Edited version of private ruling

Authorisation Number: 1011769936855

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Ruling

Subject: Capital gains tax and transfer of shares

Question 1

Are share purchases treated as being bought by the respective parties at the cost price when tax payer A purchased them on their behalf?

Answer

No

Question 2

Does the transfer of shares from the taxpayer to the respective parties trigger a CGT event under Division 104 of the ITAA 1997?

Answer

Yes

Question 3

Are the taxpayer liable to pay capital gains tax under section 102-10 of the ITAA 1997 for the capital gains made from the transfer of shares to the respective parties?

Answer

Yes

Question 4

Are any net capital gain made from the disposal of shares that are in the name of the Trust be included in the calculation of net income of the trust under section 95 (1) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period<s>:

01 July 2009 to 30 June 2010

The scheme commences on:

September 2009

Relevant facts

Taxpayer A opened an on line trading account in their name for their investments.

They bought shares in their name for their family members.

They contacted their tax agent regarding this and they advised them that this was not correct and that they should open separate trading accounts.

Taxpayer A contacted their sharebroker regarding this arrangement and they were advised that this is only a change of name and that this will not trigger any capital gains tax event.

On the advice of their sharebroker, A ,transferred a number of listed shares to their family trust.

The tax agent advised the taxpayer that they would be liable for capital gains tax on account of their transferring shares to other entities.

The taxpayer was surprised about this CGT affair and was under the impression that they could get their 50% discount if the shares were held for more that 12 months.

The client forwarded a detailed statement of all their transactions.

None of these documents indicate that the shares were bought for the trustee and the beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97 (1)

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 95(1)

Income Tax Assessment Act 1997 Section102-20

Income Tax Assessment Act 1997 Sub section 104-10(1)

Income Tax Assessment Act 1997 Sub section 104-10(2)

Income Tax Assessment Act 1997 Sub section 104-10(3)

Income Tax Assessment Act 1997 Sub section 104-10(4)

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 116-30

Reasons for decision

Section 106-50 of the ITAA 1997 provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust then the CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary. While the scope of the phrase 'absolutely entitled to an asset as against the trustee of a trust' in this section is unclear. It is clear that it applies at least to bare trusts.

A trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holing of the legal title, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries or at their direction (see Herdegen & Anor v Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271)

In this case the facts indicate that the shares were in the taxpayer's name and the dividends received from the shares were credited to the taxpayer's account.

Accordingly, it is considered there were no trust relationship exists between the parties and the taxpayer. Therefore, it is considered that the shares were owned by the taxpayer and when the shares were transferred to the respective parties there is a change of ownership occurs.

Subsection 104-10(1) of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset.

Subsection 104-10(2) of ITAA 1997 states as follows.

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. However, a change of ownership does not occur:

(c) if you stop being the legal owner of the asset but continue to be its beneficial owner; or

(d) merely because of change of trustee.

In this case when the taxpayer transferred the shares to the respective parties CGT event A1 happened.

Sub section 104-10(3) of the ITAA 1997 states that:.

The time of the event is:

(c) when you enter into the contract for the disposal; or

(d) if there is no contract-when the change of ownership occurs.

Sub section 104-10(4) of the ITAA 1997 states that 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 116-30(1) of the ITAA 1997 states that:

If you receive no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is subject of the event.

The capital proceeds from a CGT event are replaced with the market value of the CGT asset that is subject to the event.

Accordingly the taxpayer is liable to pay capital gains tax at the market value of the shares at the time they transferred the shares to the respective parties.

If the shares were transferred more than 12 months of the date of acquisition, the taxpayer is eligible for the discount capital gain under section 115-5 of the ITAA 1997.

However, if the shares were transferred within 12 months of the date of purchase the taxpayer is not eligible for the discount of capital gains under section 115-25 of the ITAA 1997.

Trust's capital gain

If there were any capital gain made from the disposal of shares that are in the name of trust should be included in the calculation of net income of the trust under section 95 (1) of the Income Tax Assessment Act 1936 (ITAA 1936) and be distributed to the respective beneficiaries. Presently entitled beneficiaries are liable to pay tax under section 97 (1) of the ITAA 1936 for the share of their distribution. If no beneficiary is presently entitled, then the trustee is liable to pay tax under section 99 of the ITAA 1936.

Does Part IVA or any other anti avoidance provision 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: PartIVA: the general anti-avoidance rule for income tax.