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Edited version of your private ruling
Authorisation Number: 1012599292261
Ruling
Subject: CGT - transfer of shares
Question
Will a capital gains tax (CGT) event occur when you transfer the shares to your children as an off-market transfer?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
Shares were purchased in your name.
You have advised that the intention was to purchase the shares for your children and the funds used to acquire the shares originated from bank accounts held for your children. Your children were under the age of 18 at the time.
The dividends have been declared on your children's tax returns ever since they have been required to lodge.
The dividends from the shares were reinvested in a dividend reinvestment plan and consequently the number of shares has grown over time.
Your children are now both over the age of 18. They wish to sell their shares. However you have realised that the shares are still in your name.
You intend to carry out an off-market transfer of the shares to your children to enable them to deal with them as they wish.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 100-20(1)
Income Tax Assessment Act 1997 Subsection 104-10(2)
Income Tax Assessment Act 1997 Section 106-50
Reasons for decision
You only make a capital gain or capital loss if a CGT event happens to an asset that you own (subsection 100-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).
CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you maintain beneficial ownership.
Section 106-50 of the ITAA 1997 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), then the CGT provisions apply to an act done by the trustee in relation to the asset as if you had done it.
'Trust' is not defined in the Income Tax Assessment Act 1936 or ITAA 1997. French J in Harmer & Ors v. Federal Commissioner of Taxation (1989) 20 ATR 1461; 89 ATC 5180 stated that a trust 'is notably a definition of a relationship by reference to obligations'. He went on to state that the four essential elements of a trust are:
1. the trustee who holds a legal or equitable interest in the trust property
2. the trust property which must be property capable of being held on trust and which includes a chose in action
3. one or more beneficiaries other than the trustee and
4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.
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 (ignoring any legal disability) for the asset to be transferred to them or to be transferred at their direction. This means that the beneficiary and not the trustee will be liable for any capital gain or loss which arises in relation to the asset.
In this case, you have advised that the money used to purchase the shares originated from your children's bank accounts and the intention was to purchase the shares for your children. The shares were registered in your name, due to their legal age. Since 1999 the shares were under a dividend reinvestment plan and your children will be receiving the benefit of all of the dividends by way of the additional shares they will receive.
The investment is therefore subject to a trust with you as the trustee and your children as the beneficiaries.
It is considered that your children are absolutely entitled to the shares and you were merely acting in a trustee capacity. Section 106-50 of the ITAA 1997 would apply to treat your children as the relevant taxpayers in relation to any CGT event that happens to the shares. Accordingly, when you transfer the shares to your children no CGT event will occur, as the beneficial owners of the shares will not change.