ATO ID 2004/122: Capital gains tax: split assets - discretionary trusts
Date of decision: 12 December 2003
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
If an asset owned by the trustee of a discretionary trust is split into two or more assets, should the trustee calculate the cost base or reduced cost base of each of the new assets in accordance with section 112-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. There has been no change in beneficial ownership of the assets. Therefore, the trustee should calculate the cost base and reduced cost base of each new asset in accordance with the rules in section 112-25 of the ITAA 1997.

Facts
The taxpayer is the trustee of a discretionary trust. In the 1998 income year the trust purchased a block of land. In the 2004 income year the trustee subdivided the block of land into two blocks. The taxpayer is now seeking advice as to whether the rules in section 112-25 of the ITAA 1997 apply with respect to calculation of the cost base and reduced cost base of the two new blocks.

Reasons for decision
Summary: Section 112-25 of the ITAA 1997 sets out what happens if a CGT asset is split into two or more assets and you are the beneficial owner of the original asset and each new asset. The split is not a CGT event (subsection 112-25(2) of the ITAA 1997). The cost base and reduced cost base of each new asset is calculated in accordance with the method statement in subsection 112-25(3) ITAA 1997. The method statement provides that you first determine each element of the cost base and reduced cost base of the original asset at the time of the split and then apportion in a reasonable way each element to each new asset. At issue is whether the requirement in subsection 112-25(1) of the ITAA 1997 regarding beneficial ownership of the original and new assets has been satisfied as the assets are owned by the trustee of a discretionary trust. The beneficiaries of a discretionary trust do not have any interest either individually or collectively in the property of the trust estate. They have no more than a right to have the trust duly administered. This right does not constitute beneficial ownership: see paragraph 2 of Taxation Determination TD 2000/27. The equivalent provision in Income Tax Assessment Act 1936 (ITAA 1936) to section 112-25 of the ITAA 1997, is subsection 160ZH(12). This subsection provided that the rules about the cost base and reduced cost base in subsections 160ZH(13) and 160ZH(14) of the ITAA 1936 applied if there had not been any change in the beneficial ownership of the asset or assets concerned. If that condition were applied in this case, it would be satisfied, because both before and after the subdivision there was no beneficial owner of the land. It is considered that the relevant provisions in the ITAA 1936 and ITAA 1997 express the same ideas, although different forms of words are used. Section 1-3 of the ITAA 1997 provides that if the ITAA 1936 expressed an idea in a particular form of words and the ITAA 1997 appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style, the ideas are not taken to be different just because different forms of words are used. Therefore, as the beneficial ownership of the land has not changed the subdivision is not a CGT event and the trustee of the discretionary trust will calculate the cost base and reduced cost base of the subdivided land in accordance with the rules in section 112-25 of the ITAA 1997. The cost base and reduced cost base of the subdivided land will be determined by apportioning in a reasonable way each element of the original cost base and reduced cost base.

Legislative references: Income Tax Assessment Act 1936 subsection 160ZH(12) subsection 160ZH(13) subsection 160ZH(14)
Related public rulings and determinations: Taxation Determination TD 2000/27 | Taxation Determination TD 2000/31 | Capital Gains Cell Determination TD 7
Other references: Explanatory Memorandum to Taxation Law Improvement Bill (No. 1) 1998
Subject references: capital gain capital gains tax CGT assets CGT cost base CGT events CGT reduced cost base CGT cost base modification-split, changed or merged asset rule CGT original assets discretionary trusts trustees trusts