Edited version of private advice

Authorisation Number: 1051991882386

Date of advice: 7 June 2022

Ruling

Subject: Capital Gains Tax

Question

Is the trustee of the Blue Family Trust (the Family Trust) permitted to choose to obtain roll-over relief in relation to the distribution of the property located in a capital city (the Property) and shares in the listed companies (the Shares) pursuant to Subdivision 122 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period

Year ended 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

BACKGROUND:

Blue Pty Ltd (Blue Co)

1.    Blue Pty Ltd (Blue Co) is a trustee company. It has never undertaken any activities in its own right. All activities it has carried on were in its capacity as trustee of the Blue Family Trust (the Family Trust) and as trustee of the Blue Superannuation Fund.

a.         The shareholders of Blue Co are Mr and Mrs Blue, each holding 50% of the shares.

b.         Mr and Mrs Blue are the current directors of Blue Co.

The Blue Family Trust (the Family Trust):

2.         On 31 December 1980, the Family Trust was settled with Blue Co as trustee.

3.         The Specified Beneficiaries of the Family Trust are the children of Mr and Mrs Blue. Broadly, the Beneficiaries of the Family Trust are the parents, siblings, spouses and similar family members of the Specified Beneficiaries, and any corporations or trusts in which any beneficiary has an interest.

4.         Clause 1.(6) of the Trust Deed defines "the Vesting Day" as the first of the following dates:

(i)        the day if any specified described or defined as such in the Schedule;

(ii)       the date of expiration of the perpetuity period applicable to this Settlement;

(iii)      the day appointed by the Trustees with the consent of the Guardian;

(iv)      (if there be no living Guardian) the day appointed by the Trustees.

5.         The Schedule of the Trust Deed prescribes the Vesting day as 79 years from the date of the Deed.

Assets of the Trust:

6.         On XX/XX/XXXX, the trustee purchased real property located at 20 xxx Lane in a capital city (the Property). Blue Co is the sole name registered on the title of the Property. All income and expenditure associated from the Property has been reported by the Company in its capacity as trustee.

7.         The trustee holds shares in ten listed companies (the Shares). Although the share certificates do not record that the Shares are held by the Company in its capacity as trustee of the Family Trust, all income and expenditure associated from the Shares has been reported by the Company as trustee.

a.         Each shareholding has been built up from numerous small parcel share purchases over many years. Due to this, the purchase dates of the parcels are not readily available but occurred after 20 September 1985.

8.         The trustee also holds cash at bank. The sources of these funds at bank are from dividends received from shareholdings and the proceeds of the sale of property at 55 yyy Street in a capital city.[1]

Activities of the Family Trust:

9.         The Family Trust's sole source of income is from the assets it holds, it does not undertake any business activities.

Proposed arrangement:

10.      The trustee proposes to vest the Trust sometime during the year ended 30 June 20xx and make a distribution of the assets of the trust fund in favour of Blue Co (in its own capacity).

11.      The receipt of amounts which previously represented income from the Trust will, as a result of the proposed arrangement, become receipts of Blue Co from which the company will declare dividends in favour of the shareholders.

Anti-avoidance rules

Part IVA is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision

Question 1

Is the trustee of the Family Trust permitted to choose to obtain roll-over relief in relation to the distribution of the Property and the Shares pursuant to Subdivision 122?

CAPITAL GAINS TAX

12.      Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)[2] provides that a taxpayer may make a capital gain or loss when a capital gains tax (CGT) event occurs to a CGT asset. Subsection 108-5(1) defines a CGT asset as any kind of property or a legal or equitable right that is not property.

a.         Cash at bank is not considered to be a CGT asset.

CGT events:

13.      Section 104-5 of the sets out a list of CGT events. Where more than one CGT event[3] can occur in relation to a transaction, the CGT event which is the more specific CGT event is the applicable one.

CGT event A1 - disposal of a CGT asset:

14.      CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1). Subsection 104-10(2) states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity.[4]

15.      Paragraph 104-10(3)(a) of the provides that the timing of the CGT event will be when the contract to dispose of the asset is entered into by the taxpayer. Paragraph 104-10(3)(b) explains that if there is no contract, the time of disposal will be when the change of ownership occurred.

a.         Subsection 104-10(5) provides that a capital gain or loss made under CGT A1 will be disregarded for CGT assets acquired before 20 September 1985.

CGT event E5 - beneficiary becoming absolutely entitled to a trust asset:

16.      CGT event E5 will occur when a beneficiary of a trust becomes absolutely entitled to a CGT asset pursuant to section 104-75. Subsection 104-75(2) provides that the timing of the event is when the beneficiary becomes absolutely entitled.

a.         Subsection 104-75(6) provides that a capital gain or loss made under CGT E5 will be disregarded for CGT assets acquired before 20 September 1985.

17.      Guidance on the Commissioner's interpretation of the meaning of the term 'absolutely entitled' for the purposes of the CGT provisions is found in 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). Paragraph 10 of TR 2004/D25 explains broadly that absolute entitlement will be present where a beneficiary, who has a vested and indefeasible interest in an entire trust asset, has the ability to call upon the trustee for the asset to be transferred to them or at their direction.

a.         Absolute entitlement will not generally be present where interest in a trust asset is held by more than one beneficiary.[5]

Application to your circumstances:

18.      The trustee of the Family Trust proposes to vest the Trust sometime during the year ended 30 June XXXX. Upon vesting, the Trustee proposes to distribute the Trust assets, comprising of the Property and Shares, in favour of Blue Co (in its own capacity) in accordance with clause 5 of the Trust Deed.

a.         You have not explained how the cash at bank held by the trustee will be dealt with upon the vesting of the Family Trust. However, as cash at bank is not a CGT asset, this is not relevant for the purposes of this ruling.

19.      As the Property and Shares are property, they are CGT assets pursuant to subsection 108-5(1).

20.      The distribution of the Property and Shares in favour of Blue Co represents the disposal of CGT assets by the trustee and therefore CGT event A1 will occur, pursuant to subsection 104-10(1).

21.      The distribution of the Property and Shares at vesting in favour of Blue Co will give the company a vested and indefeasible interest in both assets in their entirety. Hence, Blue Co will have absolute entitlement to the whole of the trust assets as it is able to call upon its entitlement as against the trustee and CGT event E5 will also be triggered in accordance with section 104-75.

a.         The Property was purchased on after 20 September 1985 and the exemptions in subsections 104-10(5) and 104-75(6) will not apply to disregard any capital gain or loss made under CGT events A1 and E5.

b.         Similarly, although the exact date of the purchase of the Shares is not known, they were nevertheless acquired after 20 September 1985. Consequently, the exemptions in subsections 104-10(5) and 104-75(6) will not apply to disregard any capital gain or loss made under CGT events A1 and E5.

22.      Given that the proposed disposal of the Property and Shares by the trustee by way of a distribution in favour of Blue Co will trigger both CGT events A1 and E5, the more specific event, being CGT event E5, will be applicable.

Roll-over for the disposal of assets to a wholly owned company:

23.      Subdivision 122 provides for roll-over relief where a CGT asset is disposed by a taxpayer to a company in which that taxpayer is the sole shareholder. In particular, section 122-15 provides that taxpayer who is either an individual or trustee can elect to obtain a roll-over with regards to one of the following CGT events:

24.      The example in section 122-15 illustrates the necessity for the taxpayer disposing of the asset to the company to be the sole shareholder of that company:

Example:

Gavin runs a plumbing business. He wants to incorporate it so he disposes of all its assets to a company. He becomes the sole shareholder of the company.

25.      Broadly, section 122-20 provides that the consideration, that the taxpayer disposing of the CGT assets which triggers the CGT event, must only be shares in the company.

26.      Consistent with the example in section 122-15, section 122-25 stipulates that the taxpayer disposing of the assets must own all the shares in the company just after the CGT event.

Application to your circumstances:

27.      In order to access the roll-over relief Subdivision 122, it is necessary to establish that the distribution of the Property and the Shares by the trustee of the Family Trust to Blue Co will give rise to a CGT event that is listed in the table in section 122-15.

28.      The distribution of the Property and the Shares by the trustee represents the disposal of CGT assets such that CGT event A1 is triggered. However, as explained above, it is also the case that Blue Co will have absolute entitlement to the Property and Shares through the distribution of the assets by the trustee such that CGT event E5 will also occur. With CGT event E5 being the more specific event, it is this event that is relevant in considering whether roll-over relief can be accessed. As CGT event E5 is not one of the events listed in the table in section 122-15, the first criteria for roll-over will not be satisfied.

29.      Even if section 122-15 was able to be satisfied such that the proposed distribution of the Property and the Shares to Blue Co is an event that is listed in the table, which is not accepted, the distribution will not satisfy section 122-25. That is, the trustee of the Family Trust, as the taxpayer disposing of the CGT assets, does not own all the shares in the company.

a.         Mr and Mrs Blue each own 50% of the shares in Blue Co.

30.      You submit that guidance material provided on www.ato.gov.au (Website Guidance) indicates that the trustee of the Family Trust may be eligible to choose to access roll-over relief for the disposal of the Property and Shares, quoting the following:

Other replacement asset rollovers:

You may be able to defer a capital gain or capital loss when you replace an asset in the following circumstances:

•               an individual or trustee disposes of assets to, or creates assets in, a wholly owned company

...

Other same asset rollovers:

You may be able to defer a capital gain or capital loss when you transfer of dispose of assets in the following circumstances:

•               an individual or trustee transfer a CGT asset to a wholly owned company

...

•               a trust disposes of a CGT asset to a company under a trust restructure

31.      The Website Guidance material makes it clear that the deferral of a capital gain or loss may be available if the circumstances listed in the dot points are present. The use of the word 'may' is deliberate to indicate that the Website Guidance is a high level explanation of when deferral might be available in certain situations, it is not a full analysis of all the necessary criteria that must be satisfied in order to access the concession. Consequently, it does not provide a detailed analysis of all scenarios. Despite this, the Website Guidance is consistent with the explanation provided in the proceeding paragraphs in that requirement of the company to which the assets are disposed be wholly owned by the trustee[6]. This is not present in the current case, as Mr and Mrs Blue each hold 50% of the shareholding in the company. Blue Co is not 100% owned by the trustee of the Family Trust. Nor is the disposal of the CGT assets part of a trust restructure but rather the distribution of trust assets to a beneficiary of the Family Trust.

a.         The term 'trust restructure' in the Website Guidance material refers to a scenario where a business activity is undertaken by a trust and business activity, and therefore the associated CGT assets, are transferred to a company structure.

32.      As a result, the Website Guidance does not support the conclusion that the trustee of the Family Trust will be eligible to choose roll-over relief for the proposed distribution of the Property and the Shares to Blue Co.

33.      In conclusion, as the disposal of the Property and Shares to Blue Co will trigger CGT event E5 and the shares in the company are not wholly owned by the trustee of the Family Trust, the trustee will not be eligible to choose to obtain roll-over relief for the proposed disposal pursuant to Subdivision 122.

[1] Property was sold on 31 January 20xx.

[2] All future references to the legislation are to the Income Tax Assessment Act 1997, unless otherwise stated.

[3] except for CGT events D1 and H2.

[4] However, subsection 104-10(2) of the ITAA 1997 also provides that a change in ownership will not occur is the taxpayer ceases to be the legal owner of the asset but continues to be its beneficial owner.

[5] See paragraph 20 of TR 2004/D25.

[6] or individual, which is not relevant to the current case.