Edited version of private ruling

Authorisation Number: 1011736368965

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Ruling

Subject: Capital gains tax (CGT) implications for statutory trustee

Question 1

Was a new tax entity created upon the court vesting the property in the name of the statutory trustee for the sale?

Answer

Yes

Question 2

Did a CGT event occur that would raise a CGT liability upon the vesting of the property in the statutory trustee?

Answer

Yes

Question 3

Does a CGT event and or liability occur when the statutory trustee sells the property, and if so does the CGT liability fall to the trustee?

Answer

Yes

This ruling applies for the following period:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

A vacant block of land was owned as tenants in common in equal shares.

An application was made to appoint a statutory trustee for the sale of the property.

The court made an order to vest the property in the trustee and that it was to be held by them on statutory trust for sale.

The title to the property has since been transferred to the statutory trustee for sale.

Since the trustees appointment as statutory trustee they have organised for the sale of the property and has subsequently entered into a contract for the sale of the property with an unrelated third party.

No continuing enterprise has been carried on by the statutory trustee since their appointment. All that has been done by the statutory trustee during the period that the property has been vested in them is to organise for its sale.

The beneficiaries of the trust are the previous tenants in common. Proceeds will be distributed to these beneficiaries.

The statutory trustee has applied for a tax file number for the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Subsection 104-55(3)

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 960-100

Income Tax Assessment Act 1997 Paragraph 960-100(1)(f)

Income Tax Assessment Act 1997 Subsection 960-100(2)

Income Tax Assessment Act 1997 Section 960-100(3)

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

All legislative references contained herein refer to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

A new entity for taxation purposes was created when the court vested the property in the statutory trustee for the sale of the property.

Detailed reasoning

Entities are defined in section 960-100. Paragraph 960-100(1)(f) specifically includes a trust as an entity. The trustee of a trust is considered to be an entity under subsection 960-100(2). If a person is a trustee of multiple trusts, as trustee of each trust they are a different entity (section 960-100(3)).

When the court vested the property in the statutory trustee for the sale, a new entity for taxation purposes was created.

Question 2

Summary

CGT event A1 in section 104-10 will happen in respect of the property on the appointment of the statutory trustees.

Detailed reasoning

CGT assets

Section 108-5 provides a definition of CGT assets which reads in part as follows:

(1) A 'CGT asset' is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

(2) To avoid doubt, these are 'CGT assets'

(a) part of, or an interest in, an asset referred to in subsection (1)…

Therefore the interest that each owner held in the property is a CGT asset.

CGT event A1 happens if you dispose of a CGT asset: subsection 104-10(1).

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: subsection 104-10(2).

If the disposal is not made under a contract, then CGT event A1 happens when the change of ownership occurs: subsection 104-10(3).

The effect of the court order is to vest the property in the trustee. This is clear from the terms of the court order itself (which expressly vests the property in the trustees) and from the property act for the relevant state which says that on the appointment of a statutory trustee for sale the property shall vest in that trustee.

Also, another subsection of the property act says that where land becomes subject to a statutory trust for sale it shall be deemed to be 'converted' upon the appointment of a trustee for sale unless the court otherwise directs.

In equity, conversion is the notional change of land into money (or money into land). Its effect is to turn realty into personalty (or personalty into realty). The principle is that land directed to be sold and turned into money (or money directed to be employed in the purchase of land) is considered to be that species of property into which it is directed to be converted. Refer Meagher, Gummow and Lehane, Equitable Doctrines & Remedies , Fourth edition (Meagher, Lehane and Leeming) Butterworths, Lexis Nexis, 2002 at [38-005] and [38-010]; Fletcher v. Ashburner (1779) 1 Bro CC 497; 28ER 1259.

On the making of the court order the whole of the co-owners' interests in the property vested in the statutory trustee for the sale of the property; and the co-owners' interests were converted into personalty, that is, into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests.

In these circumstances it is considered that the making of the court order effects a disposal of the property from the co-owners to the trustee for sale by operation of law. Therefore, CGT event A1 happens.

A capital gain will be made as a result of CGT event A1 happening if the capital proceeds from the event are more than the asset's cost base. The capital proceeds for the event are the total of the money you receive or are entitled to receive in respect of the event happening and the market value of any other property you receive or are entitled to receive in respect of the event happening (refer section 116-20).

On the making of the court order each co-owner's interest in realty is converted to personalty. It is expected that the market value of this property will equate to the share of net proceeds received.

CGT event E1 did not happen when the trust was created over the property. That event happens if you create a trust over a CGT asset by declaration or settlement. It is considered that this event has no application where the trust is created by order of a court, rather than by the actions of the owners of the property. That is, given the court's role, it is impossible to cast the co-owners in the role of 'you' for the purpose of CGT event E1.

If the property was held by the co-owners for more than 12 months then the general discount of 50% may be available under Division 115.

Question 3

Summary

CGT event A1 occurs upon the sale of the property. The trustee will be liable for any capital gain or capital loss that arises under subsection 104-10(4) of the ITAA 1997 on the disposal of the property.

Detailed reasoning

Disposal by the trustee

CGT event A1 in section 104-10 happens if a CGT asset is disposed of, that is, when there is a change of ownership from one entity to another entity. In this case, the trustee is taking steps to dispose of the property.

Under CGT event A1 you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-55(3)).

Under section 106-50, if someone is absolutely entitled to a CGT asset as against the trustee, then any act done by the trustee in relation to the asset is taken to be an act of the beneficiary. Whether section 106-50 applies in this case will depend on whether the beneficiaries are absolutely entitled to the trust asset (100% interest in the property) as against the trustee.

Core principle of absolute entitlement

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 (1841) 4 BEAV 115; 49 E.R. 282 (Saunders v. Vautier) applied in the context of the CGT provisions.

Rule in Saunders v. Vautier

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.

Core principle: applying it in practice

The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.

More than one beneficiary with interests in a trust asset

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 call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

Where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible.

If the assets are not fungible, but more than one beneficiary has an interest in them, then that is the clearest possible indication that, under the terms of the trust, individual beneficiaries are not entitled to particular assets to the exclusion of others. That is, if each asset is unique, but the trust does not clearly set out which beneficiary is to get which asset, this indicates an intention that each beneficiary is in fact to have an interest in each of the assets.

When are assets fungible?

Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets are fungible if they are of the same type (for example, shares in the same company and with the same characteristics), although assets within the class need not be exactly identical and in this regard it is enough that a beneficiary might reasonably be expected to be indifferent between them.

However, land would rarely be fungible because each parcel of land is unique.

Application to your circumstances

An asset such as land raises particular problems where there are multiple beneficiaries because it is generally not possible to divide the land without prejudicing the interests of other beneficiaries. While each beneficiary has an interest in the land, the asset held by the trust is the whole of the land. Absolute entitlement cannot be established, as each beneficiary must be able to point to the particular asset that belongs to them.

As mentioned, where a beneficiary is absolutely entitled to an asset of the trust as against the trustee, section 106-50 applies to treat any act done by the trustee as if the beneficiary had done it. Where section 106-50 applies, the disposal by the trustee is regarded as a disposal by the beneficiaries.

In this case the requirements of section 106-50 have not been met. Accordingly, CGT event A1 will happen to the trustee in respect of the disposal of the whole of the property. A capital gain or capital loss may arise to the trustee under subsection 104-10(4).

A capital gain will arise if the capital proceeds for the disposal are more than the cost base of the asset (the first element of the cost base is the market value of the property as at the time the trust was created). A capital loss will arise if the reduced cost base is more than the capital proceeds.

If the property is held by the statutory trustee for more than 12 months then the general discount of 50% may be available under Division 115.