Edited version of private advice

Authorisation Number: 1052222538598

Date of advice: 16 February 2024

Ruling

Subject: CGT - absolutely entitled

Question 1

Upon the execution of a deed, did CGT Event E5 occur in relation to a property under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Upon the registration of transfer of the property to the beneficiary, does a CGT Event E5 occur in relation to the property under section 104-75 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Income year ending 20XX

Income year ending 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

Background

A will of an individual (the Will) established a testamentary trust (the Trust) for the lifetime benefit of the individual's child (Individual A).

Company X is the trustee for the Trust (the Trustee). Company X is an Australian resident Company.

Individual A had a spouse, Individual B. Individual A and Individual B had two children.

Individual A executed a will that provided that Individual A exercised Individual A's power of appointment under the Will in respect of the Trust to appoint Individual B as the beneficiary entitled to half of the assets of the Trust and Individual A's children as the beneficiaries to share equally in the other half of the Trust.

On DD MM 19XX, a deed was executed between the Trustee, Individual A, Individual B, their two children and others which provided that Individual A will not revoke or alter the appointment mentioned above.

Individual A executed a further final will and replicated the terms in relation to the appointment mentioned above.

The Property

The Trustee acquired a property on DD MM 19XX (the Property).

The Trustee became the registered proprietor of the Property on DD MM 19XX.

BY transfer of land instrument dated DD MM 19XX, the Property was acquired for the stated consideration of $XXX.

The Deed of Release and Indemnity

Individual A passed away on DD MM 20XX and was survived by Individual B and their two children.

On DD MM 20XX, Individual B, the two children as beneficiaries and the Trustee executed a deed of release and indemnity (the Deed of Release and Indemnity).

Under the Deed of Release and Indemnity, the Trustee made a capital distribution of the Property to Individual B.

Under the Deed of Release and Indemnity, the Trustee also made capital advances of cash distributions to the two children and $XXX to Individual B comprising of the value of the Property as well as cash distributions.

Transfer of the Property

Legal title of the Property was not transferred to Individual B by updating the owner's name on the title deed although the Deed of Release and Indemnity advanced the Property to Individual B.

Another deed was executed between the Trustee and Individual B on DD MM 20XX. The Deed confirmed that the Property has been held by the Trustee on bare trust for Individual B since the execution of the Deed of Release and Indemnity.

A retrospective valuation of the Property was obtained on DD MM 20XX valuing the Property at $XXX on DD MM 20XX. This date is in proximity to the capital distribution of the Property made by the Deed of Release and Indemnity.

There were no significant changes or alterations to the Property that would impact the value of the Property between DD MM 20XX and DD MM 20XX.

You have supplied the deed executed between the Trustee and Individual B on DD MM 20XX to support your position that as Trustee you hold the Property on bare trust for Individual B.

In recent months, the Chief Commissioner of State Revenue at the relevant State issued a case decision and duties assessment to the Trustee, assessing duty and interest in respect of the Deed of Release and Indemnity.

It was held that a bare trust was declared over the Property for Individual B's benefit under the Deed of Release and Indemnity, and accordingly, the transaction was assessed under the relevant legislation, and that interest is payable on the dutiable transaction as the duty liability arose in the year the Deed of Release and Indemnity was executed.

It was confirmed that the duty liability arose on the date of execution of the Deed of Release and Indemnity and that it was considered the Deed of Release and Indemnity was the instrument that gave rise to duty in the year the Deed of Release and Indemnity was executed.

The amount payable under the duties notice of assessment in respect of the declaration of bare trust was paid in full.

In recent months, the Chief Commissioner of State Revenue at the relevant State issued a private ruling which ruled that the proposed transfer of the Property to the Trustee to Individual B would be eligible for concessional duty under the relevant legislation on the basis that the Property is held on bare trust for Individual B's absolute benefit and that full duty on the declaration of bare trust has been charged and paid in full.

It is expected that the Property will be transferred to Individual B in the near future to clarify that Individual B is the owner of the Property for her own estate planning purposes.

Relevant legislative provisions

Section 104-75 of the Income Tax Assessment Act 1997

Subsection 104-75(2) of the Income Tax Assessment Act 1997

Section 106-50 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

Upon the execution of the Deed of Release and Indemnity, CGT Event E5 occurred in relation to the Property under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

CGT event E5 happens when a beneficiary becomes entitles to a trust asset. Section 104-75 provides:

Beneficiary becoming entitled to a trust asset: CGT event E5

(1)  CGT event E5 happens if a beneficiary becomes absolutely entitled to a *CGT asset of a trust (except a unit trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Note: Division 128 deals with the effect of death)

(2)  The time of the event is when the beneficiary becomes absolutely entitled to the asset.

Trustee makes a capital gain or loss

(3)  The trustee makes a capital gain if the *market value of the asset (at the time of the evet) is more than its *cost base. The trustee makes a capital loss if that market value is less than the asset's *reduced cost base.

Exception for trustee

(4)  A *capital gain or *capital loss the trustee makes is disregarded if it *acquired the asset before 20 September 1985.

Note: There is also an exception for employee share trusts: see section 130-80.

Beneficiary makes a capital gain or loss

(5)  The beneficiary makes a capital gain if the *market value of the asset (at the time of the evet) is more than its *cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset.

The trustee makes a capital loss if that market value is less than the asset's *reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset.

Exceptions for beneficiary

(6)  A *capital gain or *capital loss the beneficiary makes is disregarded if:

(a)  the beneficiary *acquired the *CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure; or

(b)  the beneficiary acquired it before 20 September 1985; or

(c)   all or part of the capital gain or capital loss the trustee makes from the *CGT event is disregarded under Subdivision 118-B (about main residence).

Expenditure can include giving property: see section 103-5

Note 1: For provisions affecting the application of Subdivision 118-B to the trustee, see sections 118-215 to 118-230.

Note 2: There are also exceptions for employee share trusts: see sections 130-80 and 130-90.

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) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee:

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction...

20. The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it.

21. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

22. Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their discretion (see Explanation paragraphs 76 to 79).

30. Broadly, the provisions dealing with capital gains and losses treat an absolutely entitled beneficiary as the relevant taxpayer in respect of the asset. This means that if a CGT event happens in relation to the asset, the beneficiary (and not the trustee) is responsible for any resulting capital gain or loss. It also means that a CGT event will generally be triggered when a beneficiary becomes absolutely entitled. The main CGT provisions to which the concept of absolute entitlement is relevant are discussed in more detail at paragraphs 141 to 148.

141. A beneficiary that is absolutely entitled to a CGT asset as against the trustee will be the relevant taxpayer if a CGT event happens to the asset. This is the effect of section 106-50 of the ITAA 1997 which provides that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset.

142. Therefore, the beneficiary (and not the trustee) will be required to account for any capital gain or loss that arises on disposal of the asset in the calculation of their net capital gain or net capital loss and hence their taxable income. This is so regardless of whether the beneficiary has always been absolutely entitled to the asset or they become absolutely entitled to it at some time after the trust commenced.

143. Because the beneficiary is the relevant taxpayer, and the capital gain or loss is included in the beneficiary's income calculations, it is not included in the net income of the trust under section 95 of the ITAA 1936.

144. Also, no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

Application to your circumstances

The trust asset in question for your circumstances is the Property.

In recent months, the Chief Commissioner of State Revenue at the relevant State issued a case decision and duties assessment to the Trustee, assessing duty and interest in respect of the Deed of Release and Indemnity.

It was held that a bare trust was declared over the Property for Individual B's benefit under the Deed of Release and Indemnity, and accordingly, the transaction was assessed under the relevant legislation, and that interest is payable on the dutiable transaction as the duty liability arose in the year the Deed of Release and Indemnity was executed.

It was confirmed that the duty liability arose on the date of execution of the Deed of Release and Indemnity and that it was considered the Deed of Release and Indemnity was the instrument that gave rise to duty in the year the Deed of Release and Indemnity was executed.

The amount payable under the duties notice of assessment in respect of the declaration of bare trust was paid in full.

In recent months, the Chief Commissioner of State Revenue at the relevant State issued a private ruling which ruled that the proposed transfer of the Property to the Trustee to Individual B would be eligible for concessional duty under the relevant legislation on the basis that the Property is held on bare trust for Individual B's absolute benefit and that full duty on the declaration of bare trust has been charged and paid in full.

Under subsection 104-75(2) of the ITAA 1997, the time of CGT event E5 occurs when the beneficiary becomes absolutely entitled to the asset. TR 2004/D25 at paragraph 20 explains that when a single beneficiary has all the interests in the trust asset, the beneficiary is absolutely entitled to that trust asset. It further explains at paragraph 144 that when the beneficiary calls for the asset and it is transferred there is no CGT event.

144. Also, no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

Individual B, as the beneficiary of the Trust, became absolutely entitled to the trust asset of the Property upon execution of Deed of Release and Indemnity. You have supplied the deed executed between the Trustee and Individual B on DD MM 20XX to support your position that as Trustee you hold the Property on bare trust for Individual B. Further that this was recognised by State Revenue of the relevant State, and relevant duties and interests were paid to recognise the transfer of the Property to the Trustee for Individual B's benefit.

Paragraphs 30 and 141 of TR 2004/D25 confirms that an absolutely entitled beneficiary is the relevant taxpayer in respect of the asset for the provisions dealing with capital gains and losses.

Accordingly, as Individual B became absolutely entitled to the trust asset of the Property upon execution of Deed of Release and Indemnity, CGT event E5 occurred at the time Individual B became absolutely entitled to the Property under section 104-75 of the ITAA 1997, and Individual B as the beneficiary is the relevant taxpayer in respect of CGT provisions for the Property.

Question 2

Summary

Upon the registration of transfer of the Property from the Trustee to Individual B, CGT Event E5 does not occur under section 104-75 of the ITAA 1997.

Detailed reasoning

As explained above in question one, under subsection 104-75(2) of the ITAA 1997, CGT Event E5 occurs when a beneficiary become absolutely entitled to a trust asset. Individual B became absolutely entitled to the Property upon execution of Deed of Release and Indemnity.

TR 2004/D25 at paragraph 144 provides that no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary.

Accordingly, CGT Event E5 occurred upon execution of Deed of Release and Indemnity and does not occur upon the registration of transfer of the Property from the Trustee to Individual B.

No CGT event happens when the legal title of the Property, which Individual B is absolutely entitled as against the Trustee, is transferred to Individual B.