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Ruling

Subject: Capital gains tax - Trust - Transfer of assets from the trust to the beneficiary

Issue 1

Question 1: Did you as Public Trustee of the Court Trust for a single beneficiary incur a capital loss on the disposal of certain investments in 200X?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commenced on

1 January 2005.

Issue 2

Question 1: Will a CGT event happen when you legally transfer the assets of the Court Trust for a single beneficiary to that beneficiary?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2012.

Year ended 30 June 2013.

The scheme commenced on

1 January 2005.

Relevant facts and circumstances

The beneficiary was born sometime in 1990s.

Later, whilst still a minor, the beneficiary was rendered incapacitated following an accident. The beneficiary's parent, on the beneficiary's behalf, made a personal injuries claim.

In the particular year, a certain Judge of the District Court gave leave to compromise the claim and, among others, made an order:

'The Defendant do pay within 7 days on which this order is served on the Defendant, the sum of a certain significant amount to the Public Trustee for investment in trust for the Plaintiff (that is, the beneficiary) until the Plaintiff shall attain the age of 18. Such investment shall not be restricted to the common fund.'

You (as Public Trustee (a body corporate established by the relevant Act)) were appointed as trustee of the Court Trust for the single beneficiary (Court Trust) in the particular year.

The Court Trust was established to receive the certain significant sum of money as per the order made by a certain Judge of the District Court.

The trust deed of the Court Trust states that in the event that the beneficiary does not attain the age of 18, that there is no gift over. The assets of the Court Trust will be transferred to the beneficiary's legal personal representative and dispersed in accordance with either their Will, if they have one or according to the laws of intestacy.

You, as Public Trustee invested a large portion of the trust funds in external investments and acquired other assets.

When you as Public Trustee established your own Public Trustee Investment Funds, a decision was taken to redeem the external investments and invest part of the trust funds in the Public Trustee Investment funds Growth fund (the PTI Fund).

When you redeemed the external investments sometime in 200X, a capital loss of a certain significant amount (the capital loss) was incurred.

The value of the PTI fund has since risen, but the gain is presently less than the capital loss.

You, as Public Trustee intend to transfer the assets, the subject of the Court Trust, including the investment in the PTI Fund to the beneficiary. For the purposes of this private binding ruling this will happen sometime before 30 June in the subsequent year.

You have included a document titled 'Statement of Assets and Liabilities', this document lists the assets of the Court Trust held by you as Public Trustee as at a certain date sometime in the recent year (there have been no material variations) and forms part of and is to be read with these facts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 104-75 and

Income Tax Assessment Act 1997 Section 106-50.

Reasons for decision

Issue 1

Question 1

Summary

You as Public Trustee of the Court Trust for a single beneficiary did not incur a capital loss on the disposal of certain investments in 200X.

Detailed reasoning

Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the capital gains and capital loss provisions commonly referred to as CGT. You make a capital gain or capital loss if a CGT event happens (section 102-20 of the ITAA 1997).

A beneficiary that is absolutely entitled to a CGT asset as against the trustee (disregarding any legal disability) 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.

This means that the beneficiary (and not the trustee) will be required to account for any capital gain or loss that arises on the disposal of an asset, in the calculation of their net capital gain or net capital loss and hence their taxable income.

Therefore establishing whether or not a beneficiary is absolutely entitled to a CGT asset of a trust is necessary to determine the relevant taxpayer. Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) provides the Australian Taxation Office (ATO) view in regard to the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against the trustee.

Paragraph 10 of TR 2004/D25 states the following:

'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 rule derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions……'

A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring, that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

The interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event. For example the admission of new beneficiaries or for example a scenario whereby if the beneficiary does not reach a certain age that the trust assets pass to a different person or persons, (gift over).

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 asset 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.

A sole beneficiary will be entitled to terminate the trust in respect of an asset provided there are no legal impediments to the beneficiary's obtaining immediate possession and enjoyment of the asset. A direction by the settler of the trust that the beneficiary's enjoyment of an asset be delayed is not an effective impediment.

TR 2004/D25 also specifically identifies those factors which do not prevent absolute entitlement. Those factors of relevance to you are:

· Trustee's lien at paragraph 18 wherein it states;

'The existence of a trustee's lien to enforce a right of indemnity against a trust asset will not prevent a beneficiary being absolutely entitled to the asset.'; and

· Legal disability at paragraph 19 where in it states;

'the fact that the beneficiary cannot give the trustee a good discharge for any asset transferred to them because the are suffering a legal disability (for example infancy or insanity) will not prevent the beneficiary being absolutely entitled. Absolute entitlement for CGT purposes is determined ignoring any legal disability.'

Application to your circumstances

The beneficiary is the sole beneficiary of the Court Trust.

In the event of the beneficiary's death the income and capital of the Court Trust is to be transferred to the legal personal representative of the beneficiary.

The right of the beneficiary to take possession of the property (barring legal disability) is not contingent upon an event occurring that may or may not take place.

It is therefore considered that the beneficiary had an absolute entitlement to the Court Trust's assets from the establishment of the Court Trust. This means that an act done by you as Public Trustee in relation to an asset of the Court Trust is taken to have been done by the beneficiary as an individual.

Therefore the beneficiary has incurred the capital loss that happened in 200X.

Issue 2

Question 1

A CGT event will not happen when you legally transfer the assets of the Court Trust for the beneficiary to the beneficiary.

As the beneficiary had an absolute entitlement to the Court Trust's assets from the establishment of the Court Trust, no CGT event will happen when the trust assets are legally transferred to them.