Edited version of your private ruling

Authorisation Number: 1012569627921

Ruling

Subject: Capital gains tax

Question 1

Are you absolutely entitled to the property currently owned by the family trust?

Answer:

No.

Question 2

Will there be a capital gains tax event on the transfer of a property from the family trust to you?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are a beneficiary in a family discretionary trust which was established on after 20 September 1985.

A property was purchased by your parent after 20 September 1985.

You and your parent, along with your spouse, all lived in the property.

When your father died, you were named as the Executor/Trustee of the estate.

Your parent left the property to the family trust as part of the residue of his estate. There was no specific mention of the property in the Will.

Had you predeceased your parent then the whole of the residue of the estate would have been held in the trust for the two named grandchildren until they reached 21 years of age as tenants in common in equal shares. Had one of the two grandchildren predeceased your parent or failed to attain 21 years, that share was to go to the survivor absolutely.

You and your spouse have continued to live in the property.

It has never been rented and you have not owned any other property.

The property is mortgaged.

You want to transfer the property into your name as you are about to retire and wish to apply for an age pension.

You will not pay anything for the transfer of the property to your name other than a transfer fee.

The settlor of the family trust is a third party.

The Trustee of the family trust is another party.

The specified beneficiaries of the family trust are yourself, your spouse and your children.

Your children are not living in the property.

There are no additional beneficiaries.

The guardians of the family trust are yourself and your spouse.

The appointors of the family trust are yourself and your spouse.

A clause of the family trust gives the Trustee

…absolute discretion … or distribute any property in specie comprising at any time part of the trust fund to any of the general beneficiaries for his or her or its own use and benefit or apply the same to or for the manner as the Trustee in its absolute discretion shall think fit;

A subclause of the family trust gives the Trustee the power to:

…sell transfer convey …or otherwise deal with any real or personal property…

All beneficiaries will agree to bring the trust to an end on the transfer of the house to the beneficiary noted.

Your arguments and references

Under draft ruling TR 2004/D25, it appears that the beneficiary could be classed as absolutely entitled to the property which would make you the relevant taxpayer with respect to that property for the purposes of the CGT provisions.

Under paragraph 42 this is a similar situation when the testator left the property on trust for use by his son. The property should have been transferred on death of the deceased, but you were not aware of the future pension and CGT implications of leaving the property in trust.

Under paragraph 48 all beneficiaries will agree to bring the trust to an end on the transfer of the house to the beneficiary noted.

Paragraphs 85, 86 and 87 all appear to be satisfied. The property is now and always has been your main and only residence and will continue in the future as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

All references to legislation are to the Income Tax Assessment Act 1997 (ITAA 1997).

Capital gains tax

Part 3.1 contains the relevant provisions for capital gains tax (CGT). Division 104 sets out all the CGT events for which you can make a capital gain or loss. It explains how to work out if you have made a capital gain or capital loss from each event and the timing of each event. It also contains exceptions for gains and losses for many events such as the exception for CGT assets acquired before 20 September 1985.

Under section 108-5 a CGT asset is defined as any kind or property, or a legal or equitable right that is not property. A right to receive income or capital from a trust is a CGT asset. The disposal of an ownership interest in property is the disposal of a CGT asset.

Property owned by the family trust

From the death of the deceased, the property in question has been owned by the family trust. For assets in the nature of real property, the Commissioner will only accept that a particular beneficiary is absolutely entitled to an asset as against the trustee where the beneficiary can demonstrate that no other beneficiary has any call against it. 

Absolute entitlement

Section 106-50 advises that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, any act done by the trustee in relation to the asset is treated as if it were done by the beneficiary.

For the purposes of section 106-50 a beneficiary is absolutely entitled to an asset of a trust as against the trustee if the beneficiary is:

· absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and

· able to direct the trustee how to deal with the asset.

Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

Commencing at paragraph 23, TR 2004/D25 explains where more than one beneficiary has an interest in the trust assets absolute entitlement can only be established if the assets are fungible. Assets are fungible if each asset matches the same description such that one asset can be replaced with another, or if they are of the same type.

Land is rarely fungible because each parcel is unique (paragraph 94 of TR 2004/D25). Real estate is traded based on the actual sale price, not the sale price per unit. This is because the value of one part of the land may have better views and access to the main street than another part of the land and therefore be worth more. Unlike fungible commodities, parcels of real estate do not have equal value.

It is noted within the family trust deed that you, your spouse and your children are all beneficiaries.

Because the property is not fungible and there is more than one beneficiary, then one individual beneficiary is not entitled to the property at the exclusion of others. That is, if the trust does not clearly set out which beneficiary is to get which asset, this indicates an intention that each beneficiary is in fact to have an interest in each of the assets contained within the trust, not just the property.

In other words, you as one of the beneficiaries cannot direct or compel the trustee to transfer the property to you or at your direction such that it is not under the trust any more. You cannot do that because there are other beneficiaries who are equally entitled to an interest in the property.

Given the above, you are not a sole beneficiary and are not absolutely entitled to an asset of the trust as against the trustee.

There will be a disposal of the property to you when the family trust transfers the legal title to the property to you because the transfer will cause a change of ownership of the property.

Both CGT event A1 (disposal of a CGT asset) and CGT event E7 (disposal of a CGT asset to end beneficiary's interest in the trust's capital) will happen as a result of this disposal.

CGT event E7 is more specific to your situation, so it is used when determining how the capital gains provisions apply to your situation.

The following is provided as general advice only and does not form part of the private ruling:

CGT event E7 - Disposal to beneficiary to end capital right

CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary to satisfy all or part of the beneficiary's interest in trust capital (section 104-85).

The time of CGT event E7 is when the disposal occurs. If an asset is acquired by a trust beneficiary as a result of CGT event E7, it is acquired at the time of that CGT event.

A trustee of a trust makes a capital gain from CGT event E7 if the market value of the asset at the time of the disposal is more than its cost base. If that market value is less than the reduced cost base of the asset, a capital loss is made.

A beneficiary makes a capital gain from CGT event E7 if the market value of the asset at the time of the disposal is more than the cost base of the beneficiary's interest in trust capital. If that market value is less than the reduced cost base of that interest, a capital loss is made.

A capital gain or loss made from CGT event E7 by a beneficiary is disregarded if:

· the trust interest was acquired for no expenditure (except where it was assigned from another entity)

· the trust interest was acquired before 20 September 1985, or

· the gain or loss made by the trustee was disregarded under the main residence exemption, for example due to being a special disability trust (section 104-85(6)).