Edited version of private advice

Authorisation Number: 1052310756600

Date of advice: 26 September 2024

Ruling

Subject: Capital gains tax

Question 1

Will CGT event A1 happen if the current custodian (Current Custodian) (listed in Column 2 of Table 1) for the individual (listed in Colum 1 of Table 1) retires as custodian and transfers all CGT assets to the replacement Custodian (Replacement Custodian) (listed in Column 3 of Table 1)?

Table 1:

Answer 1

No

Question 2

Will any amount be included in the assessable income of the Current Custodian (Column 2, Table 1) as a result of the transfer of all the CGT assets held as custodian for the relevant individuals (Column 1 of Table 1) to the proposed Replacement Custodian (Column 3 of Table 1) pursuant to section 6-5 of the Income Tax Assessment Act 1997?[1]

Answer 2

No

Question 3

Will CGT event E1 or E2 happen if the current custodian (listed in Column 2 of Table 2) for the individual (listed in Column 1 of Table 2) retires as custodian and transfers all CGT assets of the custodian arrangement to the replacement custodian (listed in Column 3 of Table 2)?

Answer 3

No

Question 4

If the answer to Questions 1 and 3 are yes, will section 102-5 apply to include the net capital gain in the assessable income of the Custodian of the relevant trust (listed in Column 1 of Table 1)?

Answer 4

No

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

RELEVANT FACTS AND CIRCUMSTANCES

Company A

1.            On XX XXX 20XX Company A was incorporated.

2.            The current directors of Company A are:

(a)          Individual 1

(b)          Individual 2

(c)          Individual 3

(d)          Individual 4

(e)          Individual 5.

Bare trust arrangements with Company A as custodian

3.            Company A currently holds separate CGT assets as custodian for the following individuals:

(a)          Individual 1

(b)          Individual 2

(c)           Individual 3.

Proposed arrangement

4.            It is proposed that Company A will retire as the Custodian of the trusts listed in Column 2 of Table 1 and the companies listed in Column 3 be appointed as replacement custodians of the relevant trusts listed in Column 1:

Table 1:

5.            To implement the retirement and replacement custodians as provided in Table 1, it is proposed that:

(a)          a Deed of Retirement and appointment of replacement custodian is executed, and

(b)          share transfer documentation is completed to all for the transfer of all CGT assets from Company A, as Current Custodian, to the Replacement Custodians listed in Column 3 of Table 1.

6.            Draft copies of the documentation listed in paragraph 5 were provided to the Commissioner in support of this ruling application.

Anti-avoidance rules

Part IVA is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision

Question 1

Will CGT event A1 happen if the current custodian (Current Custodian) (listed in Column 2 of Table 1) for the individual (listed in Colum 1 of Table 1) retires as custodian and transfers all CGT assets to the replacement Custodian (Replacement Custodian) (listed in Column 3 of Table 1)?

Table 1:

Summary

No

Detailed reasoning

BARE TRUSTS

7.            Broadly, a bare trust is the most basic type of trust relationship where a trustee legally holds property for beneficiaries. While the trustee is the legal owner of the assets, the beneficiaries are the actual or beneficial owners of the particular assets.

8.            A custodian arrangement is treated as a bare trust relationship.

CAPITAL GAINS TAX

CGT event A1

9.            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.

10.            The Note to section 104-10 explains that CGT event A1 will not occur merely because there has been a change in the trustee of a trust.

11.            Paragraph 14 of Taxation Determination TD 2001/26 Income Tax: capital gains: what are the capital gains tax consequences for a beneficiary of a discretionary trust who renounces their interest in the trust? (TD 2001/26) confirms the Commissioner's view that a mere change in trustee of a trust has no CGT consequences.

Application to your circumstances

12.            It is proposed that the current custodians of the trusts will retire and replacement custodians be appointed for the relevant trusts as outlined in Table 1. Consistent with the Note in section 104-10 and TD 2001/26, the purposed changes of the custodians, acting as trustees of the bare trusts, will not result in CGT event A1 occurring.

Question 2

Will any amount be included in the assessable income of the current trustee (Column 2, Table 1) as a result of the transfer of all the CGT assets of the relevant trust (Column 1 of Table 1) to the proposed Replacement Custodian (Column 3 of Table 1) pursuant to section 6-5?

Summary

No

Detailed reasoning

ORDINARY INCOME - SECTION 6-5

13.            Subsection 6-5(1) provides that your assessable includes ordinary income, being 'income according to ordinary concepts'. Guidance on the ordinary meaning of a term can be found with reference to dictionary definitions. The Oxford English Dictionary defines income as 'periodical (usually total annual) receipts from one's business, lands work, investments and so on'.

14.            However, dictionary definitions do not necessarily have the force of law and without further guidance in the legislation, reference to case law is required for a proper understanding of the meaning of a term. While the courts have not applied a strict definition to income, a number of characteristics have been identified to provide the basis in determining whether a receipt is income.

15.            The main characteristics that are generally applicable to a receipt being considered as income are:

(a)          received periodically and regularly

(b)          received for personal services (for example, salary and wages)

(c)          received from property and investment returns (for example, dividends and interest)

(d)          relied upon or expected

(e)          earned

(f)          for the replacement of income

(g)          derived by way of a profit-making intention or carrying on a business.

16.            Therefore, ordinary income generally bears a direct relationship to some form of input or investment made by the taxpayer. It is important to note, however, that it is not necessary for all of these characteristics to exist in order for a receipt to be considered under ordinary concepts.

Application to your circumstances

17.            As a result of the proposed retirement of the Current Custodians and appointment of the Replacement Custodians, the assets of the relevant trust funds will be transferred to the Replacement Custodians. The Replacement Custodians will commence to hold the assets on trust for the benefit of the beneficiary of the relevant trust. The transfer of the assets to the Replacement Custodian does not exhibit the general characteristics of ordinary income, as explained in paragraphs 13 to 16. Consequently, section 6-5 will not be satisfied and the Replacement Custodians will not be required to include an amount in their assessable income from the transfer of the assets.

Question 3

Will CGT event E1 or E2 happen if the current custodian (listed in Column 2 of Table 2) for the individual (listed in Column 1 of Table 2) retires as custodian and transfers all CGT assets of the custodian arrangement to the replacement custodian (listed in Column 3 of Table 2)?

Summary

No

Detailed reasoning

EXPLANATION OF THE LEGISLATION:

CGT event E1 - creating a trust over a CGT asset

18.            Subsection 104-55(1) provides that CGT event E1 happens when a trust is created over a CGT asset by declaration or settlement. The Note to this section explains that the mere change in the trustee of a trust will not result in CGT event happening.

CGT event E2 - transferring a CGT asset to a trust

19.            Subsection 104-60(1) provides that CGT event E2 will happen when a CGT asset is transferred to a trust. The Note to this section further provides that a mere change in trustee of a trust does not result in CGT event E2 happening.

Application to your circumstances

20.            The implementation of the proposed arrangement involves the retirement of the Current Custodian and the appointment of the Replacement Custodian for the relevant trusts, as outlined in Table 1. That is, the proposed arrangement involves solely the change of custodian, acting as trustee. Consequently, CGT event E1 and E2, pursuant to subsections 104-55(1) or 104-60(1), respectively, will not apply.

Question 4

If the answer to Questions 1 and 3 are yes, will section 102-5 apply to include the net capital gain in the assessable income of the Custodian of the relevant trust (listed in Column 1 of Table 1)?

EXPLANATION OF THE LEGISLATION:

Assessable income includes net capital gains

21.            Section 102-5 provides that your assessable income includes any capital gains and broadly outlines the manner in which the net capital gain is calculated.

Application to your circumstances

22.            The answers to Questions 1 and 3 are no and CGT events A1, E1 and E2 will not occur. Consequently, there will be no net capital gain resultant from these events under the proposed arrangement and section 102-5 will not be satisfied.

ATO view documents

Taxation Determination TD 2001/26 Income Tax: capital gains: what are the capital gains tax consequences for a beneficiary of a discretionary trust who renounces their interest in the trust?

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6-5

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

[1] ^{All future legislative references are to the Income Tax Assessment Act 1997, unless otherwise indicated.}