Edited version of private advice

Authorisation Number: 1052394011995

Date of advice: 16 May 2025

Ruling

Subject: Vesting of trust

Question 1

Did CGT event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on the Vesting Day?

Answer

No

Question 2

Did CGT event E5 under section 104-75 of the ITAA 1997 happen on the Vesting Day?

Answer

No

Question 3

Did CGT event A1 under section 104-10 of the ITAA 1997 happen on the Vesting Day?

Answer

No

Question 4

Under Option 1, will CGT event A1 under section 104-10 of the ITAA 1997 happen to the trustee for the Family Trust (the Trust) when the Trust enters into a contract for the disposal of the Property?

Answer

Yes

Question 5

Under Option 1, will CGT event E4 under section 104-70 of the ITAA 1997 happen to Person A and Person B when the trustee of the Trust distributes the net proceeds from the disposal of the Property to them?

Answer

No

Question 6

Under Option 2, will CGT event E7 under section 104-85 of the ITAA 1997 happen to Person A and Person B when the trustee of the Trust transfers the Property to them?

Answer

Yes

Question 7

Under Option 2, will the first element of the cost base and reduced cost base of the Property transferred to Person A and Person B by the trustee of the Trust be its market value at the time of the transfer pursuant to subsection 112-20(1) of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

The Trust is a discretionary trust established by deed in 19XX between the settlor and Company A as trustee (the Trust Deed).

In 19XX, the Appointer, removed Company A as trustee and appointed Company B as trustee for the Trust (Trustee).

The assets currently held by the Trust are:

•                     a residential property (the Property), and

•                     cash at bank.

The Property was acquired by the Trust prior to 20 September 1985.

Pursuant to the Trust Deed, the Vesting Day of the Trust shall be the date of death of the last to die of Person C and Person D or such other date as the Trustee may appoint.

Clause 4 of the Trust Deed provides:

As from the Vesting Day the Trustees shall stand possessed of the Trust Fund and the income thereof

(1)           in trust for such of the beneficiaries for such interests and in such proportions and for one to the exclusion of the other or others as such age or time or respective ages or times if more than one in such shares and with such trusts and powers ... as the Trustees may subject to clause 10 hereof by instrument in writing revocable or irrevocable and without offending the rule against perpetuities before the Vesting Day appoint provided that any revocable appointment shall be revocable only until the end of the day preceding the Vesting Day when it shall become irrevocable;

(2)           insofar as any part of the Trust Fund shall not have been disposed of in accordance with sub-clause (1) of this clause then

(a)           if one Specified Beneficiary is named or described in the Schedule and that Specified Beneficiary is in existence on the date of this Deed in trust for such Specified Beneficiary absolutely and if more than one Specified Beneficiary are so named or described and at least one of such Specified Beneficiaries is in existence on the date of this Deed in trust for the Specified Beneficiaries who come into existence before the Vesting Day as tenants-in-common in equal shares absolutely;

...

The Specified Beneficiary of the Trust is described in the Schedule as all the children of Person C and Person D living at the date of the Trust Deed or born thereafter.

At the time of the establishment of the Trust, Person C and Person D had 2 children, Person A and Person B.

Person D passed away in 1992 and Person C passed away on DD MM 2006. They were survived by Person A and Person B.

The Trustee did not make any appointment of a new Vesting Day. The Vesting Day of the Trust was therefore the date of Person C's death on DD MM 2006.

After the death of Person C, the Trustee remained on title as legal owner of the Property. All income arising from the Property had since then been distributed equally to both Person A and Person B (the Specified Beneficiaries).

The Trustee intends to carry out one of the following transactions during the 20XX or 20XX income year:

• Option 1 - engage a real estate agency to put the Property on the market for sale to a third party and, after completion of the sale, distribute the net proceeds together with the cash held in the Trust equally to Person A and Person B.
• Option 2 - distribute the cash held in the Trust equally to Person A and Person B and transfer the Property to Person A and Person B in equal shares as tenants-in-common.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 subsection 104-55(1)

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 subsection 104-70(1)

Income Tax Assessment Act 1997 paragraph 104-70(1)(a)

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 subsection 104-75(1)

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 subsection 104-85(1)

Income Tax Assessment Act 1997 subsection 104-85(2)

Income Tax Assessment Act 1997 subsection 104-85(3)

Income Tax Assessment Act 1997 subsection 104-85(4)

Income Tax Assessment Act 1997 subsection 104-85(5)

Income Tax Assessment Act 1997 subsection 104-85(6)

Income Tax Assessment Act 1997 paragraph 104-85(6)(a)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 paragraph 112-20(1)(a)

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 Division 149

Further issues for you to consider

This private ruling is confined to the questions contained in the application.

While it confirms that CGT event A1 will happen to the Trust under Option 1, it does not consider whether any capital gain or capital loss realised from that event may be disregarded. Similarly, while it confirms that CGT event E7 will happen under Option 2, it does not consider whether any capital gain or capital loss realised by the Trustee from that event may be disregarded.

The ability to disregard a capital gain or capital loss pursuant to paragraph 104-10(5)(a) of the ITAA 1997 (relating to CGT event A1) or subsection 104-85(4) of the ITAA 1997 (relating to CGT event E7) is conditional on the disposed of CGT asset having been acquired before 20 September 1985 (i.e. it being a pre-CGT asset), and the CGT asset's ongoing status as a pre-CGT asset subject to the application of Division 149 of the ITAA 1997 (about when an asset stops being a pre-CGT asset).

Further, while the private ruling confirms that CGT event E4 will not happen to the Specified Beneficiaries under Option 1, it does not address the potential application of any other CGT event under Division 104 in relation to the distribution of the net proceeds from the disposal of the Property.

The rulees may apply for another private ruling on these or any other matter.

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Question 1

Summary

CGT event E1 under section 104-55 did not happen on the Vesting Day as no new trust was created over the trust property by declaration or settlement.

Detailed reasoning

Subsection 104-55(1) states that CGT event E1 happens if you create a trust over a CGT asset by declaration of settlement.

Taxation Ruling TR 2018/6[1] relevantly states:

12. On a trust's vesting date, the interests in the property of the trust become vested in interest and possession. In the case of a discretionary trust, from the time the trust vests the trustee no longer has any discretionary power to appoint the income or capital of the trust. Rather it holds the trust property for the absolute benefit of those beneficiaries specified as the takers on vesting.

13. The vesting of beneficial interests in a trust, even if described as a 'Termination Date', does not ordinarily cause the trust to come to an end, nor cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, or that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting).

14. Further, where a trustee continues to hold property for takers on vesting, the property is held on the same trust as existed pre-vesting; albeit the nature of the trust relationship changes.

CGT consequences of trust vesting

15. ...

16. It may be the case that no CGT event happens by reason alone of the trust's vesting. But events occurring post-vesting may cause a CGT event to happen subsequently.

In TR 2018/6, 'takers on vesting' is defined in paragraph 4 to mean those beneficiaries that, under the deed, hold a fixed interest in the capital (and income thereon) after the trust vests.

In relation to the vesting of a trust and CGT event E1, TR 2018/6 explains:

17. The vesting of a trust, of itself, does not ordinarily cause the trust to come to an end and its property to settle on the terms of a new trust. As such CGT event E1 need not happen merely because a trust has vested.

18. Circumstances might, however, occur in which the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement so as to cause CGT event E1 to happen ...

As of the Vesting Day, the Trustee has been required to hold the trust property for Person A and Person B. While the nature of the trust relationship has changed, the Trustee has continued to hold the trust property for those Specified Beneficiaries on the same trust that existed prior to the Vesting Day.

A new trust was not created over the trust property by declaration or settlement, and CGT event E1 did not happen.

Question 2

Summary

CGT event E5 under section 104-75 did not happen on the Vesting Day because neither Specified Beneficiary became absolutely entitled to the trust property.

Detailed reasoning

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 (subsection 104-75(1)).

TR 2004/D25[2] explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. Paragraph 10 of that ruling explains the core principle underpinning the concept of absolute entitlement in the CGT provisions as:

... 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 ...

The application of this principle to situations where there is more than one beneficiary with interests in a non-fungible trust asset is set out in paragraphs 20 and 23 of TR 2004/D25. They explain that a beneficiary will generally not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it because their entitlement is not to the entire asset and 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.

As of the Vesting Day, the trust property vested in Person A and Person B equally. The Property is not a fungible asset, and it is not possible for either Specified Beneficiary to call for it to be transferred to them or at their direction.

Therefore, no beneficiary became absolutely entitled to the trust property as against the Trustee on the Vesting Day and CGT event E5 did not happen.

Questions 3 and 4

Summary

CGT event A1 under section 104-10 did not happen on the Vesting Day as the trust property was not disposed of by the Trustee on that day. However, where (under Option 1) the Trustee disposes of the Property to a third party CGT event A1 will happen.

Detailed reasoning

CGT event A1 under subsection 104-10(1) happens if you dispose of a CGT asset. Subsection 104-10(2) states that 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.

As concluded in response to question 1 of this ruling (and consistent with paragraph 14 of TR 2018/6), as of the Vesting Day the Trustee has continued to hold the trust property for Person A and Person B (the takers on vesting) on the same trust that existed prior to the Vesting Day. There was therefore no change in the legal ownership of the trust property on that day and CGT event A1 did not happen.

CGT event A1 will, however, happen to the Trust where the Trustee disposes of the Property (a CGT asset under section 108-5) pursuant to Option 1.

In accordance with subsection 104-10(3), the time of the event will be when the Trustee enters into the contract for the disposal.

Question 5

Summary

Where (under Option 1) the Trustee distributes the net proceeds from the disposal of the Property to Person A and Person B, CGT event E4 under section 104-70 will not happen to them because the interest they hold in the Trust is not an interest in a trust of the nature or character required in paragraph 104-70(1)(a).

Detailed reasoning

Subsection 104-70(1) states:

CGT event E4 happens if:

(a)           the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and

(b)           some or all of the payment (the non-assessable part ) is not included in your assessable income.

According to paragraph 4 of Taxation Determination TD 2003/28[3], in its context in section 104-70, the interest in the trust is one that is both akin to the interest that a unit holder has in a unit trust and in which a taxpayer invests.

The interests of Person A and Person B (as takers on vesting) are not considered akin to the interest that a unit holder has in a unit trust, nor are they capable of acquisition by purchase or by way of assignment, and are therefore not an interest in a trust of a nature or character required in paragraph 104-70(1)(a). The distribution of proceeds from the disposal of the Property by the Trustee will therefore not trigger CGT event E4 for Person A and Person B (even if some or all of the payment is not included in their assessable income).

Question 6

Summary

Where (under Option 2) the Property is transferred by the Trustee to Person A and Person B in satisfaction of their interest in the Trust, CGT event E7 under section 104-85 will happen to them.

Detailed reasoning

Under subsection 104-85(1), CGT event E7 happens if the trustee of a trust (other than 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. The timing of the event is when the disposal occurs (subsection 104-85(2)).

The trustee may make a capital gain when CGT event E7 happens in accordance with subsection 104-85(3) if the market value of the CGT asset at the time of the disposal is more than its cost base.

A beneficiary may also make a capital gain when CGT event E7 happens in accordance with subsection 104-85(5) if the market value of the CGT asset at the time of the disposal is more than the cost base of the interest, or part of it, being satisfied. However, pursuant to paragraph 104-85(6)(a) any 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.

Where the Property is transferred by the Trustee to Person A and Person B in equal shares pursuant to Option 2, the transfer will constitute a disposal of a CGT asset of the Trust to the Specified Beneficiaries in satisfaction of part of their interest in the trust capital which vested on the Vesting Day in accordance with the Deed. CGT event E7 under section 104-85 will happen at the time of the transfer.

The Trustee will make a capital gain when CGT event E7 happens if the market value of the Property at the time of the transfer to the Specified Beneficiaries is more than its cost base.

As Person A and Person B did not acquire their interest in the Trust for any expenditure, any capital gain they make under subsection 104-85(5) will be disregarded under paragraph 104-85(6)(a).

Question 7

Summary

Where (under Option 2) the Property is transferred by the Trustee to Person A and Person B, the first element of the cost base and reduced cost base of their respective interest in the Property will be its market value at the time the Property is transferred to them in accordance with subsection 112-20(1).

Detailed reasoning

Subsection 112-20(1) states that:

The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if:

(a)          you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from:

(i)            CGT event D1 happening; or

(ii)           another entity doing something that did not constitute a CGT event happening; or

(b)          some or all of the expenditure you incurred to acquire it cannot be valued; or

(c)           you did not deal at arm's length with the other entity in connection with the acquisition.

Person A and Person B will not incur any expenditure to acquire the Property from the Trustee in the circumstances contemplated under Option 2 and none of the exemptions in section 112-20 apply. Paragraph 112-20(1)(a) will therefore apply such that the first element of the cost base and reduced cost base of the Property will be its market value at the time of acquisition.

[1] Income tax: trust vesting - consequences of a trust vesting.

[2] 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.

[3] Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to:

(a) a mere object; or

(b) a default beneficiary?