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Edited version of your written advice
Authorisation Number: 1051344623659
Date of advice: 28 February 2018
Ruling
Subject: Capital gains tax – section 99B
Question 1:
For the purposes of subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) is the Commissioner satisfied, or thinks it reasonable to assume, that, at all times on and after 20 September 1985 and before the sale of Property A, the majority underlying interests in Property A were held by the same ultimate owners who held the majority underlying interests in Property A immediately before that day?
Answer
Yes.
Question 2:
Is Property A treated as being your asset (instead of being an asset of the trust) because at any time you became absolutely entitled to an interest in Property A as against the trustee of Trust A (disregarding any legal disability you may be under), for the purposes of section 106-50 of the ITAA 1997?
Answer
No.
Question 3:
Does CGT event E5 happen because you became absolutely entitled to Property A (a CGT asset of a trust) as against a trustee or the trustees (disregarding any legal disability you may be under), for the purposes of section 104-75 of the ITAA 1997?
Answer
No.
Question 4:
Is an amount paid to you, or applied for your benefit by Trust C included in your assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) in the income year the amount is paid to you or applied for your benefit?
Answer
Yes.
Question 5:
Where an amount is paid to you or applied for your benefit by Trust C and is included your assessable income under subsection 99B(1) of the ITAA 1997, can you access the CGT discount in relation to that amount?
Answer
No.
Question 6:
Is an amount paid to you, or applied for your benefit by Trust B included in your assessable income under section 99B of the ITAA 1936?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2017
Year ending 30 June 2018
The scheme commenced on
1 July 2015
Relevant facts and circumstances
A number of persons acquired Property A located in an overseas country before 20 September 1985.
These persons are tax residents of an overseas country.
At the time of the acquisition each person held an equal interest in Property A.
Trust A was established over Property A before 20 September 1985.
Each person assigned portions of their interest in Property A to a family member and Trust B
Trust B was established before 20 September 1985.
Certain beneficiaries of Trust B assigned their interests in Trust A to Trust C
Trust C was established after 20 September 1985.
Property A was sold after 20 September 1985.
Each trust has several beneficiaries.
You as a beneficiary of Trusts B and C are entitled to part of the proceeds of the sale of Property A.
You a resident of Australia for tax purposes.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 99B
Income Tax Assessment Act 1936 Subsection 99B(1)
Income Tax Assessment Act 1936 Subsection 99B(2)
Income Tax Assessment Act 1936 Paragraph 99B(2)(a)
Income Tax Assessment Act 1936 Paragraph 99B(2)(b)
Income Tax Assessment Act 1997 Subsection 104-55(1)
Income Tax Assessment Act 1997 Subsection 104-55(2)
Income Tax Assessment Act 1997 Subsection 104-55(4)
Income Tax Assessment Act 1997 Subsection 104-25(5)
Income Tax Assessment Act 1997 Section 104-75
Income Tax Assessment Act 1997 Subsection 104-75(6)
Income Tax Assessment Act 1997 Section 104-85
Income Tax Assessment Act 1997 Section 106-50
Income Tax Assessment Act 1997 Section 110-25
Income Tax Assessment Act 1997 Section 112-20
Income Tax Assessment Act 1997 Subsection 149-15(1)
Income Tax Assessment Act 1997 Subsection 149-15(2)
Income Tax Assessment Act 1997 Subsection 149-15(3)
Income Tax Assessment Act 1997 Section 149-30
Reasons for decision
Question 1:
For the purposes of subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) is the Commissioner satisfied, or thinks it reasonable to assume, that, at all times on and after 20 September 1985 and before the sale of Property A, the majority underlying interests in Property A were held by the same ultimate owners who held the majority underlying interests in Property A immediately before that day?
Answer
Yes. The Commissioner is satisfied, or thinks it reasonable to assume, that, at all times on and after 20 September 1985 and before the sale of Property A, the majority underlying interests in Property A were held by the same ultimate owners who held the majority underlying interests in Property A immediately before that day.
Detailed reasoning
An asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before the 20 September 1985.
Majority underlying interests is defined as more than 50% of:
(a) The beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and
(b) The beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset.
An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.
An ultimate owner is defined to include an individual but does not include a trust.
Trust C
Due to the assigning of interests in Property A to Trust C, there was a change in ultimate ownership in Property A of X%. However, majority underlying interests in Property A remained to be held by ultimate owners who had majority underlying interests in the land immediately before 20 September 1985.
Question 2:
Is Property A treated as being your asset (instead of being an asset of the trust) because at any time you became absolutely entitled to an interest in Property A as against the trustee of Trust A (disregarding any legal disability you may be under), for the purposes of section 106-50 of the ITAA 1997?
Answer
No. Property A is not treated as being your asset (instead of being an asset of Trust A) because you did not became absolutely entitled to an interest in Property A at any time, as against the trustee of Trust A.
Detailed reasoning
If you (a beneficiary) are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust). Any act done by the trustee in relation to the asset is treated as if it were done by you (the beneficiary).
Draft Taxation Ruling TR 2004/D25 states the Commissioner’s view that:
10. 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 beneficiaries of Trust A were not absolutely entitled to Property A as against the trustee of Trust A. The beneficiaries did not have a vested, indefeasible and absolute entitlement in the trust property, as:
(a) There were multiple beneficiaries with respect to a single asset, being land;
(b) The trustees’ retained a power of sale; and
(c) The trustees’ lien in respect of their right of indemnity continued to attach to Property A (property of the trust).
You were not absolutely entitled to the whole of Property A. Property A is not treated as being your CGT asset, instead of being treated as a CGT asset of the trust.
Question 3:
Does CGT event E5 happen because you became absolutely entitled to Property A (a CGT asset of a trust) as against a trustee or the trustees (disregarding any legal disability you may be under), for the purposes of section 104-75 of the ITAA 1997?
Answer
No. CGT event E5 does not happen because you did not became absolutely entitled to Property A (a CGT asset of a trust) as against a trustee disregarding any legal disability you may be under), at any time.
Detailed reasoning
See our detailed reasons for Question 2 above.
Question 4:
Is an amount paid to you, or applied for your benefit by Trust C included in your assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) in the income year the amount is paid to you or applied for your benefit?
Answer
Yes. An amount paid to you, or applied for your benefit by Trust C is included in your assessable income under section 99B of the ITAA 1936 in the income year the amount is paid to you or applied for your benefit.
Detailed reasoning
An amount was paid to you, or applied for your benefit, by Trust C, while you were a resident of Australia. This will be included in your assessable income unless subject to reduction. It will be reduced by so much of the amount that represents:
(a) Corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if the amounts had been derived by 'a taxpayer being a resident', would have been included in the assessable income of that taxpayer for a year of income; or
(b) An amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income.
The amount paid to you is attributable (in whole or part) to:
(a) An amount derived by the Trust C that, if it had been derived by 'a taxpayer being a resident', would have been included in the assessable income of that taxpayer for a year of income; and
(b) An amount that, if it had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income.
Our reasons follow
Certain individuals held interests in Trust A.
On XX/XX/199X, both a Deed of Gift and a supplemental Deed of Settlement were executed. The Deeds when read together, expressly created Trust C over those individuals’ interest in Trust A (a CGT asset). A trust was created over a CGT asset by declaration or settlement. The first element of the cost base of the CGT asset in the hands of a taxpayer being a resident would be the market value of the individuals’ interest in Trust A - at the time Trust C was created.
The sale of property A and/or the distribution of the net proceeds would have caused a CGT event to happen in relation to the interest that Trust C had in Trust A (CGT Event E5 or CGT Event E7 and/or CGT Event C2 - if more than one CGT Event happens, you use the one more specific to your situation). A capital gain would have arisen. A capital gain is an amount that would have been included in the assessable income of a taxpayer being a resident, for a year of income.
The amount to be included in your assessable income may be reduced by the cost base of the CGT asset.
Question 5:
Where an amount is paid to you or applied for your benefit by Trust C and is included your assessable income under subsection 99B(1) of the ITAA 1997, can you access the CGT discount in relation to that amount?
Answer
No.
Detailed reasoning
This issue has been considered by the Commissioner in Taxation Determination TD 2017/24. It states that although an amount assessable to a beneficiary under subsection 99B(1) of the ITAA 1997 may be attributable to a capital gain, the assessable amount does not have the character of a capital gain for Australian tax purposes.
Consequently, the amount included in your assessable income under subsection 99B(1) of the ITAA 1997 is not treated as a capital gain for CGT discount purposes.
A more in-depth explanation of this issue can be found in the Taxation Determination.
Question 6:
Is an amount paid to you, or applied for your benefit by Trust B included in your assessable income under section 99B of the ITAA 1936?
Answer
No.
Detailed reasoning
Trust B was created before 20 September 1985 and the property of the trust (a CGT asset) was acquired before 20 September 1985. Any capital gain in relation to it would be disregarded.