Edited version of private advice

Authorisation Number: 1051717183777

Date of advice: 17 July 2020

Ruling

Subjects: Capital gains tax and trust income tax liability

Question 1

Did you acquire the Property under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Based on the information provided it is viewed that the making of the court order effected a disposal of the Property from the co-owners to you for sale by operation of law. Capital gains tax (CGT) event A1 occurred for the co-owners and you, being the statutory trustee, became the owner of the Property for CGT purposes.

Therefore, you are viewed as having acquired the Property on the date the court order was made in accordance with section 109-5 of the ITAA 1997 and the principles provided in ATO ID 2009/129.

Question 2

Will the first element of the cost base of the Property be the net proceeds from the sale of the Property to be paid to the beneficiaries in accordance with the court order?

Answer

Yes. Under the general cost base and reduced cost base rules covered under subsections 110-25(2) and 110-55(2) of the ITAA 1997, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of the property given (or required to be given) in respect of acquiring it.

Due to the nature of this arrangement it is reasonable for the Commissioner to consider that the market value at the time of acquiring the Property is equal to the net proceeds that will be paid to the beneficiaries under your obligation as trustee.

Question 3

Can the market value of the Property be determined by using the valuation obtained from the independent valuer?

Answer

Yes. As the valuation was provided by an independent qualified valuer who used an appropriate methodology to determine the market value of the Property Market, it is deemed to be suitable for the purpose of determining the market value of the Property.

Question 4

Will you have any income tax liability in respect of the sale of the Property?

Answer

No. Based on the information provided the Trustee will not have any taxation liability in relation to the sale of the Property as follows:

·         if any capital gain is made on the sale of the Property it will be the beneficiaries who will be assessable upon any distribution to them from the trust, and there will be no portion of the capital gain left to which either sections 115-220 or 115-222 of the ITAA 1997 will apply; and

·         the conditions for the sections contained in Division 6 of the ITAA 1936 have not been met and will therefore not apply.

Question 5

Will the proceeds from the sale of the Property be treated as ordinary income under section 6-5 ITAA 1997 as a result of an "isolated transaction" carried out for profit and commercial in character?

Answer

No. Based on the information provided there is nothing to support that the conditions contained in Taxation Ruling TR 92/3 were met.

Therefore, it is not considered that the sale proceeds received from the sale of the Property will be assessable on revenue account as ordinary income as a result of a profit-making undertaking but are capital in nature assessable under the CGT provisions.

Question 6

Are you required to lodge a trust return in the income year in which the Property was sold if you did not receive any other income from the Property?

Answer

No. As the proceeds from the sale of the Property will be identical to your costs of acquiring them, there will be no capital gain. Additionally, based on the information provided you did not derive any income in relation to the Property being sold, such as interest income.

Therefore, as you have not received any income during the income year in which the Property was sold there will be no obligation for you to lodge a trust return under section 161 of the Income Tax Assessment Act 1936 (ITAA 1936) in the income year in which the Property was sold.

This ruling applies for the following periods

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

Person A, as the plaintiff, initiated court proceedings in the matter of Company XYZ and others which included the following defendants:

·         First Defendant - Company XYZ

·         Second Defendant - Person B

·         Third Defendant - Company X

·         Fourth Defendant - Company Y

·         Fifth Defendant - Company Z

·         Sixth Defendant - Person C; and

·         Seventh Defendant - Person D.

Prior to the court action, several properties (collectively referred to as the Properties) were owned as tenants in common in equal shares by Person A and various defendants (collectively referred to as the Co-owners) which included the Property, which was co- owned by Persons A and B.

All interests in the Property were held on capital account and it was used in the business conducted by Company XYZ.

Persons A and B are residents of Australia for taxation purposes and are not under legal disability.

You were appointed by court in the role as statutory trustee to undertake the following activities under the court order in the role of 'Trustee':

·         obtain a valuation of the market value of the Property from and appropriate property valuer

·         instruct a licenced real estate agent and an auctioneer if required

·         offer the Properties for sale by public auctions, or private treaties, with the power to fix a reserve price for any auction, or fix the sale price for a sale:

-        after Persons A and B were provided with a valuation of the Property

-        not enter into a contract of sale of the Property before a specified date and before a period of 14 days from the provision of the valuation has lapsed without the written consent of Persons A and B, or a court order

·         on the completion of the sale of any of the Properties, would distribute the settlement received on the completion of the sale in the following order:

-        Payment of selling costs and expenses in connection with the sale of the relevant property including selling agent's fees and commission, advising fees, auctioneer's fees, legal costs and disbursements in transferring the relevant property into the names of the Trustee and the Trustee's legal costs and disbursements associated with the sale

-        Payment of any amounts owing in connection with the relevant property for council rates, water rates, water usage and any other utility or statutory impost including Capital gains tax, Land tax and Goods and Services Tax

-        For remuneration and expenses of the Trustee in respect of the sale

-        Payment of the costs of obtaining any report from a valuer

-        The remaining balance of the sale proceeds shall be paid equally between Persons A and B subject to any further order that the Court might make.

An independent valuation report was for obtained for the Property in accordance with the court order.

The Property was not used to derive any rental or trading income by you prior to it being sold.

The Property was sold by public auction in accordance with the court order for $XXX,XXX.

You have received the sale proceeds from the sale of the Property.

The balance of the sale proceeds from the sale of the Property after you have paid expenses will be paid to Persons A and B as beneficiaries pursuant to the court order.

Your activities have been confined to those as authorised by the court order.

Assumptions:

For the purpose of making this ruling decision the following assumptions have been made:

·         You will record in the records of the trust the receipt of the sale proceeds from the sale of the Property and the amounts each of the beneficiaries can reasonably expect to receive no later than two months after the end of the income year in which the Property was sold

·         All payments of the sale proceeds pursuant to the Court Order have been made, or will be made by the end of the income year in which the Property was sold

·         The valuation obtained in relation to the Property was provided by a qualified valuer using one of the accepted methodologies to determine the market value of the Property

·         You did not receive any income, such as interest, in relation to the sale proceeds from the sale of the Property; and

·         No further Court Orders will be made in relation to the Properties by the Court.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 161