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Edited version of private advice
Authorisation Number: 1051770215925
Date of advice: 22 October 2020
Ruling
Subject: Capital gains tax
Question
Will the distribution of properties to unit holders trigger a CGT event as per section 104-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The trust is a unit trust (the trust).
A company is the trustee to the trust.
The Trust Deed was established on the XXXX.
The trustee holds two properties at the same value (property 1 and property 2).
There are now three unit holders.
Unit holder 1 holds % of membership interest.
Unit holder 2 and 3 share the remaining % of membership interest.
The trust intends to distribute property 1 to unit holder 1 and property 2 to unit holder 2 and 3.
The holders do not intend to write financial agreement due to the above.
Assumptions
The value of the properties held by the trustee does not exceed the value of the unit holder's corresponding unit holdings or membership interest.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-1
Income Tax Assessment Act 1997 section 104-70
Income Tax Assessment Act 1997 section 104-85
Reasons for decision
You make a capital gain or capital loss if a CGT event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset (e.g. property). For example, if you sell an asset for more than you paid for it, the difference is your capital gain. You make a capital loss if your reduced cost base of your CGT asset is greater than the capital proceeds.
A payment by a trustee of a trust in respect of a beneficiary's unit (except for Capital Gains Tax Event (CGT) event A1, C2, E1, E2, E6 or E7 happening in relation to it), will give rise to a CGT event E4 under section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997) where some or all of the payment (the non-assessable part) is not included in the beneficiary's assessable income.
In working out the non-assessable part, any part of the payment that is non-assessable non-exempt (NANE) income is to be disregarded pursuant to paragraph 104-71(1)(a) of the ITAA 1997.
In your case, the trustee intends to distribute properties held in the trust to the unit holders who are also beneficiaries of the trust. This will trigger CGT event E4.