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Edited version of your written advice
Authorisation Number: 1012776065920
Ruling
Subject: Capital gains tax
Question
Will a capital gains tax (CGT) event occur when you and your spouse transfer the shares to your child?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
In 19XX, you and your spouse purchased a number of shares for your child.
The funds for the purchase of the shares were given to your child as a gift.
The shares were registered in the name of you and your spouse. It was not possible at the time to put them into your child's name.
All dividends have been reinvested for the benefit of your child.
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'.
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, the money used to purchase the shares was a gift to your child. All dividends have been reinvested for the benefit of your child. The shares were registered in the name of you and your spouse as it was not possible at the time to put them into your child's name.
The investment is therefore subject to a trust with you and your spouse as the trustee and your child as the beneficiary.
It is considered that your child is absolutely entitled to the shares and you and your spouse 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 and your spouse transfer the shares to your child no CGT event will occur, as the beneficial owners of the shares will not change.