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Ruling

Subject: Absolute entitlement of a CGT Asset

Question 1

Is the beneficiary 'absolutely entitled' to the trust assets for the purposes section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) before attaining the age of X years?

Advice/Answers

No

Question 2

If the answer to question 1 is no, will the beneficiary become 'absolutely entitled', for the purposes of section 106-50 of the ITAA 1997, to the trust assets held within the trust upon attaining the age of X years?

Advice/Answers

Yes

Question 3

If the answer to question 2 is yes, will a CGT event E5 under section 104-75 of the ITAA 1997 occur at the time the beneficiary becomes 'absolutely entitled' to the trust assets?

Advice/Answers

Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

Date X

Relevant facts

A trust was set up with one listed beneficiary.

The capital was a lump sum payment made by entity Y and the trust deed had two clauses being:

· the lump sum payment is to be held in trust until the beneficiary attained the age of X years; and

· if the beneficiary did not attain the age of X any amount held in trust would be returned to entity Y.

The trustee has used the trust capital to invest and acquire units in a managed fund.

The trust will be would up when the beneficiary attained age X which will be on date Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

Question 1

Is the beneficiary "absolutely entitled" to the trust assets for CGT purposes before attaining the age of X years?

In respect of the CGT provisions, section 106-50 of the ITAA 1997 has the effect to treat an absolutely entitled beneficiary (rather than the trustee) as the relevant taxpayer in respect of a CGT asset. Any act undertaken by the trustee in relation to the asset is considered to have been done by the absolutely entitled beneficiary.

The meaning of the words 'absolutely entitled' have been discussed in Draft Taxation Ruling TR 2004/D25 and paragraph 10 states:

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 (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

In respect of people who cannot be absolutely entitled paragraph 14 of TR 2004/D25 states:

Also, a beneficiary with an interest in the trust's assets cannot be absolutely entitled if that interest is contingent or defeasible (see Explanation paragraphs 73 to 75).

Paragraphs 73 to 75 of TR 2004/D25 state:

The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest.

A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

Also, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event. For example, if the class of potential beneficiaries has not yet closed then a beneficiary's interest is capable of being defeated, at least in part, by the admission of new beneficiaries to the class. Another example is if assets are held on trust for X should X attain the age of 25, but if X does not attain 25, then the assets are to pass to Y. This is referred to as a 'gift over' and its existence means that X's interest will be defeated if he does not attain 25.

These paragraphs demonstrate that in this case the beneficiary is not absolutely entitled to the assets of the trust prior to attaining the age of X.

This is because if the beneficiary does not attain the age of X any credit must be returned to entity Y. This means that the beneficiary's interest will be defeated if before attaining the age of X.

Question 2

If the answer to question 1 is no, will the beneficiary become "absolutely entitled" to the trust assets held within the trust upon attaining the age of X years?

The circumstances of this case are similar to those in Example 1 of TR 2004/D25 in which paragraphs 149 to 151 which state:

In her will Mary directed that her bank shares be held on trust for her daughter Megan until she reached 25 years, but if Megan were to die before that time, the shares were to be transferred to Mary's nephew, Peter.

When Mary died, Megan was aged 17 years. The existence of the gift over in favour of Peter should Megan not reach 25 years, means that Megan's interest in the trust assets is defeasible. Therefore, until Megan turns 25 she is not absolutely entitled to the shares. The trustee (and not Megan) is the relevant taxpayer in respect of any capital gain or loss made on the disposal of the shares.

When Megan turns 25, she will become absolutely entitled to the shares and Megan (and not the trustee) will be the relevant taxpayer in respect of any capital gain or loss made on their disposal. Because the trust is a testamentary trust, CGT event E5 will not happen when Megan becomes absolutely entitled to shares Mary owned just before she died. However, CGT event E5 will happen if Megan becomes absolutely entitled to any shares acquired by the trustee after Mary's death.

Once the beneficiary attains the age of 18 on date Y the trustee is no longer obliged to return anything to entity Y on the death of the beneficiary. This means that the beneficiary's interest in the trust cannot be defeated and it is at this point the beneficiary becomes 'absolutely entitled'.

Question 3

Will a CGT event E5 occur at the time the beneficiary becomes 'absolutely entitled' to the trust assets?

A CGT event E5 under section 104-75 of the ITAA 1997 occurs when a beneficiary of a trust becomes 'absolutely entitled' to a trust assets and a CGT event E5 in respect of the units held in the managed fund (and any other assets that may be held in the trust) will occur on date Y.

Generally both the trustee and the beneficiary would make a capital gain or loss as a result of a CGT event E5 happening. However any gain or loss made by the beneficiary would be disregarded if the beneficiary acquired their interest in the trust for no expenditure.

In respect of the capital gain or loss of the trustee subsection 104-75(3) if the ITAA 1997 states:

The trustee makes a capital gain if the *market value of the asset (at the time of the event) is more than its *cost base. The trustee makes a capital loss if that market value is less than the asset's *reduced cost base.

* denotes a term defined in section 995-1 of the ITAA 1997.

In addition, a CGT event will not arise if after date Y, the units held in the managed fund are transferred to the beneficiary. However if the units are sold after date Y (either by the trustee or by the beneficiary) the beneficiary will be the relevant taxpayer in respect of any capital gain or loss made on the sale.