Edited version of private advice

Authorisation number: 1052265305864

Date of advice: 25 June 2024

Ruling

Subject: CGT - trusts

Question 1:

Does section 116-55 of the Income Tax Assessment Act 1997 (ITAA 1997)[1] apply to the trustee for Trust A or Company B from the assignment to the purchasers, and the purchasers' assumption of, the Accommodation Bonds (the Accommodation Bonds) to modify the calculation of the capital proceeds from the sale of the XXXX Businesses pursuant to section 116-20?

Answer:

No.

Question 2:

Does section 103-10 apply to include the Accommodation Bonds, or the value of the Bonds, in the capital proceeds received by Trust A or Company B?

Answer:

No.

This private ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Background:

1.         Company A is the Trustee for the Trust A (Trust A). Until late date (explained below), the Trustee held a XXXX.

2.         Trust A and Company B are related entities. Until late date (explained below), Company B held a XXXX Business.

3.         Both XXXX Businesses have Accommodation Bonds (Accommodation Bonds), which are deposits paid by the residents when they move into the facilities. Generally, Bonds are paid back to the residents or their XXXX upon the expiry of their residence. In certain circumstances, the Bonds are forfeited, or otherwise reduced by other amounts payable, by the residents for services at the relevant XXXX XX.

4.         Where a resident vacates one of the facilities, or has XXXX, the incoming individual who takes up residence will pay an Accommodation Bond, which replaces the Bond that was been paid by the outgoing resident.

5.         Both Trust A and Company B recorded the Accommodation Bonds as a liability in their respective financial statements.

Sale of XXXX Businesses:

6.         On date, both Trust A and Company B sold their XXXX Businesses to unrelated purchasers.

7.         Clause 1.15 of the Business Sale Agreements (the Sale Agreements) define the term "Adjustment Time" as 11:59:59 on the Completion Date.

8.         The Sale Agreements define the term "Completion Date" as the later of:

a.            date, or

b.            three business days after the last of the Conditions is satisfied or waived.

or any other date as agreed between the parties.

9.         Clause 1.21 of the Sale Agreements defines the term "Assumed Liabilities" as

1.21.1 all obligations and Liabilities of the Seller as at the Adjustment Time in respect of:

(a)           the Accommodation Bond Balance; and

(b)           the Refundable Deposit Balance;

...

10.         Clause 7.3 of the Sale Agreements provides that:

7.3.1 Subject to Completion occurring, and from the Adjustment Time:

(a)          all Liabilities and obligations of the Business to the extent they relate to the period up to and including the Adjustment Time, are a Liability of the Business Seller (other than the Assumed Liabilities); and

(b)          all Assumed Liabilities are a Liability or obligation of the Business Buyer.

11.         The Sale Agreements include the assignment of the resident agreements to the purchaser and the purchaser assuming the outstanding Accommodation Bonds that were potentially payable with respect to transferring the residents. In particular, clause 10.1 provides that:

10.1.2 Subject to Completion, from the Adjustment Time:

(a)          the Business Buyer will be bound by the Resident Agreements;

(b)          any warranties, covenants or undertakings by the Business Seller under the Resident Agreements are taken to be given by the Business Buyer;

(c)          the Business Buyer must perform the obligations of the Business Seller under the Resident Agreements arising after the Adjustment Time and for the balance of the term of those agreements, including in respect of the handling, application, treatment and repayment of Accommodation Bonds, Refundable Deposits; and

(d)          all contractual rights, claims and remedies which the Residents may have or claim to have under the Resident Agreements from the Adjustment Time will be available against the Business Buyer

12.         As at completion of the sale, the amounts that were potentially payable on the accommodation bonds were $x and $y.

13.         In accordance with the contracts of sale of the XXXX Businesses, a number of trusts associated with Trust A and Company B also sold land upon which the Businesses operated to a party related to the purchaser. Additionally, another trust associated with the Trust A and Company B sold a residential property.

14.         All contracts for sale were interdependent and were all completed on date.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-55

Reasons for decision

Question 1:

Does section 116-55 apply to Trust A or Company B from the assignment to the purchasers, and the purchasers' assumption of, the Accommodation Bonds to modify the calculation of the capital proceeds from the sale of the XXXX Businesses pursuant to section 116-20?

EXPLANATION OF THE LEGISLATION

CAPITAL GAINS TAX (CGT)

1.         Subsection 102-5(1) provides that the assessable income of a taxpayer includes any net capital gains made during the income year.

2.         Section 102-20 provides that a capital gain or loss can only occur if a CGT event happens. CGT events are simply the different types of transactions which may result in a capital gain or loss, and are not limited to the sale of assets. Division 104 lists and explains each CGT event.

What is the relevant CGT asset?

3.         A CGT asset is defined in subsection 108-5(1) as being any kind of property or a legal or equitable right that is not property. Whether or not rights under contract will be considered as one asset or separate CGT assets is dependent on the particular circumstances of the case. However, as stated in paragraph 1 of Taxation Determination TD 93/86 Income tax: capital gains: are the totality of rights under a contract considered to be the one asset, or is each right considered to be a separate asset for CGT purposes? (TD 93/86), generally the totality of rights under a contract will be regarded as the one CGT asset for the purposes of Parts 3-1 and 3-3.

4.         The example in TD 93/86 helps illustrate the circumstances when rights will be considered a single asset or separate assets for CGT purposes. In this example, Maria enters into an agreement to purchase rights to market a particular product in Australia. Consistent with paragraph 1, these rights are one asset for CGT purposes. However, if Maria then assigns some of her rights, to market the product in Western Australia, South Australia and the Northern Territory, to Peter then this would constitute a disposal of part of her asset. The asset held by Peter is a single asset in his hands, distinct from the remaining asset held by Maria.

Application to your circumstances

5.         On date the Sale Agreements were executed such that both Trust A and Company B disposed of their XXXX Businesses.

6.         In order to determine the CGT consequences of the sale of the XXXX Businesses, it is necessary to correctly identify the CGT assets being disposed.

7.         Consistent with TD 93/86, the totality of rights under a contract will be regarded as the one CGT asset for the purposes of Parts 3-1 and 3-3. That is, the XXXX Business in their entirety, including the totality of rights (coupled with obligations) under the contract of sale, and not the allocated place or bed licence, would be the relevant CGT asset.

What is the relevant CGT event?

8.         Section 104-5 sets out a list of CGT events. CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1). Subsection 104-10(2) states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity.[2]

9.         Paragraph 104-10(3)(a) provides that the timing of the CGT event will be when the contract to dispose of the asset is entered into by the taxpayer.

Application to your circumstances

10.         Pursuant to paragraph 104-10(3)(a), CGT event A1 occurred when the XXXX Businesses were disposed. That is, at the time the parties executed the Sales Agreements on date.

CGT asset subject to a liability by way of security over the asset

11.         Division 116 provides a number of rules regarding the calculation of the capital proceeds from a CGT event. The general rule is provided by section 116-20, which states that the capital proceeds from a CGT event are the total of:

a.            the money an entity receives, or is entitled to receive, in respect to the CGT event, and

b.            the market value of any other property an entity receives, or is entitled to receive.

12.         Modifications to the general rule of section 116-20 are found in sections 116-25 to 116-110. With regards to the assumption of liability from a CGT event, section 116-55 provides that the capital proceeds are increased if another entity acquires the CGT asset (that is the subject of the event) subject to a liability by way of security over the asset. In such a case, the capital proceeds from the CGT event are increased by the amount of the liability the other entity assumes.

13.         The term "liability" as contained in section 116-55 is not defined by the legislation. Consequently, the term takes on its ordinary meaning. The Macquarie Dictionary defines "liability" to mean an obligation, especially for payment, debt or pecuniary obligations (opposed to asset).

14.         The legislation also does not define the term "security" and as such, the term takes on its ordinary meaning. The Macquarie Dictionary defines "security" to mean "something given or deposited as surety for the fulfilment of a promise or an obligation, the payment of a debt, etc". In relation to section 116-55, the modification will only apply in circumstances where the CGT asset is subject to a secured liability over it. This meaning is supported by the example provided for in section 116-55, which illustrates that a buyer of land becomes responsible for an outstanding mortgage, being a liability by way of security over the land.

Application to your circumstances

15.         As a result of the execution of the Sale Agreements executed on date Trust A and Company B received $x and $y respectively.

16.         Therefore, the amounts provided in paragraph 39 are the capital proceeds received by the Trust A and Company B respectively in relation to the CGT events from the Sale Agreements, pursuant to section 116-20.

17.         In order to determine whether subsection 116-55 will also apply to modify the proceeds from the sale of the XXXX Businesses, it is necessary to establish whether the purchasers acquired the Businesses subject to a liability by way of security over the asset.

18.         The Accommodation Bonds received are payments made by residents to enable them to commence residing at the XXXX Businesses. Trust A and Company B recorded the Bonds in their financial statements as liabilities because they do not have an unconditional right to defer settlement. The Accommodation Bonds are liabilities and are equal to the proceeds received, less retentions and amounts deducted at the election of the resident.

19.         The repayment of the Accommodation Bonds to residents is a liability incurred by the XXXX Businesses and are liabilities transferred to the purchasers. That is, the purchasers will be liable to repay the Bonds upon the residents' XXX or departure from the facility. This means that the purchaser of XXXX Businesses will purchase a CGT asset subject to a liability.

20.         Although the purchasers will be liable to repay the Accommodation Bonds upon XXXX or departure of the resident, this does not amount to security over an asset which the resident could deal with to satisfy the amounts owing. That is, it is not consistent with the general business meaning of the word "security" which refers to an asset pledged to guarantee repayment of a loan, providing the lender with a right to that secured asset and the ability to take it into their possession in the case of default. The resident will have recourse against the purchaser for repayment of the Accommodation Bond but he/she will have no secured asset to access or deal with in order to satisfy the debt.

21.         Consequently, the Accommodation Bonds are not liabilities by way of security over an asset, being the XXXX facilities, but are part of the carrying on of the business of the facility. Section 116-55 therefore does not apply to modify the capital proceeds from the sale XXXX Businesses.

Question 2:

Does section 103-10 apply to include the Accommodation Bonds, or the value of the Bonds, in the capital proceeds received by Trust A or Company B?

Detailed reasoning

EXPLANATION OF THE LEGISLATION

Entitlement to receive money or property:

22.         Section 103-10 provides that:

(1)           This Part and Part 3-3 apply to you as if you had received money or other property if it has been applied for your benefit (including by discharging all or part of a debt you owe) or as you direct.

(2)           Those Parts apply to you as if you are entitled to receive money or other property:

(a)           If you are entitled to have it so applied; or

(b)           if:

(i)            you will not receive it until a later time; or

(ii)            the money is payable by instalments.

23.         Consequently, the operation of section 103-10 ensures that money or property applied for an entity's benefit in relation to a CGT event will be captured by the CGT provisions in Part 3-1 or 3-3.

Application to your circumstances:

24.         The Sale Agreements provide that the Accommodation Bonds will be assigned to, and become liabilities of, the purchasers. Consequently, the purchasers have taken over the obligation to pay the Bonds, or outstanding balance of the Bonds, to residents (or their Estates) when they vacate the facilities or XXX. When these amounts are paid to the outgoing residents, or their Estates, it cannot be said that the amounts have been received or applied for Trust A or Company B's benefit. Nor will the payment of the Bonds discharge an obligation, or debt, of Trust A or Company B. Trust A and Company B will not gain any benefit from the payment of the Bonds sometime in the future. Given this, section 103-10 will not apply to Trust A or Company B.

[1] All future references are to the Income Tax Assessment Act 1997, unless otherwise stated.

[2] However, subsection 104-10(2) also provides that a change in ownership will not occur is the taxpayer ceases to be the legal owner of the asset but continues to be its beneficial owner.