Edited version of private advice

Authorisation Number: 1051888754584

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Date of advice: 31 August 2021

Ruling

Subject: CGT - trust distribution

Question 1

Did CGT event C2 occur when Individual A (on behalf of Individual A, the spouse and their children) renounced the interest as a beneficiary of the XX Family Trust (XXFT) under section 104-25 of the ITAA 1997 and will any resulting capital gain or loss be disregarded?

Answer

Yes

Question 2

Can the X Family Trust disclaim its entitlement to the assessable capital gains pursuant to the resolution made by Y Pty Ltd as trustee for the XXFT on XX Month 20XX?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Y Pty Ltd acts as trustee of the XX Family Trust (XXFT). The XXFT was established by deed dated X Month 19XX and amended by deeds dated X Month 19XX and 20XX (the XXFT Trust Deed).

The XXFT is a discretionary family trust.

Individual B was the parent of Individual A and the siblings.

Beneficiaries identified in Item A of the schedule to the XXFT Trust Deed include:

• At Item A (iii) - any child or children of Individual B
• At Item A (iv) the spouse of any child or children of Individual B
• At Item A (v) any grandchild or grandchildren of Individual B
• At Item A (ix) any Trust of which any one of those persons referred to in paragraphs (i) to (viii) ...is a vested or contingent beneficiary

Individual C is Individual's A spouse. They were married on XX Month 19XX.

Individual A and Individual C have XX children.

Y Pty Ltd is the Trustee of the X Family Trust. Individual A and Individual C are the sole shareholders and directors of Y Pty Ltd and the controllers of the X Family Trust. The beneficiaries of the X Family Trust are XXXX and XXX, their XX children and their Associates (as defined in clause 2.4 of the XXFT Trust Deed).

Under clause 2 of the XXFT Trust Deed the Trustee shall "hold the Trust fund upon trust as to the income thereof for the benefit of the persons named in Item A of the Schedule... or any one or more of them exclusive of the other or others in such shares and proportions as the Trustee in the absolute discretion of the Trustee may from year to year determine."

Under paragraph 2A(c)(i) (inserted 2018) of the XXFT Trust Deed payment to a Beneficiary may be made by "crediting the amount to the Beneficiary in the books of the Trust Fund."

Following the death of Individual C on X Month 20XX, Individual A and the X siblings became the directors of Z Pty Ltd. The Constitution of Z Pty Ltd requires that following the death of Individual C all decisions of directors had to be unanimous.

During the administration of Individual's C estate and discussions relating to the assets of the XXFT, issues arose between Individual A and the X siblings. This led to a falling out between Individual A and the X siblings.

In late 20XX and early 20XX negotiations took place between Individual A and the X siblings which led to a proposal that:

a)    The assets of the XXFT would be valued;

b)    Shares equal to 25% of the value of the shares owned by the XXFT would be transferred in-specie to Individual A or an entity nominated by her;

c)    Cash equal to:

(i)            25% of the value of a property known as A Property, in Australia owned by the XXFT (Goolwa Property);

(ii)           25% of the cash held by the XXFT; and

(iii)          The sale proceeds of 25% of the shares in the XYZ Inc., company incorporated in the Country X, owned by the XXFT,

would be paid to Individual A and/or her nominee;

d)    The capital gains imbedded in the publicly-listed shares to be transferred in-specie and to be crystallised upon sale of 25% of the XXFT's holding in XYZ Inc. will be 'streamed' to Individual A;

e)    Upon receipt of the assets and amounts referred to in paragraphs (b) to (c), Individual A would resign as a director of Z Pty Ltd and renounce the interest in the XXFT;

f)     Individual C would renounce the interest in the XXFT; and

g)    Individual A and Individual C, on behalf of their children and remoter issues, would renounce their interests in the XXFT.

A document entitled 'Deed of Renunciation of Entitlement, for the XX Family Trust (the Deed of Renunciation) was drafted and signed on XX Month August 20XX.

The Deed provided that effective from the date of the Deed and upon payment of the 'Settlement Sum' that:

(a)  Individual A and Individual C (on behalf of themselves, their children and their remoter issue) hereby renounce and relinquish all of their entitlements to any further benefits from the date hereof from the Trust whether those benefits be income or capital or any other nature;

(b)  Individual A and Individual C (on behalf of themselves, their children and their remoter issue) hereby request that each of the parties consent to and recognise their request that they are to receive no further benefit from the Trust and furthermore recognise the renunciation and relinquishment created by this Deed of their specified interest in the Trust as irrevocable; and

(c)   Each of the Trustee, and the X siblings hereby acknowledge, consent to and accept the renunciation and relinquishment of any further entitlement and interest referred to in clause 2(b) now or in the future of the Trust.

The term 'Settlement Sum' is defined as the total of:

{i} The value of certain publicly-listed shares to be transferred to Individual A (or to a company or trust as Individual A may direct) with an agreed market value to $xxx;

{ii} A payment of $xx to Individual A (or as Individual A may direct); and

{iii} A payment to individual A (or as Individual A may direct) of 25% of the net sale proceeds received by the Trust as a result of the disposal of the Trust's shareholding in XYZ Inc.

The share transfers were completed by the broker following the signing with all transfers completed by XX Month Month 20XX.

A sum of $xx was paid by cheque. The deposit appeared in the trustee for the X Family Trust bank statement on XX Month 20XX.

A signed trust distribution minute for the XXFT dated XX Month 20XX shows a distribution of 100% of capital gains for the year ending 30 June 20XX to the X Family Trust.

The XXFT Realised Capital Gains Tax (CGT) working papers for the period 1 July 20XX to 30 June 20XX show total sale proceeds of $xxx, and various share transfers (including pre-GST assets).

As a number of the shares were pre-CGT assets the total assessable capital gain made on disposal of CGT assets was $xxx and total losses were $xx.

The CGT Schedule 20XX for the XXFT shows a net capital gain of $xx after the CGT discount was applied.

The statement of distribution in the XXFT Trust Tax Return 20XX for the X Family Trust show at label W a share of income of the trust estate totalling $xxx and at label F capital gains of $xx.

The XXFT Detailed Balance Sheet for the year ended 30 June 20XX shows a decrease in Equity of $xx with a payment to Individual A. The XXFT Trial Balance for the year ended 30 June 20XX also records as a decrease in Equity a 'Payout re Renunciation of Entitlement' to Individual A of $xx and distribution to X Family Trust of $xxx.

These accounting entries reflect the total value of the shares and cash received by the x Family Trust in Month 20XX of $xxx.

On XX Month 20XX the legal representative for the X Family Trust advised the lawyer acting for the XXFT that their clients would proceed to obtain a private binding ruling (PBR) from the Commissioner of Taxation and advised that their clients may renounce their interests in the XXFT depending on the outcome of the Application.

Therefore, $X amount of the renunciation payment (which totalled $XXX and was paid in Month 20XX) has been treated in the financial statements as a physical payment of the trust distribution made to the X Family Trust in Month 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 116-30

Reasons for decision

Question 1

Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when you enter into the contract that results in the asset ending. If there is no contract, the event happens when the asset ends.

A beneficiary of a discretionary trust who has no interest in either the assets or income of the trust before the exercise of any discretion by the trustee as to the allocation of assets or income can renounce his or her interest in the trust.

Taxation Determination TD 2001/26 sets out the Commissioner's view that a renunciation by a beneficiary of an interest in a discretionary trust (the interest being a CGT asset) gives rise to CGT event C2 for the beneficiary because it is an abandonment, surrender or forfeiture of the interest.

A discretionary beneficiary may or may not receive any capital proceeds for renouncing their interest in the discretionary trust. Whether or not capital proceeds are received, the beneficiary will need to determine and use the market value of the interest under section 116-30 of the ITAA 1997 at the time of the renunciation of the interest. A capital gain may arise if the market value exceeds the cost base of the beneficiary's interest.

However, any capital gain or loss is disregarded if the interest in the trust were acquired prior to 20 September 1985 (subsection 104-25(5) of the ITAA 1997).

On XX Month 20XX Individual A and the spouse (on behalf of themselves, their children and their remoter issue) renounced their interests in the discretionary trust ABFT by signing the Deed of Renunciation.

In accordance with s 104-25 of the ITAA 1997, CGT event C2 occurred on the date you entered into the Deed of Renunciation.

Individual A, the spouse and their children all acquired their interests in the XXFT prior to 20 September 1985. Therefore, any capital gain or loss that occurs under CGT event C2 on renouncing these interests will be disregarded.

Question 2

Until disclaimer, a beneficiary's entitlement to income of a trust is operative for the purposes of section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) from the moment it arises notwithstanding that the beneficiary has no knowledge of it (see Vegners v. FC of T 91 ATC 4213 at 4215; (1991) 21 ATR 1347 at 1349).

A beneficiary may disclaim an entitlement on its coming to their knowledge. A disclaimer does not need to be effected by a formal deed, however the beneficiary must do some act to show their dissent - mere silence or inactivity is not sufficient to establish that the interest has been disclaimed (see Federal Commissioner of Taxation v. Cornell (1946) 73 CLR 394; 8 ATD 184; 3 AITR 405).

An effective disclaimer, once made, operates retrospectively and not merely from the time of disclaimer.

To be effective, a disclaimer must be made within a reasonable time of the beneficiary becoming aware of the relevant gift and the gift must be disclaimed in its entirety (see Commissioner of Taxation v. Ramsden [2005] FCAFC 39; 2005 ATC 4136; (2005) 58 ATR 485 ( Ramsden )). In addition, the right to disclaim will be lost if the beneficiary explicitly or implicitly accepts the interest.

In Ramsden the Court found that each entitlement arising as the result of the exercise of the trustee's discretion to appoint income was a separate gift - the subject matter of that gift being the income (as defined by the deed) for the relevant accounting period.

In this case the XXFT purported to distribute 100% of the capital gains income to the X Family Trust on XX Month 20XX.

To be assessed on the trust funds, the X Family Trust must be a beneficiary of the XXFT trust estate, who is not under any legal disability, and is presently entitled to a share of the income of the trust estate (section 97 of the ITAA 1936). The assessable income of a beneficiary includes so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident.

In this case the XXFT Trust Deed provides the trustee with the power to distribute trust income among the beneficiaries in such shares and proportions as they may determine in their absolute discretion. The X Family Trust is an eligible beneficiary of the XXFT under Item A of the Schedule to the XXFT Trust Deed.

To date the X Family Trust has not disclaimed the distribution but from XX Month 20XX has put the trustee of the XXFT on notice that they may do so pending the outcome of this private ruling.

The 'streaming' of the net capital gains for the 20XX income year from the XXFT to X Family Trust was discussed as part of the negotiations leading up to the signing of the Deed of Renunciation by Individual A and the spouse.

The Deed of Renunciation does not reference the agreement to stream the resulting capital gains imbedded in the publicly-listed shares transferred in-specie and crystallised upon sale of 25% of the XXFT's holding in Entity Z to Individual A. However, Individual A and the spouse signed the Deed of Renunciation with the understanding that this would occur as evidenced by the prior negotiations.

The XXFT Trust Deed does not require a physical transfer of a distribution and may be made by crediting the amount to the Beneficiary in the books of the Trust Fund.

X Family Trust cannot disclaim as the Entity A and the spouse have implicitly accepted the distribution by signing the Deed of Renunciation.

There has also been a significant amount of time that passed from when X Family Trust became aware of the distribution and when the trustee provided notice of an intention to disclaim the distribution from the XXFT. The Commissioner considers that the disclaimer was not made in a reasonable time period and in any case the right to disclaim the interest was lost as a result of signing the Deed of Renunciation which accepted the distribution.

It is considered in your circumstances that you have not validly renunciated or disclaimed your interest in the XXFT Trust.