Edited version of your written advice

Authorisation Number: 1013113943093

Date of advice: 25 October 2016

Ruling

Subject: Beneficial ownership

Question 1

Has a change in beneficial ownership occurred as a result of the transfer of the property?

Answer

Yes.

Question 2

Will a capital gains tax (CGT) event happen to the Trust when the property is transferred?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XY

Relevant facts and circumstances

Company A (as trustee for the Trust) owns a property.

The property was acquired post September 1985.

Each of your unitholders is also the sole member of a self-managed super fund (SMSF).

The property will be transferred at the current market value to the SMSFs who will hold the property as tenants in common in the same percentages as their respective share of the units.

Some unitholders have reached preservation and retirement age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-60

Reasons for decision

Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income for an income year includes your net capital gain. Your net capital gain includes any capital gains or losses you made during the income year.

Subsection 102-25(1) of the ITAA 1997 provides that where more than one of the CGT events outlined in division 104 of the ITAA 1997 can apply in a situation, you use the CGT event that is most specific to your situation.

CGT event A1 happens under section 104-10 of the ITAA 1997 if you dispose of an asset. You are taken to have disposed of an asset if a change of ownership occurs from you to another entity, whether because of some act or event; or because of an operation of law. The time of the event is when you enter into a contract for the disposal; or when the change of ownership occurs if there is no contract.

CGT event E2 happens under section 104-60 of the ITAA 1997 if you transfer a CGT asset to an existing trust. The time of the event is when the asset is transferred. CGT event E2 does not happen where:

● there is merely a change in the trustee of a trust; or

● the transfer occurs; and you are the sole beneficiary of the trust; and you are absolutely entitled to the asset against the trustee of the trust; and the trust is not a unit trust

ATO Interpretative Decision ATO ID 2003/559 provides that where a CGT asset is transferred to a trust, CGT event E2 will be the most specific CGT event where the transferor is a beneficiary or object of that trust or where the parties are connected.

The capital gain or capital loss is made at the time of the event. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base of the CGT asset. A capital loss is made if the capital proceeds are less than the reduced cost base.

A superannuation fund is considered to be a trust, and as such fits into the general definition of a trust. Assets are held in the fund for the future benefit of the named recipients of the fund. However, unlike a normal trust fund, members in a super fund do not have the same rights of entitlement as most beneficiaries in a trust.

The reason for that distinction is that members of a superannuation fund have a right to receive benefits from the fund but are not absolutely entitled to the assets themselves. Once they place assets into the fund (whether by sale or a specie transfer) they give up their claim to those assets until the fund ceases to function.

Paragraphs 197 and 198 of Taxation Ruling TR 2010/1 state that when a person contributes real property to a fund, legal ownership will pass with registration of the superannuation provider as owner of the real property and that beneficial ownership may pass earlier. In the case of a sale and acquisition of land, beneficial ownership normally passes when the purchase is settled at which time the buyer hands over the purchase price in exchange for a completed transfer in registrable form, together with any other necessary documents including title deeds and discharge of mortgage that enable transfer of title.

Paragraph 139 of TR 2004/D25 states that the CGT concept about the entitlement of a beneficiary to trust assets does not apply to superannuation funds regardless of whether the member has met a condition of release for payment of benefits.

Example 11 in TR 2004/D25 considers a situation where an individual contributes shares to his own self-managed superannuation fund. The individual held the shares in his own name prior to the transfer and is the only member of the fund. It is stated that CGT event E2 will happen as a result of the transfer, as the individual is not absolutely entitled to the assets of the superannuation fund.

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act.

Application to your circumstances

The Trust owns a property that will be transferred to the unitholder's superannuation funds. In accordance with TR 2010/1 the Trust is taken to have passed the legal and beneficial ownership of the property to the super funds when the transfer occurs.

There is no evidence that a constructive trust has been imposed by an order of the court, therefore, a constructive trust cannot be said to exist based on your current circumstances.

The transfer satisfies the requirements of both a CGT event A1 and a CGT event E2 happening as there is a disposal of both legal and beneficial ownership of the property. None of the exceptions to a CGT event E2 happening are present in your circumstances. In accordance with ATO ID 2003/559 and example 11 in TR 2004/D25 CGT event E2 is the most specific to your situation as you are connected with the super funds.

Given that a CGT event E2 happened as a result of you transferring your property, you are required to include any capital gain or capital loss you made as a result of the transfer in your assessable income under section 102-5 of the ITAA 1997.