Edited version of your written advice

Authorisation Number: 1051498836477

Date of advice: 29 March 2019

Ruling

Subject: Capital gains tax

Question 1

Does CGT event E5 happen if the Trust makes in-specie distributions of two real properties (the CGT Assets) to two different adult beneficiaries of the Trust in accordance with the trust resolution?

Answer

Yes.

Question 2

Does the Trust make a capital gain in respect of CGT event E5 happening?

Answer

Yes.

Question 3

Will each Beneficiary be specifically entitled to the Trust’s capital gains?

Answer

Yes.

Question 4

Do the Beneficiaries apply the provisions in sections 115-215 and 115-225 of the Income Tax Assessment Act 1997 (ITAA 1997) to calculate the amount of capital gain to be included in their assessable income?

Answer

Yes.

Question 5

Will the 50% CGT discount be available to the beneficiaries to reduce their capital gains?

Answer

Yes.

Question 6

Is the Trust liable to pay tax on any part of the capital gains arising from the in-specie distributions of the CGT Assets?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The trust property

In 199X, the Trust purchased Blackacre.

The cost base of Blackacre is $X00,000. The Trust has obtained an independent valuation of the property. The current market value of Blackacre is $X,000,000.

In 199X, the Trust purchased Whiteacre.

The cost base of Whiteacre is $XX0,000. The Trust has obtained an independent valuation of the property. The current market value of Whiteacre is $X,000,000.

The Trust

Key clauses of the Trust Deed allow the Trustee to make partial and final distributions of the capital of the Trust Fund in its absolute discretion to any persons, and to exclude any persons from such distribution.

The First and Second Schedules of the Trust Deed stipulate that the class of eligible beneficiaries of the Trust includes “Any child or grandchild of A and B”.

C and D are the only surviving children of A and B.

C and D (the Beneficiaries) are Australian residents, over 18 years of age and not under a legal disability.

The trust distributions

In accordance with the Trust Deed, the Trust proposes to make partial distributions of capital to the Beneficiaries (the trust resolution). Under the trust resolution, C and D will each receive a capital benefit. C will receive an indefeasible interest in Whiteacre and D will receive an indefeasible interest in Blackacre. The trust resolution specifically provides that the distribution is a distribution of capital and that the Beneficiaries are entitled to associated capital gains.

Relevant legislative provisions

Income Tax Assessment Act 1997, subsection 104-75(1)

Income Tax Assessment Act 1997, subsection 104-75(3)

Income Tax Assessment Act 1997, section 115-215

Income Tax Assessment Act 1997, paragraph 115-215(4)

Income Tax Assessment Act 1997, section 115-225

Income Tax Assessment Act 1997, subsection 115-225(1)

Income Tax Assessment Act 1997, section 115-228

Public Rulings (including Determinations)

Draft Taxation Ruling TR 2004/D5

Reasons for decision

All references in this private ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise specified.

Question 1

Does CGT event E5 happen if the Trust makes in-specie distributions of the CGT Assets to the Beneficiaries in accordance with the trust resolution?

Summary

Yes, CGT event E5 will happen because the Beneficiaries will become absolutely entitled to their respective CGT Asset if the trust resolution is given effect.

Detailed reasoning

Subsection 104-75(1) provides that, subject to certain exceptions, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

‘Absolute entitlement’

Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words ‘absolutely entitled to a CGT asset as against the trustee of a trust’ as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

TR 2004/D25 states at paragraph 10 that:

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.

Taken together, the key clauses of the Trust Deed, enable the Trustee, in its absolute discretion, to make capital distributions to the Beneficiaries.

The trust resolution clearly outlines to all relevant parties that the Beneficiaries will become absolutely entitled to real property.

That is, it is clear to all relevant parties that C will receive a vested and indefeasible interest in Whiteacre, and D will receive a vested and indefeasible interest in Blackacre.

Therefore, since the trust resolution clearly stipulates that the Beneficiaries will each become absolutely entitled to their respective distribution, subsection 104-75(1) will be satisfied, and thus CGT event E5 will happen when the trust resolution is executed.

Question 2

Does the Trust make a capital gain when CGT event E5 happens?

Summary

Yes, the Trust makes a capital gain when CGT event E5 happens because, when the Beneficiaries become absolutely entitled to the CGT Assets, the market value of the CGT Assets to which the CGT event happens will be higher than the cost base of those CGT Assets.

Detailed reasoning

Subsection 104-75(3) provides that the trustee makes a capital gain if the market value of the asset at the time of the event is more than its cost base. The trustee makes a capital loss if that market value is less than the asset’s reduced cost base.

The market value of Blackacre is $X,000,000. Its cost base is $X00,000. Because the market value is more than the cost base, the Trust makes a capital gain.

The market value of Whiteacre is $X,000,000. Its cost base is $XX0,000. Because the market value is more than the cost base, the Trust makes a capital gain.

Question 3

Will the Beneficiaries be specifically entitled to the Trust’s capital gains?

Summary

The Beneficiaries will each be specifically entitled to the Trust’s capital gains because the Trust has powers under the Trust Deed to stream capital gains to the Beneficiaries, and in fact will do so if the trust resolution is given effect.

Detailed reasoning

Subdivision 115-C operates in such a way that beneficiaries of a trust can be specifically entitled to the trust’s capital gains.

Section 115-228 outlines when a beneficiary will be regarded as specifically entitled to a trust capital gain (either in whole or in part). To be specifically entitled to the whole gain, there are two key requirements that need to be met:

1. The beneficiary must have received, or reasonably expect to receive, all of the financial benefit referable to the capital gain (see paragraphs (a) and (b) of the definition of ‘share of financial benefit’ in subsection115-228(1)); and

2. The financial benefit that the beneficiary has received or can be expected to receive has been recorded in the accounts or records of the trust in its character as referable to the capital gain (paragraph 115-228(1)(c)).

ATOID 2013/33 refers to paragraph 2.59 of the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 5) Bill 2011, which states that it may be reasonable to expect that when a beneficiary becomes absolute entitled to a trust asset, the beneficiary will receive the net financial benefit referable to the deemed trust capital gain from CGT event E5.

In this case, the financial benefits referable to the capital gains are the real properties to be distributed in-specie. The absolutely entitled beneficiaries are, in accordance with the terms of the trust deed created and the trust resolution, the only ones that are expected to receive the properties.

As to the second requirement, ATOID 2013/33 notes that the accounts or records would include statements of resolutions and distributions. The trust resolution is a statement of resolution, and therefore will satisfactorily meet the requirement of being recorded in records of the trust.

Therefore, since both requirements will be met upon execution of the trust resolution, it follows that the Beneficiaries will be regarded as specifically entitled to the relevant capital gains that arose from CGT event E5 happening to Blackacre and Whiteacre.

Question 4

Does each Beneficiary apply the provisions in sections 115-215 and 115-225 to calculate the amount of capital gain to be included in their assessable income?

Summary

Yes, each Beneficiary must apply sections 115-215 and 115-225 in order to calculate the amount of capital gain referable to the proposed E5 events that would be included in their assessable income.

Detailed reasoning

Both sections 115-215 and 115-225 are critical to determining the calculation of a beneficiary’s capital gains. Importantly, these provisions apply to the specific entitlement component of the beneficiaries capital gains and are one step in the capital gains calculation process that need to be made.

When a beneficiary is specifically entitled to a capital gain, the beneficiary is assessed on it, with all the associated tax consequences in respect of that distribution applying. Where there are no beneficiaries specifically entitled to the capital gains, then the capital gains will be calculated in respect of each beneficiary’s proportionate share. It follows that a specifically entitled beneficiary will not be assessed on any share of the trust’s net income – including other capital gains – outside the amount of the specific entitlement unless they are presently entitled to other income of the trust.

In this case, the Beneficiaries will be specifically entitled to capital gains – C to the capital gains associated with Whiteacre and D to the capital gains associated with Blackacre – and so they will need to apply sections 115-215 and 115-225 to calculate their respective capital gains. If there is any other income – including capital gains – that the Beneficiaries will not be specifically entitled to, then the beneficiaries will be assessed on these amounts according to their respective shares.

Question 5

Will the 50% CGT discount be available to the Beneficiaries to reduce their capital gains?

Summary

Yes, the 50% CGT discount will be available to reduce the capital gain for each Beneficiary, because the CGT Assets will have been held for a period longer than 12 months.

Detailed Reasoning

Subsection 115-215(4) allows specifically entitled Beneficiaries to access the CGT discount when a Trust makes a capital gain.

Subdivision 115-A provides that the CGT discount applies to an asset that is acquired at least 12 months before a CGT event happens.

In this case, the Beneficiaries will be able to apply the 50% CGT discount because the Trust purchased the CGT Assets in 199X and 199X respectively. Therefore, by the time CGT event E5 happens, the Trust will have held the assets for over 12 months.

Question 6

Is the Trust liable to pay tax on any part of the capital gains arising from the in-specie distributions of the CGT Assets?

Summary

No. The Trust will not be liable to pay tax on any part of the capital gains arising from the in-specie distribution of the CGT Assets because the Beneficiaries will be specifically entitled to the Trust’s capital gains.

Detailed reasoning

As established, the Trust will resolve to distribute the CGT Assets to the Beneficiaries and this comprises 100% of the capital gains referable to the CGT Assets.

Further, the Beneficiaries will each be specifically entitled to 100% of the Trust’s capital gain. Consequently, the Trust will not liable to be assessed on any part of the capital gain arising from CGT event E5 happening. More specifically, upon execution of the trust resolution, the CGT Assets will be distributed to the Beneficiaries, and 100% of the Trust’s capital gains referable to the distributions will be streamed to each of the Beneficiaries in accordance with the terms of the trust resolution.

In short, the Trust will not liable to pay any tax on the capital gains from the in-specie distributions.

ATO view documents

ATOID 2013/33