Edited version of private advice

Authorisation Number: 1051968838309

Date of advice: 13 April 2022

Ruling

Subject: Sale of property by statutory trustee

Question 1

Did the Trustees acquire the Property as a CGT asset under Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the court order?

Answer

Yes

Question 2

Are the proceeds from the sale of the Property assessable to the Trustees under section 6-5 of the ITAA 1997, as a result of an 'isolated transaction' carried out for profit and commercial in character?

Answer

No

Question 3

Do the Trustees have a capital gain under section 100-45 of the ITAA 1997 as a result of CGT event A1 arising on the sale of the Property?

Answer

No

Question 4

Do the Trustees have an income tax liability arising from the sale of the Property under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A and Company B (the Companies) purchased land (the Property) as tenants in common in equal shares.

The Companies are in dispute as to their ownership interest and proportion in the Property. Their dispute is being progressed in Supreme Court of X.

The Companies intended to develop the Property. Development applications were lodged but were rejected by the local council.

The Property is currently vacant land zoned for Mixed Use. It can be used for residential home occupation as well as business and office land use. The Property is not included in a property subdivision plan.

Recently, the Supreme Court of X made an order (Court Order) appointing Individual A and Individual B (the Trustees) as statutory trustees to sell the Property.

Order 1 of the Court Order provides that the Trustees are appointed as statutory trustees for the sale of the Property. Order 2 of the Court Order provides that the Property vests in the Trustees, to be held upon the statutory trust for sale.

Order 3 of the Court Order empowered the Trustees to offer the Property for sale in its present condition without the requirement to undertake any repairs, maintenance and improvements and to sell the Property at the best price by private treaty or public auction.

Order 5 of the Court Order provides that the Trustees are to pay out of the proceeds of sale of the Property certain costs and expenses and to deposit the balance of the sale proceeds into an interest-bearing account, to be held in accordance with any terms of settlement reached or order(s) made in respect of either Supreme Court of X Proceedings in relation to the Property matter.

Under Order 8 of the Court Order, the Trustees are permitted to retire as statutory trustees for the sale of the Property upon completion of the sale and distribution of the monies referred to in Order 5.

In accordance with the Court Order, the Trustees undertook activities to sell the Property in its present condition. The activities undertaken by the Trustees included the following:

•                    Appointed joint real estate agents to market and sell the Property. A marketing campaign was conducted by the agents, with a two round Expressions of Interest (EOI) process.

•                    Obtained a market valuation of the Property.

•                    Obtained a town planning report used by the Trustees in their due diligence exercise of the Property.

At the conclusion of the EOI process, the Trustees had received 3 offers. The Trustees decided to proceed with an offer which matched the highest offer but provided better terms resulting in a better outcome for the Trustees.

The Trustees exchanged contracts with completion occurring in the same income year.

The Trustees did not undertake any repairs, maintenance and improvements on the Property. The Trustees did not obtain a development approval and seek a subdivision of the Property. The Property was marketed and sold in its present condition.

The Trustees' activities have been, and will continue to be, confined to those prescribed in the Orders, being to sell the Property and distribute the proceeds.

The Trustees will not derive any income (such as rental income, interest income or trading income) during the course of holding the Property other than proceeds from the sale of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6 of Part III

Income Tax Assessment Act 1936 sections, 98, 99, and 99A

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 subsection 110-25(3)

Income Tax Assessment Act 1997 subsection 110-25(4)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 subsection 116-20(5)

Income Tax Assessment Act 1997 section 116-30

Reasons for decision

Question 1

Summary

Per the Court Order, the Trustees are vested with a proprietary right over the Property of which they have fiduciary duties. As there was no contract for disposal, CGT event A1 occurred upon the change ownership when the Property vested in the Trustees as a result of the Court Order. Therefor it is the statutory trust and the Trustees who are subject to income tax under Division 6 of Part III of the Income Tax Assessment Act (ITAA 1936).

Detailed reasoning

Division 6 of Part III of the ITAA 1936 applies to trust estates with the effect that any income derived by the trustee is taxed in either the hands of the beneficiaries, the trustee or both of them. The term trust estate is not defined in the income tax legislation and takes its ordinary meaning.

A trust estate requires some proprietary right held by the trustee. In Deputy Federal Commissioner of Taxation v Trustees of the Wheat Pool of Western Australia [1932] HCA 15, Dixon J observed of the phrase "income of the trust estate" that "the income must arise or be derived by the trustee in virtue of some property or right in the nature of property which is vested in him or is under his control or of which he is a fiduciary".

Order 1 of the Court Order provides that the Trustees are appointed as statutory trustees for the sale of the Property. Order 2 of the Court Order provides that the Property vests in the Trustees to be held upon the statutory trust for sale. On this basis, it is accepted that the Trustees are vested with a proprietary right over the Property of which they have fiduciary duties. Therefore, the statutory trust and the Trustees are subject to income tax under Division 6 of Part III of the ITAA 1936.

CGT event A1 happens when you dispose of a CGT asset (subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).

In this case the Court Order effected a disposal of the Property from the Companies to the Trustees, such that CGT event A1 occurred (ATO Interpretive Decision 2009/129 Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1?).

As there was no contract for the disposal of the Property by the Companies, CGT event A1 occurred upon the change ownership when the Property vested in the Trustees as a result of the Court Order (subsection 104-10(3) of the ITAA 1997).

Question 2

Summary

Proceeds from the sale of the Property are not assessable to the Trustees as ordinary income under section 6-5 of the ITAA 1997, either because the Trustees are carrying on a business or as a result of an 'isolated transaction' carried out for profit and commercial in character.

Detailed reasoning

Under section 6-5 of the ITAA 1997, the assessable income of a taxpayer includes income according to ordinary concepts. For the Trustees, this may arise where the Trustees meet the indicia of carrying on a business in relation to dealing with the Property, or the requisite intention of the Trustees to make a profit or gain at the time of Property acquisition is proven.

In this case, the Trustees did not acquire the Property with the intention to profit from its sale. In dealing with the Property the Trustees activities were limited to appointing a real estate agent to market and sell the Property, obtaining a market valuation and town planning report. The Trustees' activities did not amount to carrying on a business of dealing in property. Therefore, no part of the proceeds or profit from the sale of the Property will be ordinary income under section 6-5 of the ITAA 1997.

Question 3

Summary

The total proceeds from the sale of the Property will not exceed the Trustees costs base, therefor the Trustee does not make a capital gain from the CGT event A1.

Detailed reasoning

CGT event A1 happened when the Trustee entered a contract to dispose of the Property (section 104-10 of the ITAA 1997). A capital gain will therefore be made by the Trustees in the income year ending 30 June 20XX, if the capital proceeds from the event are more than the asset's cost base (section 100-45 of the ITAA 1997).

Pursuant to subsection 116- 20(1) of the ITAA 1997, the capital proceeds for the event are the total of the money the Trustee received (or is entitled to receive) in respect of the event happening and the market value of any other property the Trustee received (or is entitled to receive) in respect of the event happening. The GST payable on the sale of the Property is not included in the capital proceeds (subsection 116-20(5) of the ITAA 1997).

Section 116-30 of the ITAA 1997 provides that the capital proceeds may be replaced with the market value of the property where:

•                    some or all of those proceeds cannot be valued; or

•                    those capital proceeds are more or less than the market value of the asset and: (i) the taxpayer and the purchaser of the asset did not deal with each other at arm's length in connection with the event; or (ii) the event is CGT event C2.

It is accepted the market value substitution rule (section 116-30 of the ITAA 1997) does not apply, given the sale of the Property was at arm's length, resulting from a marketing process that was open to the public and the event is not a CGT event C2.

Under subsection 110-25(2) of the ITAA 1997, the first element of the cost base of the Property is the sum of the amount paid by the Trustee (or required to be paid) and the market value of the property given (or required to be given) in respect of acquiring it.

It is accepted that the Trustees obligation under the Court Order to pay the net proceeds to the former owners will also be their cost of acquisition for the purposes of the first element of the costs base under subsection 110-25(2) of the ITAA 1997. This net proceed amount being 'the money they are required to pay' for the acquisition of the Property.

The second element of the cost base is the incidental costs incurred in respect of the Property, such as agent fees, settlement costs, sales advertising/marketing costs, legal costs, valuation costs and transfer costs (110-25(3) of the ITAA 1997).

The third element of the costs base includes the costs of owning the Property, including maintenance costs, insurance, rates and land tax (subsection 110-25(4) of the ITAA 1997).

It is accepted that all costs incurred by the Trustees in holding and selling the Property including the Trustees' remuneration will form part of the second element and third elements of the Trustee's cost base for the Property.

The Trustees' total tax cost base in this case being the first element (net proceeds) and second/third element (holding and selling costs) will equal the capital proceeds from the sale of the Property. Accordingly, the Trustee will not make a capital gain under section 100-45 of the ITAA 1997 from the sale of the property as the capital proceeds from the CGT event A1 will not exceed the Trustees' cost base.

Question 4

Summary

As there is no net income of the Statutory Trust for the income year, sections 98, 99 and 99A of the ITAA 1936 do not apply and the Trustees will not have an income tax liability.

Detailed reasoning

The Liability to taxation provisions in Division 6 of Part III of the 1936, specifically Sections 98, 99 and 99A only apply where there is net income of the trust estate.

The Property sale in this case does not give rise to a capital gain for the Trustees. The Trustees also will not derive any income from the Property during their ownership period. The Trustees will therefore not derive any net income for the statutory trust for the income year ending 30 June 20XX.

As there is no net income of the statutory trust for the income year ending 30 June 20XX, sections 98, 99 and 99A of the ITAA 1936 do not apply.