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Ruling

Subject: Capital gain tax and property subdivision

Questions:

1. Will the distribution of the trust property, acquired prior to 20 September 1985, to the beneficiaries of the trust be subject to capital gains tax (CGT)?

Answer:

No.

2. Will the distribution of the dwelling, constructed on the trust property post 20 September 1985, to the beneficiaries of the trust be subject to CGT?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced in

1 July 2011

Relevant facts

The trust was settled prior to September 1985.

The Deed of settlement names person A and person B as trustees.

The primary beneficiaries were listed as the children of person A, including adopted children, step children and de facto children.

Person A married twice and had two families; family A and family B.

A second deed of settlement, made prior to September 1985, transferred two properties to the trust. One property has since been sold. This ruling is in relation to the remaining property (the property).

A deed of variation, made post 1985, removed person A as trustee and appointed two new trustees. The property's title was transferred to reflect this change.

The property became the family residence of family B and continues to be used as their main residence.

Family A also built a cottage on the property post 1985 which they continue to maintain. It is a very small, basic structure.

The families are considering sub-dividing the property, with one part going to family A and one part going to family B, with each family holding the properties as tenants in common in equal shares.

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 112-25

Income Tax Assessment Act 1997 - Section 118-10

Income Tax Assessment Act 1997 - Section 118-55

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.

Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Where a block of land is subdivided, the date you acquired the original parcel of land is also the date you are considered to have acquired the subdivided blocks.  

In this case, the trust acquired the property on prior to 20 September 1985 and the sub-division of the land by the trust will not result in a CGT event. The sub-divided blocks will also be considered to have been acquired prior to 20 September 1985.

Although subdivision of the property is not a CGT event, the cost base or reduced cost base of each new asset needs to be re-calculated in accordance with the method statement in subsection 112-25(3) of the ITAA 1997.

Note: Subsection 104-10(2) specifically states that CGT event A1 does not happen where there is only a change of legal ownership and not of beneficial ownership. The change of trustees post 1985 did not trigger CGT event A1 as there was only a change of legal ownership.

Pre CGT assets

A CGT event will occur when the trustees of the trust dispose of the property by transferring the legal title of the sub-divided 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. 

Generally, if the asset was acquired before 20 September 1985, the exception in subsection 104-10(5) of the ITAA 1997 will apply to disregard any capital gain or capital loss made. However, any building or structure constructed on land acquired before 20 September 1985 is taken to be a separate CGT asset from the land if the construction contract was entered into on or after 20 September 1985, or construction started on or after 20 September 1985 where there is no contract (subsection 108-55(2) of the ITAA 1997).

In this case, the property was acquired before 20 September 1985 and is a pre CGT asset and any capital gain or capital loss made by the trustees will be disregarded. However, the cottage built by Family A on the property post 1985 is considered to be a separate CGT asset and, therefore, will be subject to CGT when transferred to the beneficiaries of the trust.

Transfer of property to the beneficiaries 

Division 104 of the ITAA 1997 sets out all the CGT events for which a taxpayer can make a capital gain or loss.

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. 

In this case, CGT event E7 will happen when legal title to the subdivided property is transferred to the beneficiaries of the trust. As discussed above, any capital gain or capital loss made by the trustees as a result of the disposal of the land will be disregarded under subsection 104-10(5) of the ITAA 1997. However, as a separate CGT asset, the trustees will be assessable on any capital gain or capital loss made on the dwelling when the legal title of the land containing the dwelling is transferred to the beneficiaries of the trust.