Edited version of your written advice

Authorisation Number: 1012862052224

Date of advice: 18 August 2015

Ruling

Subject: Capital gains tax

Question

If you dispose of the allotments, is the capital gain disregarded pursuant to subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997) as being acquired before 20 September 1985?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You and your sibling's parents held several properties.

By a deed of trust the parents declared that they held the whole of allotment on trust for you and your sibling and that they would not sell, convey, assign, mortgage, pledge, charge or otherwise deal with the allotment except for the benefit of you and your sibling.

It was transferred to you and your sibling, as tenants in common in equal shares, by a transfer of land dated prior to September 1985 which was registered on titled after September 1985.

The consideration for the transfer was stated to be an entitlement under the deed of trust.

Your parents recall that the rent derived from the allotment was treated as their income.

You and your sibling have included the rent derived from the allotment in your tax returns since the transfer was registered on the title.

By another deed of trust the parents declared that they held the whole of the allotment on trust for such of you and your sibling who survived them and attained the age of 18 years.

This allotment was transferred to you and your sibling outright, as tenants in common in equal shares, by a transfer of land dated after September 1985. The consideration for the transfer was stated to be an entitlement under the deed of trust dated prior to September 1985.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 120-20

Reasons for decision

Under section 120-20 of the ITAA 1997, an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985.

CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997).

If an asset is disposed of under contract, the time of the CGT event A1 happens when the taxpayer enters into the contract. If there is no contract for disposal of the asset the CGT event A1 happens when the change of ownership of the asset occurs.

Similarly, the time of the acquisition of an asset is at the time of the CGT event.

Taxation Ruling TR 94/29 considers CGT, contracts and timing. In the absence of a contract, the Commissioner considers that the time of disposal may be at the time the transfer is registered on the title.

Absolute entitlement

Section 106-50 of the ITAA 1997 explains that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), Part 3-1 and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Draft Taxation Ruling TR 2004/D25 discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its 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.

The most straight forward application of this core principle is one where a single beneficiary has all the interests in the trust asset.

Paragraphs 23 and 24 of TR 2004/D24 state that:

If there is more than one beneficiary with interests 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. This is because their entitlement is not to the entire asset.

There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

• the assets are fungible;

• the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

• there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Note that land would rarely be fungible because each parcel of land is unique.

Application to your circumstances

In this case, we do not accept that you and your sibling became the owners of allotment X and allotment Y prior to 20 September 1985.

As discussed in TR 2004/D25, 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. This is because their entitlement is not to the entire asset. The only circumstance where such a beneficiary can be considered absolutely entitled is where the assets are fungible.

We do not consider the allotments to be fungible assets as each parcel of land is unique. You and your sibling cannot have an indefeasible interest in a non-fungible asset, and cannot call for the asset to be transferred. Therefore, you and your sibling did not become absolutely entitled to the allotments prior to 20 September 1985. Instead, you and your sibling would have acquired each allotment on the date the transfers were registered on the title.

When you and your sibling dispose of the allotments any capital gain made on the disposal cannot be disregarded pursuant to subsection 104-10(5) of the ITAA 1997.