Edited version of private advice

Authorisation Number: 1052166338923

Date of advice: 26 September 2023

Ruling

Subject: CGT - trustee for sale

Question 1:

Did capital gains tax (CGT) event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) occur on the granting of the Court Orders on dd/mm/yyyy?

Answer:

Yes.

Question 2:

Is the total of the first, second or third elements of the cost base of the Property for the purpose of section 110-25 of the ITAA 1997 for the Trustees equal to the capital proceeds on the sale of the Property by the Trustees?

Answer:

Yes.

Question 3:

Did the Trustees make a capital gain on the sale of the Property under Part 3-1 of the ITAA 1997?

Answer:

No

Question 4:

Are the Trustees required to register for a tax file number (TFN) and Australian business number (ABN)?

Answer:

Yes, the Trustees are entitled to an ABN under section 8(1) of the A New Tax System (Australian Business Number) Act 1999 and required to register for a TFN to report assessable income under section 6-5 and allowable deductions under section 8-1 of the ITAA 1997.

Question 5:

Are the Trustees required to report the rental income derived from the Property from the date of the Court Orders until the date of sale?

Answer:

Yes, rental income derived in this period is assessable income of the Trustees under section 6-5 of the ITAA 1997.

Question 6:

If the answer to Question 5 is yes, is the rental income derived in the period from the date of the Court Orders to the date of settlement of the sale of the Property assessable to the Trustees under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes, rental income derived in the above period is income according to ordinary concepts under section 6-5 of the ITAA 1997and is assessable income of the Trustee.

Question 7:

If the answer to Question 5 is yes, can the Trustees deduct the expenses incurred in relation to the Property in the income year ended 30 June 20xx under section 8-1 of the ITAA 1997?

Answer:

Yes, provided that the requirements of section 8-1 of the ITAA 1997 are met.

Question 8:

Do the Trustees have an income tax liability arising from the net income derived in the income year ended 30 June 20xx under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

Yes, the Trustees have an income tax liability under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936).

Question 9:

Are the Trustees required to lodge income tax return for the income year ended 30 June 20xx?

Answer:

Yes

Question 10:

If the balance of net proceeds has not been distributed to the relevant parties by 30 June 20xx will the Trustees have an income tax liability under sections 98, 99 or 99A of the ITAA 1936?

Answer:

Yes. The Trustees have an income tax liability under section 99A of the ITAA 1936.

This ruling applies for the following period

July 20xx - 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

On dd/mm/yyyy the Supreme Court of NSW made Court Orders pursuant to section 66G of the Conveyancing Act 1919 to appoint 2 individuals as trustees for sale (Trustees) of a property (Property).

The Court Orders ordered that the Property vest in the Trustees upon the statutory trust for sale (Statutory Trust).

Prior to the date of the Court Orders the Property was owned by 2 entities X and Y (Owners) and was subject to a Lease.

Subsequent to the Court Orders the Owners continued to receive rental income from the Lease and incurred rental expenses.

The Trustees entered into a contract for the sale of the Property and settlement took place in the income year ended 30 June 20xx.

The Trustees distributed the net sale proceeds in accordance with the Court Orders.

The Trustees incurred costs such as legal fees, trustee fees and agent commission.

The Trustees have retained an amount to cover any potential tax liabilities and to discharge trustee obligations.

Relevant legislative provisions

A New Tax System (Australian Business Number) Act 1999 section 8(1)

A New Tax System (Australian Business Number) Act 1999 section 41

A New Tax System (Goods and Services Act) 1999 section 9-20

A New Tax System (Goods and Services Act) 1999 section 184-1

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 subsection 97(1)

Income Tax Assessment Act 1936 subsection 99(1)

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99A(2)

Income Tax Assessment Act 1936 subsection 99A(3)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 subsection 109-5(1)

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(1)

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 section 104-10

Income Tax Assessment Act 1997 section 104-10

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

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 need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Questions 1, 2, 3

Legislative references to these questions are to the Income Tax Assessment Act 1997 unless otherwise stated

Subsection 104-10(1) provides that 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 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? (ATOID 2009/129).

According to ATOID 2009/129 on the making of the court order the whole of the co-owners' interests in the property vested in the accountants appointed as trustees for the sale of the property; and the co-owners' interests were converted into personalty, that is, into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests.

Therefore, the making of the Court Orders on dd/mm/yyyy vested the Owners' interests in the Property in the Trustees. It is considered that the making of the Court Orders effects a disposal of the Property from the Owners to the Trustees for sale by operation of law and CGT event A1 happened.

The Trustees are taken to have acquired the Property on dd/mm/yyyy.

The cost base of the Property to the Trustees is governed by subsection 110-25 of the ITAA 1997. Subsection 110-25(2) sets out the first element of the cost base of a CGT asset.

The first element is the total of:

(a)     the money you paid, or are required to pay, in respect of acquiring it; and

(b)     the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).

At the time of the Court Orders the Trustees did not pay anything and did not give any other property for the acquisition of the Property. Due to the nature of this arrangement, the Commissioner considers that the market value at the time of acquiring the Property is equal to the net proceeds of sale that will be paid to the Partners. The first element of the cost base is, therefore, the net proceeds of the sale.

Any costs deducted from the sale price including legal fees, trustee fees and agent commission will form part of the second or third element of the cost base pursuant to subsections 110-25(3) and 110-25(4).

Therefore, the total of the first, second and third elements of the cost base to the Trustees will equal the capital proceeds, being the money the Trustees received in respect of the sale of the Property.

The Trustees did not make a capital gain on the sale of the Property.

Questions 4, 5, 6, 7 and 9

The Trustees are entitled to an ABN and are required to register for a TFN and to report the rental income derived from the Property for the period ending 30 June 20xx.

As rental income until the settlement of the sale of the Property is income according to ordinary concepts under section 6-5 of the ITAA 1997and is assessable income of the Trustee.

Rental related expenses incurred in the relevant periods are allowable under section 8-1 of the ITAA 1997 if the requirements are met.

Paragraphs 254(1)(a) and 254(1)(b) of the Income Tax assessment Act 1936 (ITAA 1936) state that a trustee shall be answerable as taxpayer for the doing of all such things as are required to be done in respect of the income, or any profits or gains of a capital nature, derived by him or her in his or her representative capacity and shall in respect of that income, or those profits or gains, make the returns and be assessed thereon, but in his or her representative capacity only.

As the Trustees derived rental income and had allowable deductions, a TFN is required so that the Trustees can make the tax return for the income year ended 30 June 20xx.

The Australian business number (ABN) is a single, unique business identifier to be used by entities that are entitled to it. 'Entity' is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act) to have the meaning given by section 184-1 of the A New Tax System (Goods and Services Act) 1999 (GST Act). A trust is an entity for the purpose of section 184-1 of the GST Act.

Under section 8(1) of the ABN Act an entity is entitled to an ABN if it carries on an enterprise in Australia. 'Enterprise' is defined in section 41 of the ABN Act to have the meaning given by section 9-20 of the GST Act.

Section 9-20 of the GST Act defines "enterprise" to include an activity, or a series of activities, done in the form of a business.

In this case the Trustees held ownership of a commercial property on trust subject to a leasing arrangement. Such activity amount to the carrying on an enterprise.

The Trustees are therefore, entitled to an ABN. The relevant entity is the Statutory Trust, with the Trustees as the legal person taken to be the trust entity and hold the ABN for the trust. There will only be one ABN registration for the trust and only one ABN issued irrespective of the number of trustees for the trust.

Whether the Trustees are required to register for GST depends on whether the turnover exceeds the GST registration turnover threshold determined under section 23-15 of the GST Act.

Questions 8

Legislative references to these questions are to the Income Tax Assessment Act 1936 unless otherwise stated.

Division 6 of Part III contains rules for assessing the net income of a trust estate calculated under section 95.

Under section 95 the net income of a trust (effectively its taxable income) is its assessable income for the year less allowable deductions worked out on the assumption that the trustee is a resident.

Generally, the net income of a trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust's income if they are 'presently entitled' to that share regardless of when or whether the income is actually paid to them.

The net income of the trust must be measured in respect of a distinct period. The relevant period over which the income of the trust must be measured is each income year, generally the year ending 30 June. A beneficiary's share of the net income of the trust in any particular income year must be matched to the income year in respect of which the trust's net income is calculated.

A beneficiary is presently entitled to trust income for an income year where they have, by the end of that year, a present or immediate right to demand payment from the trustee. The entitlement will depend on the trust deed and any discretion that the trustee has under the deed to allocate income between beneficiaries.

The trustee will need to provide each beneficiary with details of their share of the net income, so that the beneficiaries can include this amount in their tax returns. The tax law requires a presently entitled beneficiary to include in their assessable income under paragraph 97(1)(a) a share of the net (i.e. taxable) income of the trust. To establish this share of net income it is necessary for the trustee to:

•         calculate the amount of income of the trust that the beneficiary is presently entitled to, as a percentage of the total distributable income; and

•         apply that percentage to the net income of the trust estate.

A beneficiary will only be presently entitled to trust income if the trustee passes the resolution determining the specific beneficiaries by 30 June. For tax purposes, an entitlement in respect of a particular income year must exist by 30 June; otherwise the trustee will be assessed.

In this case the Owners continued to receive rental income and incur expenses after the date of the Court Orders. The Trustees did not take any action concerning the rental of the Property as they considered the rental income continued to be derived by the Owners.

As the amounts of rental income and rental deductions form part of the calculation of the net income of the Statutory Trust and the Trustees did not establish these amounts, the net income of the Statutory Trust and the beneficiaries' shares of the net income for the income year ended 30 June 20xx had not been ascertained correctly. As a result, the Trustees could not have passed a resolution by 30 June 20xx with respect to the amount of net income that had not been ascertained.

Accordingly, to the extent that an amount of net income that had not been ascertained and dealt with by way of a resolution by 30 June 20xx the Trustee will be assessed under section 99A.

Question 10

Where the income of the Statutory Trust comprises of an amount retained by the Trustees to cover any potential tax liabilities and to discharge trustee obligations, the beneficiaries' shares of the net income with respect to this amount has not been ascertained by 30 June 20xx. Accordingly, the Trustees will be assessed under section 99A of the ITAA 1936 in relation to this amount.