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Ruling

Subject: Absolute Entitlement

Question 1

Did the X children become absolutely entitled to the assets of the Trust in 1994 when the eldest child turned 26 years of age?

Answer

No

Question 2

Were the requirements of section 160ZX of the Income Tax Assessment Act 1936 (ITAA 1936) satisfied in relation to the Trusts assets in 1994 or at any time before section 104-75(CGT event E5) of the Income Tax Assessment Act 1997 (ITAA 1936) was introduced?

Have the requirements of section 104-75(CGT event E5) of the ITAA 1997 ever been satisfied in relation to the Trusts assets?

Answer

No

Question 3

Were the requirements of section 160ZZS of the ITAA 1936 satisfied in relation to the Trusts assets in 1994 or at any time before section 149-30 of the ITAA 1997 was introduced?

Have the requirements of section 149-30 of the ITAA 1997 ever been satisfied in relation to the Trusts Assets?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 1994 to

Year ended 30 June 2012

The scheme commences on:

27 April 1970

Relevant facts and circumstances

The Trust was established by a deed in 1970.

The original trustees were appointed.

Two new individuals have been appointed as trustees of the Trust after the original trustees had passed away.

The Trust owns 1) 50 pre-CGT A class shares 2) 40 pre-CGT B class shares.

The offspring of the original trustees had X children.

The final distribution date is defined in the Deed as "the date which coincides with the expiration of 21 years from the date of death of the parent or the date when the eldest child of the parent for the time being living attains the age of 26 years, whichever be the earlier.

The Trust had no income between 1985 and 2009 as no dividends were declared on the shares owned by the Trust.

In 2010 the trust received dividend income and distributed that income to the 4 children.

The X children were unaware of the existence of the Trust and their entitlements under it until after their grandparent's death in 2009.

Relevant legislative provisions

section 160ZX of the Income Tax Assessment Act 1936

section 104-75 of the Income Tax Assessment Act 1997

section 160ZZS of the Income Tax Assessment Act 1936

section 149-30 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Detailed reasoning

Under the terms of the Deed, all X children have a vested and indefeasible interest in the income and capital of the Trust. That is, as they are all over 26 years of age their interest in the trust assets have vested and if they were to die their interest in the Trust would be an asset of their estate.

The CGT consequences that flow from the children having a vested and infeasible interest in the income and capital of the Trust will depend on whether or not they are 'absolutely entitled' to the assets of the Trust and whether each of them could individually request their portion of the assets of the Trust to be transferred to them.

According to the Draft Taxation Ruling TR 2004/D25 paragraphs 84-88 and 105-109, to be 'absolutely entitled' the children must satisfy the three factors in paragraphs 85-87 in Draft Taxation Ruling TR 2004/D25.

The only assets of the Trust are its shares which are Fungible assets. So, the first factor is present.

The second factor is present in relation to the shares 50 shares as the beneficiaries could request 10 shares each, however, the shares currently can't be divided 4 ways. Based on the paragraphs 105- 110 and 113-116 of the TR 2004/D25, we believe that the second factor is not satisfied.

The third factor we believe is also not present. We do not believe, in the circumstances, that it could be said that there was 'a clear understanding on the part of all the relevant parties that, despite the shared interests, a specific number of assets of a clearly defined assets class are being held for each beneficiary to the exclusion of the other beneficiaries'. Based on paragraph 121 and 125 in the TR 2004/D25, the children were not aware of their entitlement under the Trust until after their grandparent died in 2009. As a result, it could not be said that anyone viewed a specific number of shares as been held on their behalf when the eldest child turned 26. Even after the X children became aware of the Trust, and their interest in it, they still did not view a specific number of the shares owned by the Trust as being held on their behalf.

As not all of the required factors are present we do not believe the beneficiaries are absolutely entitled to the assets of the Trust.

Question 2

Detailed reasoning

We believe as long as no beneficiary is absolutely entitled to the assets of the Trust, we do not believe the requirements of section 160ZX of the ITAA 1936 has ever been met nor do we believe the requirements of the CGT event E5 of the ITAA 1997 (the replacement for section 160ZX) have ever been met.

Question 3

Detailed reasoning

The Trust is the sole equity shareholder in Investments and the majority equity shareholder in Holdings.

As the trustee had discretion to transfer all of the assets of the trust to one or more of the children before the Final distribution date, the X children becoming absolutely entitled to their interest in the trust assets in 1994 could have had the effect of changing the majority underlying interests in each of those companies under section 160ZZS of the ITAA 1936.

We do not believe there has been a change in the majority underlying interest in the assets of the companies. If there was a change in the majority underlying interest in 1994, or at any time since then, the assets owned by the companies would lose their pre-CGT status on the same day as the majority underlying interest changed.

Based on the ATO's reasoning in Taxation Ruling IT2340 and also given that the children are not absolutely entitled to the Trust assets; we do not believe there has been a change in the majority underlying interest in the assets of the companies.

As there has not been a change in the majority underlying interest in the assets of the companies, the requirements of section 160ZZS of the ITAA 1936, section 149-30 of the ITAA 1997 has never been met.