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Ruling

Subject: Income tax and capital gains tax - shares held in trust for child

Question 1

Will the off market transfer of shares from you to your child result in a capital gains tax (CGT) event happening?

Answer

No.

Question 2

Are there any CGT roll-over relief provisions that can be applied to the transfer?

Answer

As no CGT event will happen as a result of the transfer, it is not necessary to answer this question.

Question 3

If you transfer part of the share holding in a tax year with the remaining shares transferred over the following three years, are there any CGT or other tax consequences as a result of the partial transfers?

Answer

No.

Question 4

Will you be required to declare the dividends received from the shares not transferred, and still held, in your income tax returns until the shares are fully transferred?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are an Australian resident for tax purposes.

Your parent purchased shares, in a public listed company, for your child on your child's 1^st birthday.

The shares were registered in your child's name, in trust, due to your child's legal age, and you were listed as the trustee for these shares on your child's behalf.

There is no formal trust deed for the shares.

The shares were placed in a dividend reinvestment plan as from the time of the initial purchase and no further investment decisions have been made by you for these shares.

You have declared the dividend income in your personal income tax returns since their purchase.

Your child is not aware of the shares.

It has been your responsibility to decide when your child should have the benefit of the shares. You have not received any benefit from the shares.

Your child is now over 18 years of age.

You wish to transfer the shares via an off market transfer into your child's name.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 106-50

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 of the ITAA 1936 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

Question 1

You only make a capital gain or capital loss if a CGT event happens to an asset that you own (subsection 100-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).

Section 106-50 of the ITAA 1997 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), then the CGT provisions apply to an act done by the trustee in relation to the asset as if you had done it. In your case, if there was a trust in relation to the shares and your child was absolutely entitled to the shares, anything done by you in relation to the shares would be taken to have been done by your child.

'Trust' is not defined in the Income Tax Assessment Act 1936 or ITAA 1997. French J in Harmer & Ors v. Federal Commissioner of Taxation (1989) 20 ATR 1461; 89 ATC 5180 stated that a trust 'is notably a definition of a relationship by reference to obligations'. He went on to state that the four essential elements of a trust are:

· the trustee who holds a legal or equitable interest in the trust property

· the trust property which must be property capable of being held on trust and which includes a chose in action

· one or more beneficiaries other than the trustee and

· a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.

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 (ignoring any legal disability) for the asset to be transferred to them or to be transferred at their direction. This means that the beneficiary and not the trustee will be liable for any capital gain or loss which arises in relation to the asset.

In your case, you have advised that the money used to purchase the shares originated from your parent and the intention was to purchase the shares for your child. The shares were registered in your child's name, in trust, due to your child's legal age, and you were listed as the trustee for these shares on your child's behalf. As the shares were under a dividend reinvestment plan since their purchase, your child and not you will be receiving the benefit of all of the dividends by way of the additional shares your child will receive.

These facts together with the degree of control you exercise over the shares means that all four elements of a trust are present in this case, and the investment is therefore subject to a trust with you as the trustee and your child as the beneficiary.

It is also considered that your child is absolutely entitled to the shares and you were merely acting in a trustee capacity. For CGT purposes you would not be disposing of the shares as a trustee to your child and as such no CGT event will happen to an asset that you owned.

Question 2

As no CGT event will happen as a result of the transfer of the shares, you will not make a capital gain or capital loss when the shares are transferred. It is therefore not necessary to consider whether any CGT roll-over relief provisions can apply to the transfer.

Question 3

There will be no additional CGT or other tax consequences if the shares are partially transferred over several years. There will still be no CGT event happening to an asset that you owned as a result of each partial transfer.

Question 4

Income Tax Ruling IT 2486 discusses children's savings accounts and states as follows:

Regardless of the name and type of account, the essential question that must be asked is: 'Whose money is it?'. If the money really belongs to the parent, in the sense that the parent provided the money and may spend it as he or she likes, then the parent should include the interest in his or her return. …

The answer to the question 'Whose money is it?' must inevitably depend upon the facts of each case. …

… There will be other cases where, although an account is opened by a parent in a child's name, the parent spends or intends to use the funds in the account as if they belonged to the parent. In such cases, the money in the account will be treated as belonging to the parent.

As a general rule, where the Taxation Office is satisfied that the money in the account really belongs to the child, it will not insist on a strict application of the trust provisions of the Income Tax Assessment Act where the account is operated by a parent as trustee. Where the interest is shown in a tax return lodged by a child a trust tax return will not be necessary.

This view would also apply to other forms of investment such as shares.

In your case, you have advised that the money used to purchase the shares originated from your parent and we have accepted that the shares are being held in trust for your child. The shares are to be transferred to your child in the near future and your child will be receiving the benefit of the dividends through the dividend reinvestment plan. The dividends should therefore be declared in your child's income tax returns even though all of the shares have not yet been transferred to your child.