Edited version of private advice

Authorisation Number: 1051898177313

Date of advice: 16 September 2021

Ruling

Subject: CGT - transfer of assets held in trust

Question 1

Will a capital gains tax (CGT) event occur if the Trust makes a resolution to distribute a trust asset to you as a Beneficiary?

Answer

Yes.

Question 2

If the Trust makes a capital gain resulting from CGT event E5 happening, will you as the Beneficiary be specifically entitled to Trust's capital gain?

Answer

Yes.

Question 3

Will the main residence exemption apply to disregard the capital gains?

Answer

No.

Question 4

Will the 50% CGT discount be available to reduce the capital gains?

Answer

Yes.

This ruling applies for the following period periods:

Year ending 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Property was purchased by your parents.

The Property was registered in the name of D Family Trust in 19XX.

The beneficiaries of the D Family Trust included your parents, your sibling and you.

In 20XX, you were gifted the Property by your parents, whereby you were made the sole beneficiary of the D Family Trust.

In 20XX, the Property was transferred into the J Family Trust ("J Trust") on the advice of your accountant.

You and your children are beneficiaries of the J Family Trust.

The Property was rented out between 20XX and 20XX.

In November 20XX you began living in the Property as your main residence.

You now wish to transfer the Property from the J Trust to your personal name.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 100-120

Income Tax Assessment Act 1997 - Section 104-75

Income Tax Assessment Act 1997 - Section 115-215

Income Tax Assessment Act 1997 - Section 115-225

Income Tax Assessment Act 1997 - Section 115-228

Reasons for decision

Question 1

Subsection 104-75(1) provides that, subject to certain exceptions, CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

'Absolute entitlement'

Draft Taxation Ruling TR 2004/D25 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 (TR 2004/D25) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

TR 2004/D25 states at paragraph 10 that:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

Provided that the Trust makes a resolution clearly stating that you as a Beneficiary will become absolutely entitled to the property in accordance with the key clauses of the Trust Deed, then you as the Beneficiary will receive a vested and indefeasible interest in the property. Consequently subsection 104-75(1) will be satisfied, and thus CGT event E5 will happen.

Question 2

Subdivision 115-C operates in such a way that beneficiaries of a trust can be specifically entitled to the trust's capital gains.

Section 115-228 outlines when a beneficiary will be regarded as specifically entitled to a trust capital gain (either in whole or in part). To be specifically entitled to the whole gain, there are two key requirements that need to be met:

1. The beneficiary must have received, or reasonably expect to receive, all of the financial benefit referable to the capital gain (see paragraphs (a) and (b) of the definition of 'share of financial benefit' in subsection115-228(1)); and

2. The financial benefit that the beneficiary has received or can be expected to receive has been recorded in the accounts or records of the trust in its character as referable to the capital gain (paragraph 115-228(1)(c)).

ATOID 2013/33 refers to paragraph 2.59 of the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 5) Bill 2011, which states that it may be reasonable to expect that when a beneficiary becomes absolute entitled to a trust asset, the beneficiary will receive the net financial benefit referable to the deemed trust capital gain from CGT event E5.

In the present case, the financial benefits referable to the capital gains is the real Property to be distributed. When you become absolutely entitled to the Property, you will be considered to be the only person that is expected to receive the Property.

As to the second requirement, ATOID 2013/33 notes that the accounts or records would include statements of resolutions and distributions. The trust resolution is a statement of resolution, and therefore will satisfactorily meet the requirement of being recorded in records of the trust.

Therefore, since both requirements will be met upon execution of the trust resolution, it follows that you as the Beneficiary will be regarded as specifically entitled to the relevant capital gains that arises from CGT event E5 happening.

Question 3

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The dwelling is a CGT asset.

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset.

The sale of the property is a CGT event. The CGT event happened in relation to an asset of the trust.

Under section 118-110 of the ITAA 1997 you can disregard a capital gain or capital loss from a CGT event that happens to a CGT asset that is a dwelling or your ownership interest in it if all of the following conditions apply:

•         you are an individual

•         the property is less than two hectares.

•         the dwelling was your main residence throughout your ownership period

•         the ownership interest did not pass to you through a trust or a deceased estate.

As the Trust will make a capital gain as a result of CGT event E5 happening, is not eligible for the main residence exemption.

Question 4

Subsection 115-215(4) allows specifically entitled Beneficiaries to access the CGT discount when a Trust makes a capital gain.

Subdivision 115-A provides that the CGT discount applies to an asset that is acquired at least 12 months before a CGT event happens.

In this case, the Beneficiary will be able to apply the 50% CGT discount because the Trust acquired the CGT asset in 20XX. Therefore, by the time CGT event E5 happens, the Trust will have held the asset for over 12 months.