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Edited version of your private ruling
Authorisation Number: 1012583575015
Ruling
Subject: Capital gains tax
Question 1
Will the vesting of the trust result in a capital gains tax (CGT) event?
Answer
Yes.
Question 2
If the answer to Question 1 is no, then after vesting of the trust assets in favour of the beneficiaries, will the subsequent in-specie transfer of those assets to the beneficiaries result in a CGT event?
Answer
Not applicable.
This ruling applies for the following period
Year ending 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The trust is a discretionary family trust.
The principal beneficiaries of the trust are individual A and B.
In addition, the issue/child of individual A is also an eligible beneficiary of the trust.
Individual A's child has not benefited from the trust for many years.
The principal beneficiaries are also the directors of the trustee company.
The trust will vest on 30 June 20XX, but the trustee has the power under the deed to nominate an earlier alternative vesting date.
On the vesting date, the trustee has the discretion to stand possessed of the trust fund for one or more of the beneficiaries. But in the absence of a trustee exercising that discretion, the beneficiaries will become absolutely entitled to the Trust's assets in equal shares as tenants in common.
Prior to the vesting date, the trustee hold the assets in trust and as absolute discretion as to the income and capital of the trust.
The trust holds both pre and post CGT assets.
For a number of years, the income of the trust has been distributed equally between the two beneficiaries.
It is anticipated that if the trust were to continue in its current form, then the income would also continue to be distributed equally between the principal beneficiaries.
The principal beneficiaries are seeking to simplify their financial affairs and the trust has little on-going benefit.
One option to achieve this outcome is for the trustee to nominate an earlier vesting date and for the trust assets to vest on that date in favour of the two principal beneficiaries.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-75
Income Tax Assessment Act 1997 section 106-50
Reasons for decision
Question 1
CGT event E5
When a beneficiary becomes absolutely entitled to a CGT asset of the trust as against the trustee, CGT event E5 happens under section 104-75 of the ITAA 1997. The time of the event is when the beneficiary becomes absolutely entitled to the asset.
The trustee will make a capital gain in relation to CGT event E5 if the market value of the asset is more than its cost base. The trustee will make a capital loss is that market value is less than the asset's reduced cost base. Note that any capital gain made by the trustee is disregarded if the asset was acquired by the trustee before 20 September 1985.
Absolute entitlement
Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary.
Example:
An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee.
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 for the asset to be transferred to them or to be transferred at their direction.
Discretionary trusts
Paragraph 13 of TR 2004/D25 states that:
The following persons cannot be absolutely entitled because they do not have an interest in the trust's assets:
· an object of a discretionary trust prior to any exercise of the trustee's discretion in their favour.
Application to your circumstances
The trust is a discretionary family trust and until the trustee exercises their discretion in favour of a beneficiary, no beneficiary is considered absolutely entitled to the assets of the trust. Accordingly, until the vesting date has been reached, no beneficiary is absolutely entitled to any assets of the trust and section 106-50 of the ITAA 1997 will not apply.
Therefore, CGT event E5 will occur when the trust assets vest in favour of the two principal beneficiaries. The trustee will be able to disregard any capital gain in relation to the pre CGT assets held by the trust.
Question 2
Not applicable.