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Ruling
Subject: Capital gain tax
Question:
Will the trustees be assessable on any capital gain made when they transfer the legal title of the property to the beneficiaries of the trust?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
The Trust is a discretionary family trust established over 30 years ago.
The trustees are also beneficiaries of the trust.
After 1985, the trust purchased a dwelling, with the certificate of title in the names of the trustees as joint tenants.
The trustees have occupied the dwelling as their main residence since it was purchased.
The trustees are considering winding up the trust and transferring full ownership of the property to themselves as beneficiaries.
There are no other trust assets.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 100-20
Income Tax Assessment Act 1997 - Section 102-5
Income Tax Assessment Act 1997 - Section 104-10
Income Tax Assessment Act 1997 - Section 104-85
Income Tax Assessment Act 1997 - Section 118-10
Reasons for decision
Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in assessable income any 'net capital gain' made by the taxpayer in an income year. Section 100-20 of the ITAA 1997 states that a taxpayer makes a capital gain (or loss) only if a 'CGT event' happens.
Division 104 of the ITAA 1997 sets out all the CGT events for which a taxpayer can make a capital gain or loss. Under section 104-10 of the ITAA 1997, CGT event A1 happens, in relation to a taxpayer, if the taxpayer disposes of a 'CGT asset'.
Transfer of property to the beneficiaries
A disposal of the property will occur when the trustees of the trust, transfer the legal title of the property to the beneficiaries of the trust. The transfer will be a change of ownership of the property for CGT purposes. The time of the event is when the disposal occurs.
Where more than one CGT event may apply, you use the one that is most specific to your situation. CGT event E7 is more specific to your situation.
CGT event E7 happens when the trustee of a trust disposes of a CGT asset of the trust to the beneficiaries in the satisfaction of the beneficiaries' interest, or part of it, in the trust capital, section 104-85 of the ITAA 1997.
Under subsection 104-85(3) of the ITAA 1997, the trustee will make a capital gain if the market value of the asset is greater than the cost base and a capital loss if the market value of the asset is less than the reduced cost base.
Under subsection 104 -85(5) of the ITAA 1997, the relevant beneficiaries will also make a capital gain or a capital loss. However, because the beneficiaries will acquire the property for no expenditure, the capital gain will be disregarded under paragraph 104-85(6)(a) of the ITAA 1997.
Main residence exemption
Subdivision 118-B of the ITAA 1997 contains the main residence exemption provisions. Subsection 118-110(2) of the ITAA 1997 limits the CGT events to which the main residence exemption applies to events A1, B1, C1, C2, E1, E2, F2, I1, I2, K3, K4 and K6.
As discussed above, the CGT event that is more specific to your situation is E7 and the main residence exemption does not apply to this event.
Therefore, the trustees will be assessable on any capital gain or loss made when they transfer the legal title of the property to the beneficiaries of the trust.
For more information on how to calculate your capital gain or loss go our website, www.ato.gov.au and search for Guide to capital gains tax 2011-12.