Edited version of private advice

Authorisation Number: 1052199721056

Date of advice: 5 December 2023

Ruling

Subject: CGT - family trust

Question 1

Will Capital Gains Tax (CGT) event A1 occur for The Family Trust when it transfers its interest in the Property to the individuals?

Answer

Yes.

Question 2

Will CGT event A1 occur forthe individuals when The Family Trust transfers its interests in the Property?

Answer

No.

Question 3

Did the individuals beneficially own the Property from its acquisition date?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The individuals own, in equal proportions, all the shares in the corporate trustee of The Family Trust.

The Family Trust is a discretionary trust.

The beneficiaries include the individuals and any of their relatives.

The Property was purchased in the name of The Family Trust.

The deposit for the purchase price was funded by the individuals.

The balance of the purchase price was funded by a loan taken out in the name of the corporate trustee as trustee for The Family Trust.

The Property has been rented to a third party by a real estate agent since its acquisition.

The rental income has been deposited into the bank account of the corporate trustee as trustee for The Family Trust.

Under an agreed family arrangement, the individuals have made contributions on an equal basis to fund the deficit between the rental income and the property expenses.

The Family Trust has declared all the rental income and claimed any relevant rental deductions in its tax returns.

It has been proposed that The Family Trust transfer the Property to the individuals.

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 106-50

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The Property is a CGT asset.

CGT event A1 happens under section 104-10 of the ITAA 1997 if a change in ownership of a CGT asset occurs.

Therefore, CGT event A1 will happen if ownership of the Property is transferred from The Family Trust to the individuals.

You contend that although The Family Trust has legal ownership of the Property, the individuals always had beneficial ownership of it so there is no change in ownership if the title to the Property is transferred.

However, as the Family Trust is a discretionary trust, no beneficiary or beneficiaries could have beneficially owned the trust asset, being the Property. Under the trust deed, no beneficiary or beneficiaries were guaranteed to receive a distribution of either the income generated by the trust asset or the trust asset itself. Rather, under the trust deed a distribution of income or capital in relation to the trust asset could have gone to any of the beneficiaries. Just because certain beneficiaries may end up receiving a distribution of the income or the asset itself, does not mean that while it was held by the trust that they had beneficial ownership of it.

Although the individuals may control the corporate trustee, this does not necessarily mean that they would always each receive an equal distribution of any income or capital. The individuals could have decided to distribute in different proportions or to another beneficiary if it suited their purposes at the time. That possibility is inherent in a discretionary trust. Therefore, the individuals did not have a beneficial ownership interest in the trust asset.

Paragraph 71 of 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 confirms that beneficiaries of a discretionary trust do not have an ownership interest in the trust assets themselves. Rather, they only have the right to be considered for a distribution of income and/or capital in accordance with the terms of the trust deed.

As the individuals did not have a beneficial ownership interest in the Property since its acquisition, they were not absolutely entitled to it and section 106-50 of the ITAA 1997 does not apply to treat them as having ownership of the Property for CGT purposes.

On the proposed transfer of the Property, ownership will change from The Family Trust to the individuals. CGT event A1 will happen to the existing owner of the CGT asset, being The Family Trust. It will not happen to the individuals as they are acquiring an ownership interest in the Property on the transfer rather than disposing of an ownership interest.