Edited version of private advice

Authorisation Number: 1052262069234

Date of advice: 13 June 2024

Ruling

Subject: CGT - absolute entitlement

Question 1

Is the Trust making a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) upon the distribution and transfer of the trust asset to the entity?

Answer

No.

Question 2

Will a capital gains tax (CGT) event occur if the Trust makes a resolution to distribute a trust asset to the entity as a beneficiary?

Answer

Yes.

Question 3

If the Trust makes a capital gain resulting from CGT event E5 happening, will the entity as the Beneficiary be specifically entitled to Trust's capital gain?

Answer

Yes.

Question 4

Is the entity required to pay income tax on the capital gain?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The Trust is a discretionary trust created by Deed. The Settlors intention was to establish a trust to be applied for the benefit of the beneficiaries.

The primary beneficiary listed in the Schedule of the deed is the entity.

The trust asset consists of real property being, land and buildings.

The entity was established in 19XX.

The facility was established for the community to provide care and support for people of all ages living with illness.

The entity is a company limited by guarantee. A not-for-profit charitable organisation registered with the Australian Charities and Not-for-profits Commission (ACNC) and with GST concessions, FBT exemption, Income Tax exemption and Deductible Gift Recipient (DGR) status.

The trustees of the trust will make a resolution prior to 30 June 2024 to make the entity absolutely and specifically entitled to the trust asset being the land and buildings.

The entity, once absolutely and specifically entitled and vested in possession, will call upon the trustees of the trust to terminate the trust by transferring the trust asset to them.

The trustee will act within the power conferred by the trust deed.

The trust will provide an exempt entity notice in writing of the absolute entitlement to the entity.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 section 11-5

Income Tax Assessment Act 1997 section 50-5

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 subsection 104-75(6)

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 section 160-50

Reasons for decision

Question 1

In this reasoning, unless otherwise stated,

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

•         all legislative terms marked with an asterisk (*) are defined in section 195-1 of the GST Act.

Section 9-5 provides that you make a taxable supply if you meet the following requirements:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is *connected with the indirect tax zone; and

(d) you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

All of the above requirements of a taxable supply under section 9-5 must be met for the supply to be a taxable supply.

Is the Trust required to be registered for GST?

The Trust is not currently registered for GST because it is below the GST registration threshold.

Section 23-5 provides the requirements for who is required to be registered and states:

You are required to be registered under this Act if:

(a)  you are *carrying on an *enterprise; and

(b) your *GST turnover meets the * registration turnover threshold.

The Trust is carrying on an enterprise of leasing the property to XXXXX Ltd; therefore, paragraph 23-5(a) is satisfied.

Whether or not the Trust will be required to be registered for GST when the transfer of the property occurs will depend on whether the GST registration threshold of $75,000 will be exceeded as a result of the transfer of the property.

For the purposes of paragraph 23-5(b), the meaning of GST turnover is contained in Division 188.

The registration turnover threshold is $75,000 (or $150,000 if the entity is a non-profit body).

Subsection 188-10(1) provides that your GST turnover will meet the registration turnover threshold if:

(a) your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b) your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Furthermore, section 188-25 provides that in working out your projected GST turnover you should disregard, amongst other things, any supply made or likely to be made by you by way of a transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7 Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover (GSTR 2001/7) explains the meaning of 'capital asset' in the context of section 188-25 in paragraphs 31 to 36:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Paragraph 37 of GSTR 2007/1 in relation to the meaning of 'transfer of ownership' states:

37. The GST Act does not define the concept, 'transfer of ownership'. The words retain their ordinary meaning in context, and mean a transfer of the whole of your beneficial interest in the asset with or without legal title. A transfer of an interest in property that is less than your full interest will not be captured by these words. For example, if you merely grant a lease or licence over an asset that you own, the supply of that lease or licence will not be a 'transfer of ownership'. However, if you assign your full interest in that lease or licence it will be a 'transfer of ownership'.

In this case, the transfer of the property will be a 'transfer of ownership' for the purposes of section 188-25.

We consider the transfer of the property will fall within the scope of a 'capital asset' and therefore the transfer will be disregarded in calculating the projected turnover of the Trust pursuant to section 188-25.

Given the above and based on the information provided, the turnover of the Trust will not meet the registration turnover threshold and paragraph 23-5(b) will not be met. Consequently, the Trust is not required to be registered under section 23-5 and paragraph 9-5(d) will not be satisfied.

Application to your circumstances

The transfer of the property will not be a taxable supply as defined in section 9-5.

Question 2 and 3

CGT event E5

CGT event E5 in section 104-75 of the ITAA 1997 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset.

The trustee makes a capital gain if the market value of the asset (at the time of the event) 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.

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

A capital gain or capital loss the beneficiary makes is disregarded if the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure (subsection 104-75(6)).

A capital gain or loss from CGT event E5 happening to a trustee of a trust is taken into account in working out the trustee's net capital gain or loss. A net capital gain is included in the net income of the trust in accordance with subsection 95(1) of the ITAA 1936 and taxed in accordance with Subdivision 115-C of the ITAA 1997 (paragraph 45 of Taxation Ruling TR 2006/14 Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests (TR 2016/14)).

Absolute entitlement

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 (TR 2004/D25) provides the Commissioner's view on what is meant by absolute entitlement.

The main CGT provisions to which the concept of absolute entitlement is relevant apply if a beneficiary is (or becomes) absolutely entitled to a CGT asset of the trust as against the trustee (disregarding any legal disability): see section 106-50 and CGT event E5 in section 104-75 of the ITAA 1997 (paragraph 8 of TR 2004/D25).

The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5 of the ITAA 1997, neither is the CGT asset to which the relevant provisions refer (paragraph 9 of TR 2004/D25).

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

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). 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 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.

Further, TR 2018/6 Income tax: trust vesting - consequences of a trust vesting (TR 2018/6) confirms that on a trust's vesting date, the interests in the property of the trust become vested in interest and possession.

Specific entitlement to a capital gain

Subdivision 115-C operates in such a way that beneficiaries of a trust can be specifically entitled to the trust's capital gains.

Section 115-228 outlines when a beneficiary will be regarded as specifically entitled to a trust capital gain (either in whole or in part). To be specifically entitled to the whole gain, there are two key requirements that need to be met:

1.    The beneficiary must have received, or reasonably expect to receive, all of the financial benefit referable to the capital gain (see paragraphs (a) and (b) of the definition of 'share of financial benefit' in subsection115-228(1)); and

2.    The financial benefit that the beneficiary has received or can be expected to receive has been recorded in the accounts or records of the trust in its character as referable to the capital gain (paragraph 115-228(1)(c)).

ATO ID 2013/33 - Capital gains tax: specifically entitled (ATO ID 2013/33) considers whether a beneficiary can be specifically entitled to a capital gain made by the trustee of a trust in relation to CGT event E5. ATO ID 2013/33 states that:

...the Explanatory Memorandum to the Bill that on enactment introduced section 115-228 of the ITAA 1997 stated:

2.59 [W]hether a beneficiary can be specifically entitled to a capital gain or franked distribution is a question of fact. For example, when a beneficiary becomes absolutely entitled to a trust asset, it may be reasonable to expect the beneficiary will receive the net financial benefit referable to the deemed (trust) capital gain from CGT event E5.

...the Explanatory Memorandum stated:

2.63 The accounts or records of the trust would include the trust deed itself, statements of resolution or distribution statements, including schedules or notes attached to, or intended to be read with them. However, a record merely for tax purposes is not sufficient.

Application to your circumstances

In the present case, the financial benefits referable to the capital gains is the real Property to be distributed. When the entity become absolutely entitled to the Property, the entity will be considered the only entity that is expected to receive the Property.

Further the resolution to be prepared by the trustee will meet the second requirement of specific entitlement.

Therefore, since both requirements will be met upon execution of the trust resolution, it follows that the entity as the beneficiary will be regarded as specifically entitled to the relevant capital gain that arises from CGT event E5 happening.

Question 4

Income tax exempt

Section 11-5 of the ITAA 1997 lists entities that are exempt, no matter what kind of ordinary or statutory income they have. Section 50-1 provides that the total ordinary and statutory income of certain listed entities is exempt from income tax and this includes registered charities endorsed by the Commissioner, as described in item 1.1 of section 50-5 of the ITAA 1997.

A capital gain is considered statutory income.

Application to your circumstances

In this case, as discussed at question 2 and 3, the entity will make a capital gain from CGT event E5 in relation to the proposed transaction. However, as all of the entity's ordinary and statutory income is exempt by virtue of section 11-5 of the ITAA 1997, there will be no tax payable on the proposed transaction.