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Ruling

Subject: Capital Gains Tax

Question 1

Will CGT event E2, in section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997), happen if the property included in the accounts of a unit trust is transferred to a superfund?

Answer

Yes

This ruling applies for the following period:

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

A CGT asset was acquired after 19 September 1985 and is included in the accounts of the Unit Trust.

The trustee of the Unit Trust is the title holder of the CGT asset.

All units in the Unit Trust are owned by the Superfund.

The Superfund's assets include a CGT asset.

The directors of company are the same members of the Superfund.

Relevant legislative provisions

Section 102-20 of the ITAA 1997

Subsection 102-25(1) of the ITAA 1997

Section 104-10 of the ITAA 1997

Section 104-60 of the ITAA 1997

Reasons for decision

A capital gain or loss is made when a CGT event happens to a CGT asset you own (section 102-20 of the ITAA 1997).

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 will happen if you transfer an asset to an existing trust.

SECTION 104-60  Transferring a CGT asset to a trust: CGT event E2  

104-60(1)  

CGT event E2 happens if you transfer a *CGT asset to an existing trust.

104-60(2)  

The time of the event is when the asset is transferred.

104-60(3)  

You make a capital gain if the *capital proceeds from the transfer 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.

104-60(4)  

If you are the trustee of the trust and no beneficiary is absolutely entitled to the asset as against you (disregarding any legal disability), the first element of the asset's *cost base and *reduced cost base in your hands is its *market value when the asset is transferred.

Exceptions

104-60(5)  

CGT event E2 does not happen if you are the sole beneficiary of the trust and:

(a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and

(b) the trust is not a unit trust.

104-60(6)  

A *capital gain or *capital loss you make is disregarded if you *acquired the asset before 20 September 1985.

If CGT event E2 happens the consequences for the taxpayer who transferred the asset are set down in subsection 104-60(3) of the ITAA 1997. Broadly, the taxpayer makes a capital gain or a capital loss when the asset is transferred to the trust.

As a superfund is a form of trust, CGT event E2 happens when a CGT asset is transferred to the trustee of the fund, unless the exception to CGT event E2 applies.

The proposed transfer of assets from the Unit Trust to the Superfund will trigger CGT event E2, unless the exception in subsection 104-60(5) of the ITAA 1997 applies. This is where the taxpayer who transferred the CGT asset to the superannuation fund:

is the sole beneficiary of the trust; and

is absolutely entitled to the asset as against the trustee; and

the trust is not a unit trust.

There are beneficiaries of the Superfund who are directors of the company. For the exception in paragraph 104-60 (5) to apply, the asset (in this case the Property), would need to be transferred into the Superfund by the same taxpayer who was also its sole beneficiary. Therefore, this exception does not apply as Superfund has more than one beneficiary.  

The Property is in the name of the company and it is accepted that it is an asset in the Unit Trust. The Superfund owns all of the units in the Unit Trust. While it is also accepted that the beneficiaries of Superfund are also the directors of the company, this transaction, in its simplest form is a transfer of a CGT asset from one entity to another.

Section 126-225 of the ITAA 1997 provides roll over relief for some CGT assets transferred between certain trusts. However, paragraph 126-225 (1)(b) details that the roll-over may be chosen for a CGT rollover asset if:

126-225(1)  

A roll-over may be chosen for a *CGT asset (the roll-over asset) if:

(a) the trustee of a trust (the transferring trust):

(i) creates a trust (the receiving trust), by declaration or settlement, over one or more CGT assets that include the roll-over asset; or

(ii) transfers the roll-over asset to an existing trust (the receiving trust);

at a particular time (the transfer time); and

(b) if subparagraph (a)(ii) applies - the receiving trust has no CGT assets, other than small amounts of cash or debt, just before the transfer time; and…

The transferring trust is the Unit Trust and the receiving trust is the Superfund. The Superfund currently has current CGT assets which disqualifies them from this roll-over relief.

Therefore CGT event E2 in section104-60 of the ITAA 1997 would happen as a result of the transfer.

Conclusion

The proposed transfer of the asset from Unit Trust will trigger CGT event E2. Additionally any capital gain or capital loss that arises under CGT event E2 cannot be disregarded.

The time of the event is when the asset is transferred. A person makes a capital gain from CGT event E2 if the capital proceeds from the transfer are more than the cost base of the asset.