Edited version of your written advice

Authorisation Number: 1051309485542

Date of advice: 21 November 2017

Ruling

Subject: Income tax - Capital gains tax - CGT events - general

Question 1

Did the statutory Trustees acquire the real Properties as a result of CGT Event A1 when they were appointed by the court?

Answer

Yes

Question 2

Did the statutory Trustees acquire the jewellery as a result of CGT Event A1 when they were appointed by the court?

Answer

Yes

Question 3

Did the Statutory Trustees acquire either the real property or the jewellery as a result of CGT Event E1 when they were appointed by the court?

Answer

No

Question 4

Did the Statutory Trustees acquire either the real property or the jewellery as a result of CGT Event E2 when they were appointed by the court?

Answer

No

Question 5

Did a CGT event other than A1, E1 or E2 occur when the Trustees for sale were appointed by the court?

Answer

No

Question 6

Is the first element of the cost base of the property to the Trustees equal to its net sale proceeds?

Answer

No

This ruling applies for the following period:

1 July 2015 to 30 June 2018

The scheme commences on:

1 July 2015

Relevant facts and circumstances

X was a resident of Country A. X died on the ##/##/20##. At that time X owned several Properties that they acquired prior to 20 September 1985. In accordance with the terms of the will, these assets were transferred to X’s children (‘the Individuals’) on the ##/##/20##. The parcels of real estate are collectively referred to as ‘the Properties’.

The Individuals held these Properties as tenants in common in equal shares.

The deceased estate also included items of jewellery, which they were entitled to equal shares under the will.

A dispute arose between the Individuals concerning the jointly owned assets, and one child sought a court order of the Supreme Court of New South Wales (‘the Court’) for their sale under the Conveyancing Act 1919 (NSW) (‘the Conveyancing Act’).

The Court made an order on ##/##/20## appointing Y and Z as Trustees (‘the Trustees’) for the sale of the Properties under section 66G of the Conveyancing Act, and for the jewellery under section 36A of the same Act.

The terms of the order were:

● The Properties vest in Trustees for sale subject to encumbrances affecting the entirety of the Properties, but free from encumbrances affecting any undivided shares in the Properties.

● The net proceeds of the sales (after fees and certain expenses) to be distributed to the co-owners in proportion to their respective interests.

● The Individuals will deliver up any key, code or authority or password to the Trustees to enable the Trustees to take possession and control of the jewellery for the Trustees to dispose of the jewellery by sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 104-55,

Income Tax Assessment Act 1997 section 104-60,

Income Tax Assessment Act 1997 subsection 110-25(2),

Income Tax Assessment Act 1997 subsection 112-20(1),

Conveyancing Act 1919 (NSW) section 36A and

Conveyancing Act 1919 (NSW) section 66G.

Summary

CGT Event A1 happens as a result of the change of ownership from the Individuals to the Trustees pursuant to the court order. The first element of the cost base of the property in the hands of the Trustees will be the market value of the property at the time of making the court order.

Detailed reasoning

Real Properties

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (‘ITAA97’) provides that CGT event A1 happens if you dispose of a CGT asset.

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. A change of ownership will not occur if you stop being the legal owner of an asset but continue to be its beneficial owner.

Where the disposal of a CGT asset does not occur under a contract, CGT event A1 happens when the change of ownership occurs.

The effect of the court order was to vest in the Trustees the whole of the co-owners’ interests in the Properties. Pursuant to paragraph 66(7)(b) of the Conveyancing Act, land is deemed to be ‘converted’ upon the appointment of Trustees for sale, unless the court otherwise directs.

In equity, conversion is the notional change of land into money (or money into land). Its effect is to turn realty into personalty (or personalty into realty). On the making of the court order, the Individuals’ interests were converted into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests. As such, the Individuals retained no beneficial interest in the Properties. In these circumstances it is considered that upon the making of the court order, a change of ownership occurred from the Individuals to the Trustees, resulting in CGT event A1 happening.

Consequences for the Trustees of the Court Order

The first element of a CGT asset’s cost base is the total of money paid or required to be paid, and market value of property given or required to be given, in respect of acquiring that asset (at the time of acquisition), pursuant to subsection 110-25 of the ITAA97. If no money or property is given by the Trustee, the market value substitution rule in subsection 112-20(1) operates to deem the first element of your cost base to be the market value of the property at the time it was acquired.

The Trustees acquired the Properties on the date of the court order, in accordance with subsection 104-10(3) of the ITAA97.

Although the Individuals received property as a result of CGT event A1 happening, the Trustees gave no property because the CGT event happened by operation of law. On our view, the first element of the cost base of the property in the hands of the Trustees is its market value on the date it vested in the Trustees (subsections 110-25(2) and 112-20(1) of the ITAA97).

Capital Gain from sale by the Trustees

The Trustees will make a capital gain if the sale proceeds exceed their cost base for the Properties and a capital loss if those proceeds are less than the reduced cost base of the Properties. A capital gain will be included in the net income of the trust. The Trustees will be able to apply the CGT discount if they owned the asset for more than 12 months.

Subdivision 115-C of the ITAA97 sets out the rules for dealing with the net income of a trust that has a capital gain. Amongst other things, the rules treat that part of the net income attributable to the trust’s net capital gain as a capital gain made by a beneficiary.

If, as here, the beneficiary is a non-resident, section 115-220 of the ITAA97 will apply to assess the beneficiary’s share of the capital gain to the trustee.

Section 115-115 of the ITAA97 denies a discount for a capital gain to the extent that it accrued while a beneficiary was a foreign resident. Where a beneficiary is a foreign resident for all of relevant testing period, the discount percentage is reduced to 0.

The non-resident beneficiaries will also be assessable under section 98A but will get a credit for the tax paid by the trustee.

Jewellery

In the case of the jewellery, the transfer of ownership occurred when possession passed to the Trustees for sale.

However, a change in ownership will not be taken to be a ‘disposal’ for the purposes of subsection 104-10(1) of the ITAA97 where there is no change in the beneficial ownership of the asset.

The legal term 'beneficial ownership' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner.

As above, under the court order the Individuals’ interests in the jewellery were converted into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests. The Individuals retained no beneficial interest in the Jewellery. Upon the making of the court order, a change of ownership occurred from the Individuals to the Trustees, resulting in CGT event A1 happening.

For the same reasons as set out above (regarding real property), the cost base will be equal to the market value of the jewellery at this time. The Trustees will make a capital gain if the sale proceeds exceed their cost base for the jewellery and a capital loss if those proceeds are less than the reduced cost base of the jewellery. Should a loss be made from the sale of the jewellery, a collectable CGT asset, section 108-10 of the ITAA97 provides that a loss from a collectable can only be used to offset gains from other collectables.

Other CGT events

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55 of the ITAA97). In this case, it is considered that the trust is created by an order of the Court, rather than the actions of the Individuals. As there is no act of creation by any of the Individuals, there can be no application of CGT event E1.

CGT event E2 happens if a CGT asset is transferred to an existing trust (section 104-60 of the ITAA97). The Trust, created by the order of a court, was not a pre-existing trust and the transfer of the assets to the Trustees will not give rise to CGT event E2.

There are no other CGT events that are relevant to the appointment of Trustees for the sale.

ATO view documents

ATO Interpretative Decision 2009/129

Other references (non ATO view)

Gain for the individuals from Court Order

Properties

The Individuals will make a capital gain from GCT event A1 happening when the Properties vested in the Trustees of the statutory trust for sale if the capital proceeds for the Properties at that time are greater than their cost base for the property.

Capital proceeds are defined in section 116-20 of the ITAA97 as the total of the money that you have receive or are entitled to receive in respect of the event happening and the market value of any property that you received or are entitled to receive. If you receive no capital proceeds, the market value substitution rule in subsection 116-30(1) of the ITAA97 treats you as having received the market value of the property. In this case the people who disposed of their interest in the asset got property, which was their interest in another trust.

Section 128-15 of the ITAA97 provided that the cost base of the property in the hands of the Individuals will be the market value of the Properties on the day X died.

Jewellery

The Individuals will make a capital gain from GCT event A1 happening when the Trustees of the statutory trust took possession of the jewellery for sale if the capital proceeds for the Properties at that time are greater than their cost base for the jewellery.

As above, subsection 116-30(1) of the ITAA97 treats you as having received the market value of the property, where you have received no capital proceeds.

Where the jewellery was acquired by X before 20 September 1985 the cost base of the asset in the hands of the Individuals will be the market value of jewellery on the day X died. Where the jewellery was acquired by X on or after 20 September 1985, the first element of the costs base will be the cost base of the jewellery on the day X died.