Edited version of your written advice

Authorisation Number: 1012940288706

Date of advice: 22 January 2016

Ruling

Subject: Capital gains tax - ownership v beneficial interest - express trust

Question:

Will a capital gains tax event occur when you transfer the Holdings to Trust A?

Answer:

No.

This ruling applies for the following period

Income year ending 30 June 2016.

The scheme commences on

1 July 2015.

Relevant facts and circumstances

Documentation has been provided with this private ruling which part of, and is to be read with this description.

You engaged the services of an investment advisor and held investment account with them.

You and your spouse are the Trustees of Trust A.

Trust A also engaged the services of the investment advisor and held a number of accounts with them.

During a routine review of your entities, the investment advisor suggested that Trust A should consolidate their multiple accounts into one account. The consolidation included an intended transfer of the Holdings from one Trust A account to another Trust A account.

Following a verbal agreement with you, the investment advisor prepared written instructions for you and your spouse as the Trustees of Trust A to sign and return to them. The written instructions outlined the closure of one of Trust A's accounts (Account A) and the transfer of all of the Holdings from Account A into another Trust A account (Account B), and that those changes represent no change of beneficial interest.

The written instructions were signed by the Trust A Trustees and returned to investment advisor.

The Holdings was transferred from the Trust A account into your account.

The error in the transference of the Holdings into your account from the Trust A account was not identified until taxation estimates for Trust A were being prepared around June 20XX.

A trust deed (the Declaration of Trust) was prepared between you and the Trustees of Trust A. The Declaration of Trust outlines that you are the named Trustee of Trust B, holding the Holdings, and all benefits associated with the Holdings, on trust for Trust A (the Beneficiary). The Beneficiary can instruct you as the Trustee of Trust B to transfer the Holdings to the Beneficiary, or any other person nominated by the Beneficiary, for no consideration or other value as the Beneficiary directs.

For the purposes of this private ruling, you will transfer the Holdings from your account into a Trust A account during the period covered by this ruling.

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 104-60

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

Summary

Trust A is absolutely entitled to the Holdings as against you as the trustee of Trust B. Therefore, when the Holdings are transferred from your account to Trust A no capital gains tax event will occur.

Detailed reasoning

Legal ownership v beneficial ownership

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, occurs when your ownership interest in a CGT asset is transferred to another entity.

Generally, CGT event E2 occurs if you transfer a CGT asset to an existing trust.

When considering the disposal of your interest in a CGT asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. It is possible for legal ownership to differ from beneficial ownership.

However, the CGT provisions do not apply to the legal owner of an asset if the legal owner held it on

trust for another person and that other person was absolutely entitled to that asset as against the trustee.

In such a case, the transfer of the asset to the other person is not a transfer of ownership for CGT purposes and no capital gain or capital loss can result. This is because the CGT provisions consider the beneficiary to be the assets owner, not the legal owner.

Express Trust

In some cases, an individual may hold legal ownership interest in a CGT asset for another individual in trust.  A beneficial owner is defined as a person or entity who is beneficially entitled to the income and proceeds from the CGT asset.

An express trust is one intentionally created by the owner of property in order to confer benefit upon another. It is created by an express declaration, which can be effected by some agreement or common intention held by the parties to the trust. The declaration does not necessarily need to be evidenced in writing at the time that the trust was created.

Absolute entitlement

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.

If the beneficial owner of an asset is absolutely entitled to the asset as against the trustee, it is the beneficial owner that is considered by the capital gains provisions to be the owner of the asset and the person who makes any capital gain or loss due to a CGT event happening. It follows that no CGT event happens as a consequence of legal ownership to the asset merely being transferred to an absolutely entitled beneficiary.

In the Draft Taxation Ruling TR 2004/D25, the Commissioner considered the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'. It states at paragraph 20: "The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it."

Application to your situation

In this case, the Holdings from the Trust A account had been transferred into your account in error. The Holdings will be transferred from your account into a Trust A account.

A Declaration of Trust has been signed by you, as the Trustee of Trust B, and the Trustees of the Trust A. The Commissioner accepts that an express trust has been created in relation to the Holdings and in accordance with the trust you are holding the Holdings on trust for Trust A.

Trust A is the sole beneficiary which can instruct you as the trustee of Trust B to transfer the Holdings to whomever Trust A nominates, at a time whenever Trust A chooses.

As Trust A was the only beneficiary of Trust B, Trust A is considered to have had absolute entitlement to the Holdings. Consequently, the Holdings is viewed as being the asset of the Trust A from the time it was transferred into your account until you transfer the Holdings back into the Trust A's account.

When the Holdings is transferred from your account to the Trust A's account, or to whomever the Trust A directs, there will be no transfer of ownership by you for CGT purposes. Accordingly, no CGT event will not occur when the Holdings is transferred from your account into the Trust A account and you will not make a capital gain or capital loss due to the transfer of the Holdings.