Edited version of private advice

Authorisation Number: 1051539098953

Date of advice: 15 July 2019

Ruling

Subject: Division 7A and marriage breakdown

Question

Will the transfer of units from Trust X to you be a payment as described in section 109C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question

Will the transfer of units from Trust X to you be assessable as a deemed dividend under sections 109XA or 109XB of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Trust X is a discretionary trust. It has a trustee company.

The beneficiaries of Trust X are you, your spouse and your children.

Trust X has Unpaid Present Entitlements (UPE's) as at 30 June 2018.

All the companies in which they have UPE's have distributable surpluses.

You own half the shares in the trustee company.

Trust X holds units in other trusts.

Pursuant to matrimonial proceedings underway in the Family Court of Australia between you and your spouse, you are seeking orders for units held by Trust X to be transferred to you.

You are a shareholder or an associate of a shareholder of the private companies.

Capital gains tax event A1 will occur upon the transfer.

You intend to apply the rollover in Subdivision 126-A of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain that eventuates.

You do not currently have any unpaid present entitlements owing from Trust X.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1936 subsection 109C(3)

Income Tax Assessment Act 1936 section 109XA

Income Tax Assessment Act 1936 subsection 109XA(1)

Income Tax Assessment Act 1936 subsection 109XA(7)

Income Tax Assessment Act 1936 section 109XB

Reasons for decision

The combination of Section 109XB and Subsection 109XA(1) of the ITAA 1936 treats certain payments, including transfers of property, made by trustees as deemed dividends where:

(a) a trustee makes a payment to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company) (the actual transaction); and

(b) the payment is a discharge of or a reduction in a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain; and

(c) either:

(i) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgement and the date of lodgement of the trustees return of income for the trust for the year of income of the trust in which the actual transaction takes place; or

(ii) the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgement and the date of lodgement of the trustees return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates.

Payment is defined in subsection 109C(3) of the ITAA 1936 and includes a transfer of property to the shareholder or associate of the shareholder.

Section 109XA(7) of the ITAA 1936 defines unrealised gain as follows:

Unrealised gain, in relation to a trust estate and an actual payment, means any unrealised gain, whether of a capital or income nature, but does not include an unrealised gain to the extent that it has been or would be included in the assessable income of the trust, apart from this Division, for:

(a) a year of income before the year in which the actual payment was made;

(b) the year of income in which the actual payment was made; or

(c) the year of income following the year in which the actual payment was made.

Subsection 109XA(7) of the ITAA 1936 carves out certain payments which are otherwise included in assessable income and clarifies that both capital and income unrealised gains are included.

Apart from these matters, the phrase unrealised gain is not defined for the purposes of Subdivision EA and adopts its ordinary meaning.

The Macquarie Dictionary defines the words realise and gain in the relevant context as follows:

(i)            "realize" to meanto bring as proceeds, as from a sale; the goods realised $1000; and

(ii)           "gain" to mean profit or advantage.

The ordinary meaning of the phrase realised gain is therefore to have a profit or advantage that has materialised in the form of proceeds from a sale.

Further, the Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 1) Bill 2004 provides at paragraph 8.13:

For the purposes of these rules, realisation will be taken to have occurred when a gain converts into a recoverable debt.

The meaning of the phrase unrealised gain can be summarised as:

A gain is unrealised when an item which has increased in value has not been ventured, either in whole or in part, in a transaction to obtain a return that reflects that increase in value; or has been ventured into such transaction but the return is yet to convert into a recoverable debt.

Application of subsection 109XA(1)

For subsection 109XA(1) of the ITAA 1936 to operate all elements under the subsection must be satisfied.

a)    A payment is made by the trustee to the shareholder or associate of a shareholder of a private company.

There will be a transfer of property to a shareholder, being the transfer of units to you. Therefore, there will be a payment as defined in section 109C(3).

b)    The payment is a discharge of or a reduction in a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain.

Analysing the explanation of the definition of unrealised gain above, it is taken that there is a gain in the current factual scenario. There will be a capital gain realised as the property will be transferred to a new owner. However, the gain will be disregarded under Subdivision 126-A of the ITAA 1997. This does not stop the gain being a realised gain.

Therefore, since the payment will not be a discharge of a reduction in a present entitlement of the shareholder that is wholly or partly attributable to an amount that is an unrealised gain, then all the conditions in the section will not be satisfied.

Accordingly, subsection 109XA(1) will not apply to the trust distribution.