Edited version of private advice

Authorisation Number: 1052080712085

Date of advice: 31 January 2023

Ruling

Subject: CGT - statutory trustees

Question 1

Are the trustees taken to have beneficially acquired Lots 3 to 62 following the Court order, in accordance with Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the trustees are taken to have beneficially acquired the Lots following the Court order.

Question 2

If the answer to Question 1 is Yes, will the first element of the trustees' cost base of Lots 3 to 62 be equal to the net proceeds from sale which is to be paid to the beneficiaries on settlement in accordance with the Court order?

Answer

Yes, the first element of the trustees' cost base of Lots 3 to 62 be equal to the net proceeds from sale which is to be paid to the beneficiaries on settlement in accordance with the Court order.

Question 3

Will the disposal of the Lots by the statutory trustees result in a taxable capital gain for the trustees?

Answer

No, the disposal of the Lots by the statutory trustees will not result in a taxable capital gain for the trustees.

Question 4

Will the proceeds from the sale of the Lots be treated as ordinary income 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, the proceeds from the sale of the Lots will not be treated as ordinary income under section 6-5 of the ITAA 1997 as a result of an isolated transaction carried out for profit and commercial in character.

Question 5

Will the trustees have an income tax liability under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No, the trustees will not have an income tax liability under sections 98, 99 or 99A of the ITAA 1936.

Question 6

Do the trustees have an obligation to lodge an income tax return in respect of the year the Lots are sold?

Answer

No, the trustees do not have an obligation to lodge an income tax return in respect of the year the Lots are sold.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Resort consists of a block of apartments with strata-titled lots.

Lots 1 and 2 and the common areas of the resort have been owned by Resort Limited (the company) since the 1980s.

Lots 3 to 62 (the Lots) each have 51 timeshare ownership rights which are held by XXX stakeholders. The company is one of the timeshare owners.

Three individuals were appointed as statutory trustees (the trustees) for sale of lots 3 to 62 (inclusive) of the Resort pursuant to Section 38 of the Property Law Act 1974 by order of the Supreme Court of Queensland.

The Resort is under contract for sale with settlement occurring in 20XX. There are two interdependent contracts: one for the trustees and one for the company.

The purchasing entity is acting at arms' length to the sellers. The trustees and the purchasing entity are willing but not anxious participants in the contract.

Following the sale of the Resort, the trustees will distribute the sale proceeds to the timeshare owners, net of the costs incurred in relation to the sale, as required by the Supreme Court orders.

The trustees have incurred costs in relation to the sale of lots 3 to 62, including real estate agent fees and legal fees. These will be paid by the trustees prior to the distributions of net proceeds to the timeshare owners.

The trustees will have no other sources of income and no assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 100-45

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 116-20

Reasons for decision

Question 1

Subsection 104-10(1) of the ITAA 1997 provides that capital gains tax (CGT) event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) provides that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Paragraph 104-10(3)(b) provides that the time of the event is, if there is no contract, when the change of ownership occurs.

Section 109-5 of the ITAA 1997 provides that you acquire a CGT asset when you become its owner. You are taken to a acquire the asset as a result of CGT event A1 happening when the disposal contact is entered into or, if none, when the disposing entity stops being the assets' owner.

The Commissioner's views on the CGT implications of a Court order appointing statutory trustees for the sale of a co-owned property are discussed in ATO Interpretive Decision ATO ID 2009/129 Income Tax - Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1?

Lots 3 to 62 of the Resort were vested in the trustees via a Supreme Court order in 2022. Consistent with the views expressed in ATO ID 2009/129, the making of the Court order vested the timeshare owners' interests in the Lots to the trustees. In these circumstances it is considered that the making of the Court order effects a disposal of the property from the owners to the trustees for sale by operation of law. Therefore, CGT event A1 happens.

Because there was no contract for the disposal, CGT event A1 is taken to have happened when the change in ownership occurred, which is the time at which the Lots vested as a result of the Court order.

Question 2

Under the general cost base and reduced cost base rules covered under subsections 110-25(2) and 110-55(2) of the ITAA 1997, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of the property given (or required to be given) in respect of acquiring it.

Because the property was vested in the trustees as a result of the Court order, no money was transferred on acquisition of the asset. The Court order confirms an obligation to arrange for the sale of the property and transfer the net proceeds of this sale to the beneficiaries upon settlement.

The Commissioner considers that the first element of the cost base will be equal to the net proceeds that will be paid to the beneficiaries under the obligations of the trustees.

Question 3

Section 100-45 of the ITAA 1997 provides that you have a capital gain if your capital proceeds exceed your cost base, and a capital loss if your reduced cost base exceeds your capital proceeds.

Section 110-25 of the ITAA 1997 provides the elements of the cost base. The second element of the cost base are incidentals incurred.

The trustees have incurred costs from real estate agents, solicitors, and other parties in relation to the performance of their obligations under the Court orders. Those costs will form part of the second element of the trustees' cost base.

As discussed in Question 2, given that the first element of the trustees' cost base will be equal to the net proceeds received by the trustees on settlement of the Lots, the trustees' cost base of the Lots will be equal to the capital proceeds received. Consequently, the trustees' capital gain will be reduced to nil.

The trustees will realise neither a capital gain, nor a capital loss, from the sale of the Lots.

Question 4

Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts.

The Commissioner's views on whether a profit from an isolated transaction is income according to ordinary concepts are discussed in Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income.

A profit from an isolated transaction is generally income when both of the following elements are present:

•         the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

•         the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

The trustees were appointed by a Court to sell the Lots and distribute the net proceeds to the timeshare owners. It is considered that the trustees' activities in carrying out the Court order do not have the indicia of carrying on a business as discussed at paragraph 13 of Taxation Ruling TR 92/3; nor is there the requisite intention of the trustees to make a profit or gain.

Therefore, the proceeds from the sale of the Lots are not ordinary income of the trustees under section 6-5 of the ITAA 1997.

Question 5

Sections 98, 99 and 99A of the ITAA 1936 only apply where there is net income of the trust estate. As discussed in Questions 3 and 4, there will be no capital gain or loss, nor assessable ordinary income, resulting from the sale of the Lots. Therefore, the trustees will not have an income tax liability under sections 98, 99 or 99A of the ITAA 1936.

Question 6

Based on the answer to Question 5, because the trustees will have no net income, the trustees will not be required to lodge an income tax return for the financial year in which the property sale occurs.