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Edited version of private advice
Authorisation Number: 1051620027897
Date of advice: 13 December 2019
Ruling
Subject: Capital gains tax
Question 1
Is Person A absolutely entitled, as against the trustee of the Trust, to the assets of the Trust for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 2
Will CGT event A1 under section 104-10 of the ITAA 1997 be triggered when the CGT assets are transferred to Person A?
Answer
No
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
Person A suffered a personal injury and was awarded a settlement sum by the Court. The Court ordered that the settlement sum be placed on trust for him to be held by the trustee (the Trust).
The trust deed establishes the Trust for the benefit of Person A during their lifetime. The trust deed provides that until the 'Determination Date' of the Trust, the trustee may from time to time pay the whole or any part of the income or capital of the Trust to or apply it for the benefit of Person A or in any manner in which the Trustee considers to be for the maintenance, education, advancement or benefit of Person A.
On the determination date, where the determination date is the death of Person A, the trustee must pay the whole of the remaining income and capital of the Trust in accordance with Person A's will. Where the Trust is determined by any other event the trustee must pay the whole of the remaining income and capital of the Trust to Person A or to another beneficiary at their discretion.
During the Trust's operation, Trust funds have only been distributed for the benefit of Person A and to purchase assets for Person A's use and enjoyment.
The Court has now ordered that the trustee determine the Trust and transfer the Trust assets to Person A in their personal capacity to facilitate cost savings.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 106-50
Reasons for decision
Summary
Person A is absolutely entitled to the Trust assets as against the Trustee at all times. When the Trust is determined and the Trust assets are transferred to Al, CGT event A1 will not occur for the Trustee as there will be no change in the beneficial ownership of the assets.
Detailed reasoning
The requirements of absolute entitlement are that the beneficiary has an interest in the trust assets and the interest is vested and indefeasible (TR 2004/D5 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, paragraphs 69-79).
Where the beneficiary is absolutely entitled, section 106-50 of the ITAA 1997 treats the trust asset as being owned by the beneficiary and not the trustee and actions taken by the trustee are taken to have been done by the beneficiary. Paragraph 144 of TR 2004/D5 further provides that no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.
Person A is the sole beneficiary under the trust deed prior to the Trust's determination date. As sole beneficiary, Person A has the totality of the beneficial interests in the Trust assets and automatically satisfies the requirement that their interest be vested in possession and indefeasible (paragraph 78 of TR 2004/D25). There is no known legal impediment (ignoring legal disability) to Person A obtaining immediate possession and enjoyment of the Trust assets (paragraph 78-79 of TR 2004/D5). Therefore, Person A is absolutely entitled to Trust assets as against the Trustee at all times.
As Person A is absolutely entitled as against the Trustee, when the Trust is determined, Person A is the relevant taxpayer if a CGT event happens to the assets. CGT event A1 in section 104-10(1) of the ITAA 1997 will not occur for the trustee upon transferring the Trust assets to Person A as they are absolutely entitled as against the trustee at all times and as such, there is no change in beneficial ownership.