Edited version of private advice

Authorisation Number: 1052224698533

Date of advice: 22 February 2024

Ruling

Subject: CGT - trust - absolutely entitled beneficiary

Question

Did a capital gains tax event occur when the legal title of the Property was transferred from the Trustee to Person A?

Answer

No.

In accordance with the principals contained in Draft Taxation Ruling TR 2004/D25, as Person A was the sole beneficiary in respect of the Property, they were absolutely entitled to the Property as against the Trustee.

Therefore, capital gains tax (CGT) event E5 under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) occurred when Person A became absolutely entitled to the Property when settlement on the purchase of the Property by the Trustee occurred.

Under section 106-50 of the ITAA 1997, immediately after Person A became absolutely entitled to Property as against the Trustee (disregarding any legal disability):

•         The Property is treated as Person A's asset and not an asset of the Trust; and

•         An act done in relation to the Property by the Trustee is treated as if it had been done by Person A and not the Trustee.

On becoming absolutely entitled to the asset as against the Trustee, Person A is considered to have acquired the Property under subsection 1095(2) of the ITAA 1997, and no CGT event happened when legal title in the Property was transferred from the Trustee to Person A, such as CGT event E7.

Therefore, there were no CGT consequences for the Trustee in relation to the transfer of the Property to Person A.

This ruling applies for the following period:

Income year ended 30 June 20XX.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

Person A experienced physical injuries which resulted in them undertaking legal action.

A court judgment was handed down under which Person A was awarded a sum of money.

Some weeks later a court order (the Court Order) was issued with the judgment being that the sum of money awarded under the court judgment was to be held by a State Trustee on trust with the power to advance whole or part of the capital and accumulated income thereof as the trustee thinks fit for the maintenance, education or otherwise for the benefit of Person A.

Person A was deemed to be a person with a disability under the rules of the court.

Shortly after the Court Order was handed down a trust was established in accordance with the Court Order (the Trust), with the State Trustee being appointed as the trustee (the Trustee).

The Trustee has the power to advance all income and capital for Person A's maintenance, education, or benefit in accordance with the Court Order.

Person A is the sole beneficiary of the Trust, and no other beneficiary has an interest in any of the Trust's assets.

As the only beneficiary, Person A will receive all income and capital of the Trust.

The Trustee purchased a property (the Property) with the title of the Property was registered in the name of the Trustee.

Person A and their family resided at the Property since it was purchased, with the Trustee paying outgoings arising in relation to the Property from Trust funds.

After some issues in relation to the Property the Trustee made the decision to bring the Trust to an end because it could no longer protect the assets of the Trust.

Person A had the right to terminate the Trust by directing the Trustee to transfer the Property to them when the Trustee had determined to pay the whole amount of the Trust capital and accumulated income to Person A.

The remainder of the court awarded sum of money was paid to Person A once the Trustee had confirmed with Person A's General Practitioner that they had legal capacity to deal with the Trust assets without any formal oversight.

The transfer document for the transfer of the Property listed the Trustee as the vendor, consideration being distribution of property to a beneficiary under a trust, with the transferee being listed as Person A.

The legal title of the Property was transferred from the Trustee to Person A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 106-50

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