Edited version of private advice

Authorisation Number: 1052127449770

Date of advice: 27 June 2023

Ruling

Subject: CGT - absolute entitlement

Question 1

Is Individual A as the primary beneficiary absolutely entitled to the property?

Answer

No

Question 2

Will the capital gains tax event E7 (CGT event E7) happen to the Trustee of the Trust when it transfers its legal ownership of the property to Individual A and Individual B as beneficiaries?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The Trust is a discretionary trust was established in 19XX.

Individual A and Individual B were the original trustees of the Trust.

In 19YY, under the Deed of Appointment of New Trustee, Individual A and B retired as trustees of the Trust and the Company (Trustee Company) was appointed as the new trustee.

Individual B is the director of the Trustee Company.

Individual A is the secretary of the Trustee Company.

The Trust Deed provides that the Eligible Beneficiaries or Beneficiaries at any time means the Primary Beneficiary and the Associates of the Primary Beneficiary. Associate in relation to a Primary Beneficiary includes the Specified Relatives of the Primary Beneficiary.

The Trust Deed provides that Specified Relative in relation to a Primary Beneficiary means any parent grandparent brother sister Spouse widow widower child and grandchild of the Primary Beneficiary.

The Trustee Company is the legal owner of the land.

Individual A and B used their own money to fund the land purchase and built their home on the land.

The home loan was in the name of the Company; however, Individual A and B personally paid the home loan by transferring their own fund to Company's account.

Most utilities bills are in Company's name, Individual A and B personally paid for the bills by transferring their own fund to Company's account.

The home insurance policy was in Individual A's name.

The Trust does not run any business.

The Trust has never distributed income or had a bank balance more than was required to satisfy immediate outgoings.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Question 1

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring.

Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property, or a legal or equitable right that is not property. CGT assets include part of or an interest in property or a legal or equitable right that is not property.

Subsection 104-10(3) of the ITAA 1997 provides that you dispose of a CGT asset when you either enter into a contract for its disposal, or where no contract exists, when the change of ownership occurs.

When considering the sale of property, the most important element in the application of the CGT provisions is ownership. It must be determined who had ownership of the property.

The legal owner of the property is recorded on the title deed for the property issued under that State's legislation. It is possible for legal ownership of property to differ from beneficial ownership. An individual can be a legal owner but have no beneficial ownership in an asset. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. A beneficial owner is defined as a person or entity who is beneficially entitled to the asset.

To prove that a different equitable interest exists, there must be evidence that a trust has been established - such that one party is taken merely to hold their interest in the property for the benefit of the other.

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), examines the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'.

The foundation that supports the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a secured and unbeatable interest in the entire trust asset, to call for that asset to be transferred to them or to be transferred to someone else at their direction.

Paragraph 23 TR 2004/D25 states that if there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to be absolutely entitled to the asset. In such cases, absolute entitlement can only be established if the assets are fungible. A dwelling is not a fungible asset.

Paragraph 54 of TR 2004/D25 adds that 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. The same goes for a single asset that is property.

Application to your circumstances

The Trust Deed provides that the Eligible Beneficiaries or Beneficiaries at any time means the Primary Beneficiary and the Associates of the Primary Beneficiary. Associate in relation to a Primary Beneficiary includes the Specified Relatives of the Primary Beneficiary.

The Trust Deed further provides that Specified Relatives in relation to a Primary Beneficiary means any parent grandparent brother sister Spouse widow widower child and grandchild of the Primary Beneficiary.

Individual A is the Primary Beneficiary, but Individual A is not considered the sole beneficiary of the Trust. This is on the basis that the Trust Deed does not provide that one specific beneficiary has ownership of the property. Further, Individual B being the spouse, is considered an "Associate of the Primary Beneficiary" and therefore is also a beneficiary of the Trust. Accordingly, as there are multiple beneficiaries of the Trust, none of the beneficiaries can be absolutely entitled to an ownership interest in the Property.

Question 2

Section 102-5 of the ITAA 1997 includes in assessable income any 'net capital gain' made by the taxpayer in an income year. Section 100-20 of the ITAA 1997 states that a taxpayer makes a capital gain (or loss) only if a 'CGT event' happens.

Division 104 of the ITAA 1997 sets out all the CGT events for which a taxpayer can make a capital gain or loss. If more than one event applies you use the one that is most specific to your circumstances.

Section 104-85 of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. CGT event E7 can result in a capital gain arising for the trustee of a trust and/or for a beneficiary or beneficiaries in a trust.

The trustee of the trust makes a capital gainfrom CGT event E7 if the market value of the asset disposed of by it to the beneficiary is more than its cost base (subsection 104-85(3)) unless the asset was acquired before 20 September 1985 (subsection 104-85(4)).

Application to your circumstances

In your case, the Trustee is intending to transfer the property to the beneficiaries of the Trust. The transfer will be a change of ownership and CGT event E7 will occur at the time of transfer. As a result, the Trustee of the trust makes a capital gainfrom CGT event E7 if the market value of the asset disposed of by it to the beneficiary is more than its cost base.