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.

The CGT provisions ignore legal disability in relation to determining absolute entitlement.

Therefore it is considered that the sole beneficiary of the Trust is 'absolutely entitled' to the trust's CGT assets as against the trustee for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) and has been since the commencement of the trust.

Question 2

Detailed reasoning

General discussion of the law

TR 2004/D25 discusses the circumstances where a beneficiary is already absolutely entitled in paragraphs 141-144.

141. A beneficiary that is absolutely entitled to a CGT asset as against the trustee will be the relevant taxpayer if a CGT event happens to the asset. This is the effect of section 106-50 of the ITAA 1997 which provides that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset.

142. Therefore, the beneficiary (and not the trustee) will be required to account for any capital gain or loss that arises on disposal of the asset in the calculation of their net capital gain or net capital loss and hence their taxable income. This is so regardless of whether the beneficiary has always been absolutely entitled to the asset or they became absolutely entitled to it at some time after the trust commenced.

143. Because the beneficiary is the relevant taxpayer, and the capital gain or loss is included in the beneficiary's income calculations, it is not included in the net income of the trust under section 95 of the ITAA 1936.

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.

Further, paragraph 146 of TR 2004/D25 explains that because absolute entitlement is determined ignoring any legal disability, CGT even E5 will not happen, for example, when a minor reaches the age of majority or a person recovers from a mental illness.

Application of the law

In your case, it has been determined elsewhere in this ruling that the beneficiary is considered to be absolutely entitled at the time the trust commenced.

Therefore, a CGT event does not happen for the trustee upon transfer of trust capital, where the beneficiary elects to have an in-specie transfer of the trust CGT assets when the beneficiary reaches majority, under Division 104 of the ITAA 1997.

Question 3

Detailed reasoning

Application of the law

Paragraph 144 of TR 2004/D25 explains that 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.

In your case, it has been determined elsewhere in this ruling that the beneficiary is considered to be absolutely entitled at the time the trust commenced.

Therefore, a CGT event does not happen for the beneficiary, where the beneficiary elects to have an in-specie transfer of the trust CGT assets when that beneficiary reaches majority, under Division 104 of the ITAA 1997.

Question 4

Detailed reasoning

Trust income

Division 6 of the ITAA 1936 requires the ascertainment of the net income of the trust estate as defined in section 95 of the ITAA 1936. The net income of the trust is then assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.

Once the determination has been made as to the entitlement of the beneficiary to the income of the trust estate, Division 6 of the ITAA 1936 operates to assess the net income of the trust estate in respect of the beneficiaries.

Section 98 of the ITAA 1936 provides that, where a beneficiary is presently entitled but under a legal disability or is a non-resident of Australia at the end of the income period, the trustee is liable to pay tax on that beneficiary's share of the income from the trust estate.

Sections 99 or 99A of the ITAA 1936 operate where there is an amount of trust estate income to which no beneficiary is presently entitled, to assess the trustee on that income of the trust estate and specify the method of taxing the trustee.

ATO Interpretive Decision ATO ID 2002/238 sets out the Commissioners view that where a minor is presently entitled to the net income of the trust, the trustee is assessable on the minor beneficiary's share of the net trust income under subsection 98(1) of the ITAA 1936.

Paragraph 143 of TR 2004/D25 discusses that, where a beneficiary is a sole beneficiary, the beneficiary is the relevant taxpayer, and the capital gain or loss is included in the beneficiary's income calculations; it is not included in the net income of the trust under section 95 of the ITAA 1936.

Application of the law

In accordance with section 98 of the ITAA 1936, where a beneficiary is presently entitled but under a legal disability at the end of the income period, the trustee is liable to pay tax on that beneficiary's share of the income from the trust estate.

However, in accordance with paragraph 143 of TR 2004/D25, such income will not include a capital gain in respect of a CGT event occurring to CGT assets where the beneficiary is absolutely entitled. In that circumstance, that capital gain is included in the beneficiary's assessable income.

Therefore the trustee will be assessed on the net income of the trust, excluding an amount in relation to a capital gain resulting from CGT assets of which the beneficiary is absolutely entitled, for each income year where the sole beneficiary is under legal disability, under subsection 98(1) of the ITAA 1936.

Question 5

Detailed reasoning

Application of the law

In your case, it has been determined elsewhere in this ruling that the beneficiary is considered to be absolutely entitled at the time the trust commenced.

As the beneficiary is considered to be absolutely entitled and in accordance with TR 2004/D25, the trust is not the relevant taxpayer in relation to CGT events occurring to CGT assets of the trust.

Therefore, a CGT event happening to a capital asset of the trust that results in a net capital gain, where the beneficiary is under legal disability, will not be included in the assessable income of the trust.

Question 6

Detailed reasoning

Application of the law

In your case, it has been determined elsewhere in this ruling that the beneficiary is considered to be absolutely entitled at the time the trust commenced.

As the beneficiary is considered to be absolutely entitled and in accordance with TR 2004/D25, the beneficiary is the relevant taxpayer in relation to CGT events occurring to CGT assets of the trust.

Therefore a CGT event happening to a capital asset of the trust that results in a net capital gain, where the beneficiary is under legal disability, will be included in the assessable income of the beneficiary.