Edited version of private ruling

Authorisation Number: 1011907098578

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Ruling

Subject: Capital Gains Tax

Question

Does Capital Gains Tax (CGT) event E2 in section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when an asset is transferred from a family trust to a unit trust of which the main beneficiary of the family trust is a unit holder?

Answer

Yes.

This ruling applies for the following period:

1 July 2006 to 30 June 2007

1 July 2007 to 30 June 2008

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2006

Relevant facts and circumstances

The family trust in question sold an asset to a unit trust. The consideration received at that time was a certain sum plus a percentage of the units in the unit trust. Further consideration was received subsequently.

The main beneficiary of the family trust is also a unit holder in the unit trust which acquired the asset. His initial allocation of units has since increased. The unit trust currently has several unit holders.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-60.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 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

Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Section 104-60 states that CGT event E2 will occur when a CGT asset is transferred to an existing trust. The timing of the event is the point at which the asset is transferred.

Former paragraph 104-60(5)(b) provided an exception to the rule. It stated that CGT event E2 did not happen in respect of the transfer of a CGT asset between two trusts if the beneficiaries and terms of both trusts were the same. In order to satisfy the exception, both trust deeds must have exactly the same meaning and effect. Essentially it ensured that a transfer of assets between two trusts that had the same beneficiaries and terms was treated in the same way as a change of trustee of a single trust.

That exception was repealed by Tax Laws Amendment (2009 Measures No. 6) Act 2010. As a result, the exception is no longer available for CGT events happening on or after 1 November 2008. Nevertheless, the exception would have been available at the time that the event occurred in this case.

However, in the present case the beneficiaries of the family trust and the unit holders in the unit trust are not identical and the terms of the two trusts are not the same. As a consequence, the exception would not have been applicable to the circumstances in question in any case.

Taxation Ruling TR 2006/4, which has since been withdrawn as consequence of the change in the law, addressed the meaning of the words 'the beneficiaries and terms of both trusts are the same' in paragraph 104-60(5)(b). It stated that the direct beneficiaries of the new trust must be the same as the direct beneficiaries of the original trust. It stated at paragraph 13, "The exception is not satisfied if the indirect or ultimate beneficiaries of each trust are the same but the direct beneficiaries are not."

Apart from the former sub-section 104-60(5) there are no exemptions from the operation of event E2 in respect of assets acquired after 19 September 1985. Therefore, in respect of the disposal in question, CGT event E2 will occur.

Please note that this ruling has not considered whether the disposal would qualify for the Small Business Relief concessions in Division 152.