Edited version of your private ruling

Authorisation Number: 1012446238771

Ruling

Subject: Capital gains tax implications on termination of trust

Question 1

Will a capital gains tax (CGT) event happen if the trust is terminated and the legal titles in assets held on the vesting day are transferred to the residual beneficiaries?

Answer: No

Question 2

Does the relevant acquisition date and cost, transfer from the trust to the individual residual beneficiaries for use by them when a subsequent CGT event happens?

Answer: Yes

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You received a private ruling covering the 2011-12 financial year, relating to the capital gains tax implications on the termination of the trust.

You are now requesting an extension of the original ruling to include the 2012-13 financial year as the trust is yet to be terminated.

You state that no circumstances have changed since the original ruling. These facts are:

· The trustee has no intention of acquiring assets of a type other than those already held

· The trustee has no intention of declaring an interest in the assets by beneficiaries other than the residual ones

· The assets are fungible and include cash, government bonds and listed securities

· There is no issue in halving each asset to satisfy the interest of each beneficiary

· The trust deed states that on vesting day, assets are to be split evenly between the two residual beneficiaries, so there is a clear understanding by all involved parties.

· By the trust deed, each of the two residual beneficiaries is absolutely entitled to half the existing assets on the vesting day of the trust.

You state that the aim of setting up the trust was for the principal and their spouse to make provision for their children and grandchildren. Over the operation of the trust they have been the only beneficiaries.

You state that the principal and their spouse believe that their aims regarding the children and grandchildren have been met. While the principal and their spouse still have their mental faculties they would like to see the assets transferred to their children.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

Detailed reasoning

Question 1

If there is more than one beneficiary with interest in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction.

According to Taxation Ruling TR 2004/D25, a beneficiary with a vested and indefeasible interest in trust assets where one or more other beneficiaries also have an interest in those assets will nonetheless be considered absolutely entitled to a specific number of the trust's assets if certain factors are present.

These factors are, the assets must be fungible, equity would permit the beneficiary to have their interest satisfied and there must be a very clear understanding on the part of all relevant parties. If these factors are present, then the beneficiary will be considered absolutely entitled to that specific number of the trust's assets for CGT purposes.

As per paragraph 144 of TR 2004/D25, no CGT event happens when the legal title of an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

In this case, the factors outlined in paragraph 24 of TR 2004/D25 are present. The beneficiaries are considered absolutely entitled to the assets. Therefore, in accordance with paragraph 144 of TR 2004/D25, a CGT event will not occur when the legal title is passed from the trust to the beneficiary.

Question 2

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) indicates that you make a capital gain or loss if and only if a capital gain tax event happens to a CGT asset in which you have ownership interest.

It is considered that a beneficiary is absolutely entitled to a CGT asset as against the trustee if the beneficiary is absolutely entitled in equity to the asset and therefore has a vested, indefeasible and absolute interest in the asset, and able to direct how that asset shall be dealt with.

In this case, the date the assets had a declaration of trust made over them is the date on which the trustee would have acquired the assets. As the beneficiaries are absolutely entitled to the assets, they are considered the beneficial owner and would have acquired their interest at this time. Therefore, the acquisition date and cost can transfer from the trust to the individual residual beneficiaries for use by them when a subsequent CGT event happens.