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Ruling

Subject: Capital gains tax - transfer of property to beneficiary

Question and answer:

Did capital gains tax (CGT) event E5 [section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997)] happen when the trust's asset, being a 50% interest in a dwelling, was transferred to the beneficiary?

No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust was created by the trustee for the beneficiary who was an infant at the time of the death of her parent.

The trust comprised funds from a superannuation death benefit entitlement which became payable on the death of the parent.

The beneficiary was the sole beneficiary of the trust. There was a provision in the trust deed stating that if the beneficiary should die before reaching the age of 18, the assets of the trust would pass to her estate.

The trustee was empowered to use the funds to purchase real estate to be used as the main residence of the beneficiary until she reached the age of 18.

The trustee purchased a 50% interest in a dwelling, as tenant in common, which was used as the beneficiary's main residence. The remaining 50% interest was purchased by a relative.

The beneficiary and their relative used the dwelling as their main residence.

The beneficiary turned 18 years of age on date A in the 2009-10 income year and her 50% interest in the dwelling was transferred to her as sole beneficiary from the trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 104-75.

Income Tax Assessment Act 1997 Subsection 100-20(1).

Reasons for decision

Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the capital gains and capital loss provisions commonly referred to as capital gains tax (CGT). You make a capital gain or capital loss if a CGT event happens (subsection 100-20(1) of the ITAA 1997).

A beneficiary (disregarding any legal disability) who is absolutely entitled to a CGT asset as against the trustee will be the relevant taxpayer if a CGT event happens to the asset. This is the effect of section 106-50 of the ITAA 1997 which provides that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset.

No CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

CGT event E5 in section 104-75 of the ITAA 1997 only happens when a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

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.

The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway.

A beneficiary is a sole beneficiary in respect of a trust asset if no other beneficiary has an interest in the asset. Because a sole beneficiary in respect of an asset has the totality of the beneficial interests in the asset, they automatically satisfy the requirement that their interest in the asset be vested in possession and indefeasible. Therefore, a sole beneficiary in respect of a trust estate will be absolutely entitled to that asset as against the trustee if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.

The facts in your case show the beneficiary became absolutely entitled to her share of the estate when the trust was established. She became the sole beneficiary of the 50% interest in the dwelling which was purchased by the trustee. A further indication of absolute entitlement is that should the beneficiary have died before attaining the age of 18 years, her estate would be entitled to all income accrued and assets held by the trustee on her behalf and the right of the beneficiary to take possession of the property was not contingent upon an event occurring that may or may not take place.

Section 106-50 of the ITAA 1997 states that if a beneficiary is absolutely entitled to a CGT asset as against the trustee, any act done by the trustee in relation to the asset is deemed to have been done by the beneficiary. In effect, the provision allows an absolutely entitled beneficiary to be treated as the relevant taxpayer in respect of the asset for the purposes of the capital gains tax provisions. Therefore when the assets are subsequently transferred to the beneficiary, no further CGT event happens.

Conclusion

It is therefore considered that the beneficiary had an absolute entitlement to the trust's asset (50% interest in a dwelling) from the establishment of the trust and that no CGT event happened when the trust's asset was transferred to her.