Edited version of private advice

Authorisation Number: 1052306117455

Date of advice: 19 September 2024

Ruling

Subject: Capital gains tax

Question 1

Will the vesting of the trust trigger CGT event E5 for the purposes of section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No

Question 2

Will the distribution of assets of the trust following its vesting trigger CGT event E7 for the purposes of section 104-85 of the ITAA 1997?

Answer 2

Yes

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the distribution of trust assets upon vest?

Answer 3

No

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Taxpayer A and Taxpayer B collectively own 100% of the shares in Company A. Company A is the sole shareholder of all the shares in Company B. Company B is the sole Trustee of the trust established on XX September XXXX by way of deed of settlement between a taxpayer and Company C.

Taxpayer A and Taxpayer B are married with five adult children.

The beneficiaries of the trust include Taxpayer B, Taxpayer C and Taxpayer D. Taxpayer A is not an included beneficiary.

The vesting of trust is the perpetuity date as defined by subclause X of the trust to mean XX years from the date of execution of the trust or the date of death of the last survivor of all the lineal descendants male and female of his late Majesty King George the Sixth of England living at the date of execution or such earlier date as the Trustee shall appoint to be the perpetuity date.

The trustee has obtained legal advice that the amendment clause of the trust deed establishing the trust does not allow the vesting date to be extended.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-85

Reasons for decision

Question 1

Will the vesting of the No. 1 Trust trigger CGT event E5 for the purposes of section 104-75 of the ITAA 1997?

Answer 1

No

Detailed reasoning

Section 104-75 of the ITAA 1997 provides:

(1) CGT event E5 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 (disregarding any legal disability the beneficiary is under).

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

(3) 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.

Draft Taxation Ruling TR 2004/D25 provides further guidance on the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' for the purposes of Parts 3-1 and 3-3 of the ITAA 1997. Paragraph 10 of the draft ruling provides:

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.

In considering trusts where there is more than one beneficiary paragraph 20 of TR 2004/D25 provides:

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.

Paragraphs 23-24 of TR 2004/D25 further provide:

23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

•                The assets are fungible;

•                the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

•                there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

The trust deed for the trust provides at clause X that the trustee shall have the power to accept additional property beyond the scheduled property that the trust was established with. The asset holding of the trust is not limited to a specific number of assets and furthermore the trust is not expressly limited as to who the beneficiaries are or will be in accordance with subclause X of the trust deed.

The beneficiaries do not have the power under the trust deed to call upon any specific scheduled property or contributed property of the trust and the trustee is not required to hold specific assets for a particular individual beneficiary.

The multiple beneficiaries of the trust provides that generally there will be no absolute entitlement. Furthermore, it is not possible for any beneficiary to call upon the trustee to have the property of the trust vested to them. There is a clear understanding that no beneficiary is entitled to any one particular item of trust property.

The beneficiaries of the trust cannot be said to be absolutely entitled to a CGT asset of the trust and therefore section 104-75 of the ITAA 1997 cannot apply when the vesting of this trust occurs.

Question 2

Will the distribution of assets of the trust following its vesting trigger CGT event E7 for the purposes of section 104-85 of the ITAA 1997?

Answer 2

Yes

Detailed reasoning

Section 104-85 of the ITAA 1997 provides:

(1) CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

(2) The time of the event is when the disposal occurs.

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

Subsection 104-10(2) of the ITAA 1997 further provides:

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

The vesting of the trust will not give rise to CGT event E7 as subsection 104-85(2) of the ITAA 1997 provides that the timing of the event is when the disposal occurs. The disposal of the assets to the beneficiaries will occur after vesting in accordance with any proposed deed of distribution.

CGT event E7 happens when the asset is disposed of from the Trustee to the beneficiary. It is proposed that the trustee will vest the trust during the ruling period and distribute the assets in accordance with the proposed distribution in the assumptions for this ruling. The distribution date will be the date the assets change their ownership and thus be the date that CGT event E7 occurs for the purposes of section 104-85 of the ITAA 1997.

The resulting capital gain or loss is calculated with reference to the market value at the time of the disposal and if this is greater or less than the reduced cost base of the relevant trust asset.

Question 3

Will Part IVA of the ITAA 1936 apply to the distribution of trust assets upon vest?

Answer 3

No

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision. To assist the Commissioner in considering if Part IVA of the ITAA 1936 has application to a particular scheme the Commissioner has published Practice Statement Law Administration 2005/24 (PS LA 2005/24).

PS LA 2005/24 paragraphs 44-45 provide:

44. Part IVA gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This power is found in subsection 177F(1).

45. Before the Commissioner can exercise the power in subsection 177F(1), the requirements of Part IVA must be satisfied. These requirements are that:

(i)             a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

(ii)            the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

(iii)           having regard to section 177D, the scheme is one to which Part IVA applies.

Before the Commissioner can consider the application of Part IVA of the ITAA 1936 there must be a 'tax benefit' as identified in section 177C of the ITAA 1936 that would be obtained but for the application of the Commissioners power to remove that benefit in subsection 177F(1) of the ITAA 1936.

Section 177C of the ITAA 1936 provides:

(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or..

and, for the purposes of this Part, the amount of the tax benefit shall be taken to be:

(c) in a case to which paragraph (a) applies--the amount referred to in that paragraph; and..

Upon vest, the trustee is responsible for the distribution of the trust property in accordance with the trust deed and any subsequent distribution deed establishing the perpetuity date and distribution date for the assets.

Where the trustee of the trust distributes trust property in accordance with the trust deed to a beneficiary in satisfaction of their interest in the trust, section 104-85 of the ITAA 1997 will cause that amount to be considered as a capital gains tax event E7.

The beneficiaries in receipt of any trust property in satisfaction of their interest will need to calculate their capital gain with reference to section 104-85 of the ITAA 1997. There is no asset of the trust that would not be subject to CGT event E7 in the proposed scheme and therefore no distribution that would not be included in the assessable income of any beneficiary as a taxpayer in the years of income to which this ruling applies.

All amounts of distributions will be subject to the capital gains tax provisions contained in Part 3-1 of the ITAA 1997 and as such there is no amount that would otherwise be in remainder to be addressed by Part IVA of the ITAA 1936. As such Part IVA of the ITAA 1936 cannot have application where the scheme considered or in anticipation by a taxpayer does not result in a tax benefit for the purposes of section 177C of the ITAA 1936.