Edited version of private advice

Authorisation Number: 1052251779123

Date of advice: 16 May 2024

Ruling

Subject: CGT - absolute entitlement to the land

Question 1

Will the Rulee be taken to be "absolutely entitled" to the Land held by its wholly owned subsidiary (Trustee) on trust for the sole benefit of the Rulee for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97)?

Answer

Yes.

Question 2

If the answer to question 1 is yes, will the Land maintain its pre-CGT status for the purposes of Part 3-1 and Part 3-3 of the ITAA 97 when the legal title to such Land is transferred from the Trustee to the Rulee?

Answer

Yes.

This ruling applies for the following periods:

Income years ended 30 June 2024, 30 June 2025, 30 June 2026, 30 June 2027 and 30 June 2028.

The scheme commences on:

10 May 2024

Relevant facts and circumstances

Overview

1. The Rulee was incorporated as a private company before later converting to a public company limited by shares.
2. The Rulee maintained its legal identity and Australian Company Number throughout this conversion.
3. The Rulee is the parent company of multiple, wholly owned subsidiaries, one of which is the Trustee.
4. The Rulee is the head company of a tax consolidated group of which the Trustee is a member.
5. Many of the subsidiaries of that Group, including the Trustee, are landholding entities that hold parcels of land on trust for the Rulee.
6. Prior to 1985, the Trustee became the registered owner of certain parcels of land (the Land).
7. The Land was acquired with the Rulee's funds and the Trustee agreed prior to the acquisition to hold the Land on the terms set out in the Trust Deed.

Trust Deed

8. Pursuant to the Trust Deed, the Trustee declares that it holds the Land upon trust for the Rulee.
9. The Trustee also declares that it will transfer and deal with the Land in such a manner as the Rulee directs.
10. Furthermore, for the purpose of more effectually assuring to the Rulee the "full benefit" of the terms of the Trust Deed, the Trustee "irrevocably nominates and appoints the [Rulee] and the Directors and Manager for the time being of the [Rulee] jointly and each of them severally to be its true and lawful Attorneys for it and on its behalf from time to time to sell or otherwise dispose of the" Land.
11. That power of attorney to dispose of the Land allows the Rulee or its directors/manager to assign and transfer the Land to any person or corporation whatsoever, including any of the attorneys such as the Rulee.
12. The Rulee is required to indemnify the Trustee against all liabilities which the Trustee may incur by reason of the Land being in the name of the Trustee.
13. In addition, the Rulee has the power to appoint a new trustee/s.

Relevant legislative provisions

ss104-230(2) and 106-50(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 97)

Reasons for decision

Question 1

The Rulee will be "absolutely entitled" to the Land held by the Trustee on trust for the sole benefit of the Rulee for the purposes of s106-50 of the ITAA 97.

Section 106-50(1) of ITAA 97, for CGT purposes, effectively treats an asset as being an asset of the beneficiary and not of the trustee where that beneficiary is absolutely entitled to that asset:

Absolutely entitled beneficiaries

(1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a • CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

(2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a * CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee).

Example: An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee.

Draft Taxation Ruling 2004/D25 (TR 2004/D25) outlines the Commissioners position on the meaning of "absolutely entitled". While the draft may not be relied on by taxpayers, as it is not a ruling for the purposes of Part IVAAA of the Taxation Administration Act 1953, the draft ruling still represents the considered views of the ATO.

In TR 2004/D25, the Commissioner specifically provides that a sole beneficiary of a trust who can direct the trustee of that trust to transfer the trust property to them or at their direction will be absolutely entitled to the property of the trust.

TR 2004/D25 states:

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. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

...

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 direction (emphasis added)

As noted above, the ruling relies on the principles articulated in the case of Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 (Saunders). In Saunders, the testator left assets to be held on trust to accumulate income from those assets for his beneficiary, the accumulated income and the assets to be transferred to the beneficiary when he attained the age of 25. However, when the beneficiary attained the age of 21 (being the age of majority) he sought to have the whole of the income and assets transferred to him. Despite the directions contained in the will, it was held that the beneficiary had an absolute indefeasible interest in the legacy, there being no gift over in the event of his failing to attain the age of 25. The beneficiary was therefore entitled to the fund. The Master of the Rolls, Lord Langdale, stating at p116:

where a legacy is directed to accumulate for a certain period, or where the payment is postponed the legatee, if he has an absolute indefeasible interest in the legacy, is not bound to wait until the expiration of that period.

Further Lord Davey in Wharton v. Masterman [1895] AC 186 at 198; [1895-9] All ER 687 at 691, enunciated this principle as follows:

The principle is this: that where there is an absolute vested gift made payable at a future event, with direction to accumulate the income in the meantime, and pay it with the principal, the court will not enforce the trust for accumulation in which no person has any interest but the legatee, or (in other words) the court holds that a legatee may put an end to an accumulation which is exclusively for his benefit....There is no condition precedent to happen or to be performed in order to perfect the title of the legatees, and there is no other person who has any interest in the execution of the trust for the accumulation, or who can complain of its non-execution.

Accordingly, a beneficiary is absolutely entitled to an asset of a trust if they have a 'vested and indefeasible' interest in the entire trust asset - that is, there is no other person with an interest in that property and they can direct the trustee to immediately transfer the asset to themselves or to someone else. Relevantly, the principle is simply concerned with whether a beneficiary has the ability to terminate the trust in respect of the asset, and not whether the beneficiary actually terminates (or seeks to terminate) the trust.

Under the Trust Deed, the Rulee is noted as the sole beneficiary of the Trust. Furthermore, the Trust Deed provides that the Trustee will transferand deal with the Land only as the Rulee directs, i.e., the trustee does not have the power to sell and vary investments. Moreover, to ensure that the Rulee can effect a transfer or dealing with the Land at its Direction the Trust Deed provides that the Trust "irrevocably" nominates and appoints the Rulee and its Directors and Manager jointly and severally to be its attorney with respect to assigning and transferring the Land to any person whatsoever, including the Rulee. Further, Clause 2 goes on to confirm the Trustee, and its successors, agrees to confirm and ratify all actions, and all purported actions, of its Attorneys (i.e. all actions of the Beneficiary).

Accordingly, it is clear that the Rulee, as the sole beneficiary of the Trust, and with the full power of attorney over the Trust and its assets, can direct the Trustee to transfer the Land to the Rulee or to any other entity at their direction (including the Rulee) and therefore has an indefeasible and vested interest in the Trust. Consequently, the Rulee is 'absolutely entitled' to the Land held by the Trustee for the purposes of section 106-50(1) of the ITAA97.

It follows that the Land should be treated as having been the property of the Rulee for CGT purposes, since it was acquired by the Trustee.

Question 2

The Land will retain its pre-CGT status for the purposes of Part 3-1 and Part 3-3 of the ITAA 97 when the legal title to such Land is transferred from the Trustee to the Rulee.

Pre-CGT Status

Division 149 details the requirements to be met in order to be a pre-CGT asset. Under s149-10 of the ITAA 1997, a CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

These requirements are dealt with in turn below.

Paragraph 149-10(a)

Under section 995-1, you 'acquire' a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109. Under Division 109, you acquire a CGT asset when you become its owner. The time when you acquire the asset is when you become its owner:

(2) This table sets out specific rules for the circumstances in which, and the time at which, you acquire a CGT asset as a result of a CGT event happening.

Table 1: This table sets out specific rules for the circumstances in which, and the time at which you acquire a CGT asset as a result of a CGT event happening.

Ordinarily, the purported transfer of legal title from the Trustee to the Beneficiary would attract the operation of CGT Event A1. CGT Event A1 happens if an entity "disposes of a CGT asset". The Land is such a CGT asset. An entity disposes of a CGT asset if "a change of ownership occurs" from the entity to another entity. The CGT Event A1 provisions are contained in Part 3-1 of the ITAA 1997.

As detailed above, the owner of the CGT asset is the Rulee for CGT purposes (which includes Division 149 of Part 3-3) and acts of the Trustee, as legal owner, are treated as the acts of the Rulee, as the absolutely entitled sole beneficiary.

As a result, the effect of these provisions is that when the Trustee legally transfers the land to the Beneficiary, CGT Event A1 will not occur. This is because the Trustee will be the owner of the Land for CGT purposes at all times, i.e. both before and after the legal transfer of title, such that there is no requisite 'change of ownership' to attract the operation of CGT Event A1. No other CGT event will apply on the legal transfer of the Land. Given no CGT event occurs, and the beneficiary continues to be treated as the owner of the CGT asset, the pre-CGT status of the asset will not change. Accordingly, the Rulee last acquired the asset pre-1985 and paragraph 149-10(a) is satisfied.

Paragraph 149-10(b)

In relation to paragraph 149-10(b), former subsection 160ZZS(1) of the ITAA 1936 is the equivalent provision of now Subdivision 149-B, which are the rules that apply to non-public entities. Former Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 is the equivalent provision of the now Subdivision 149-C, which includes the requirements for public entities. The Company is not a public company and accordingly only former subsection 160ZZS(1) of the ITAA 1936 is relevant.

Former subsection 160ZZS(1) of the ITAA 1936 applied to pre-CGT assets held between 20 September 1985 and the end of the 1998 income year as follows:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

Paragraph (b) is not specifically impacted by the legal transfer between the Trustee and the Rulee and it is assumed for the purposes of this Ruling that former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 does not apply.

Paragraph 149-10(c)

In relation to paragraph 149-10(c), it requires an assessment to be made under Division 149 of the ITAA 1997 as to whether the provisions will impact upon the pre-CGT status of an entity's pre-CGT assets (i.e. concerning majority underlying interests being held by ultimate owners). Paragraph (c) is not specifically impacted by the legal transfer between the Trustee and the Rulee and, for the purposes of this ruling, we have assumed that the Land are Pre-CGT assets at the time just before acquisition.

Accordingly, as the Rulee is the owner of the Land for CGT purposes, and on the assumption that the Land is a pre-CGT asset just prior to the transfer, it will continue to constitute pre-CGT property following any transfer of legal title to it from the Trustee to the Rulee for CGT.