Edited version of private advice

Authorisation Number: 1051947402965

Date of advice: 14 February 2022

Ruling

Subject: CGT - Trust - disposal

Question

Will the title transfer be exempt from capital gains tax?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The trust was established by Z in XXXX.

Z's sole purpose in establishing the trust was to provide ongoing help and security for Z's adult child W, and W's young children.

The trust purchased a property for W and W's children to live in.

The property has always been the trust's only asset.

The property was never used as an investment and never generated any income.

The trust deed lists the primary beneficiaries as W and W's children.

The trust deed states that the general beneficiaries include the primary beneficiaries as well as the respective children, brothers, sisters and grandchildren of the primary beneficiaries.

Z has died and title to the property will now be transferred to W.

In their will, Z made allowance for the money originally advanced to the trust to buy the property to be considered in the calculation of W's share of their estate's distribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 subsection 128-15(3)

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that capital gains tax (CGT) is incurred when a CGT event takes place, and you make a gain from the event.

CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else. Land and buildings are CGT assets. CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part interest, in the trust capital (section 104-85 of the ITAA 1997).

Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property occurs and this is treated as a disposal for CGT purposes. CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. If more than one event can happen, the one you use is the one that is the most specific to your situation (section 102-25 of the ITAA 1997). CGT event E7 is more specific to this situation.

Main residence exemption

Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling if:

• you are an individual (paragraph 118-110(1)(a) of the ITAA 1997)
• the dwelling was your main residence for the whole period it was owned
• you have not used the dwelling to produce assessable income, and
• any land on which the dwelling is situated on and adjacent to is two hectares or less

In your case, as the property is owned by a trust, and a trust is not an individual, you are not entitled to apply the main residence exemption under section 118-110 of the ITAA 1997.

Asset of a trust

A CGT event in relation to an asset of a trust happens to the trustee on behalf of the trust unless a beneficiary is absolutely entitled to the asset. Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the ITAA 1997 states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary.

Example:

An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee.

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

A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is:

•         absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and

•         able to direct the trustee how to deal with the asset.

Multiple Beneficiaries

The core principle underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. However, if there is some basis upon which the trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust.

TR 2004/D25 states if there is more than one beneficiary with interests in a trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. Paragraph 24 of TR 2004/D25 advises that there is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

• the assets are fungible (for example, shares in the same company and with the same characteristics);
• the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and
• there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

Paragraph 54 of TR 2004/D25 states the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it.

Application to your circumstances

Your situation involves you as the trustee having legal ownership in the trust asset being property you've held for the benefit of W and W's children.

W and W's children are the primary beneficiaries who have interests in this asset of the trust being real property. You intend to distribute the trust asset by way of transfer to W. For a beneficiary to have absolute entitlement, the trust asset is to be a fungible asset and easily divisible. Real property is not a fungible asset and the trust asset cannot be easily divided.

Neither the Declaration of Trust nor the trust deed provide any beneficiary with a vested and indefeasible interest in the whole of the property. Nor does the Declaration of Trust or the trust deed authorise any beneficiary alone to call for the property to be transferred to them or be transferred at their sole direction.

Consequently, W is not absolutely entitled to the property as against you the trustee. Therefore, CGT event E7 will happen to the trust, as the current owner of the property for CGT purposes, when the property is transferred to W.

Not an asset of Z's estate

It is acknowledged that in their will, Z made allowance for the money originally advanced to the trust to buy the property, to be considered in W's share of their estate's distribution. However, this does not mean that the property formed part of Z's estate. The property is owned by the trust and therefore cannot be an asset of Z's estate. Consequently, the exemption from CGT provided under subsection 128-15(3) of the ITAA 1997 on the passing of an estate asset to a beneficiary of the estate does not apply in this case.