ATO ID 2009/129: Capital gains tax: land vested in a statutory trustee for sale, CGT event A1 or CGT event E1?
Date of decision: 26 October 2009
Year of income: Year ended 30 June 2009
Business line: Private Groups and High Wealth Individuals

Issue
Does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if the Supreme Court of Queensland makes an order pursuant to section 38 of the Property Law Act 1974 (Qld) appointing statutory trustees for the sale of a co-owned property?

Decision
Yes. CGT event A1 in section 104-10 of the ITAA 1997 will happen in respect of the property on the appointment of the statutory trustees.

Facts
A commercial property situated in Queensland was owned by two companies as tenants in common. As a result of a disagreement between the co-owners as to their future use of the property, one of the co-owners applied to the Supreme Court of Queensland for an order under section 38 of the Property Law Act 1974 (PLA) for the appointment of trustees for the sale of the property. The court appointed two accountants as trustees of the property and vested the property in them. The court ordered that the trustees sell the property and pay each co-owner their respective share of the net sale proceeds. In accordance with the court order the property was subsequently sold and the net proceeds were remitted to the co-owners.

Reasons for decision
Summary: CGT event A1 happens if you dispose of a CGT asset: subsection 104-10(1) of the ITAA 1997. 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: subsection 104-10(2) of the ITAA 1997. If the disposal is not made under a contract, then CGT event A1 happens when the change of ownership occurs: subsection 104-10(3) of the ITAA 1997. The effect of the court order is to vest the property in the trustees. This is clear from the terms of the court order itself (which expressly vests the property in the trustees) and from subsection 38(3A) of the PLA (which says that on the appointment of statutory trustees for sale the property shall vest in those trustees). Also, subsection 38(7) of the PLA says that where land becomes subject to a statutory trust for sale it shall be deemed to be 'converted' upon the appointment of trustees for sale unless the court otherwise directs. In equity, conversion is the notional change of land into money (or money into land). Its effect is to turn realty into personalty (or personalty into realty). The principle is that land directed to be sold and turned into money (or money directed to be employed in the purchase of land) is considered to be that species of property into which it is directed to be converted. Refer to Meagher, RP, Heydon, JD, Leeming, MJ, 2002, Meagher, Gummow and Lehane, Equitable Doctrines & Remedies , 4th edn, Butterworths, Lexis Nexis, Australia, pp. 1079-1080; Fletcher v. Ashburner (1779) 1 Bro CC 497; 28ER 1259. On the making of the court order the whole of the co-owners' interests in the property vested in the accountants appointed as trustees for the sale of the property; and the co-owners' interests were converted into personalty, that is, into a right to compel due performance of the trust and to share in the proceeds of sale in accordance with their interests. In these circumstances it is considered that the making of the court order effects a disposal of the property from the co-owners to the trustees for sale by operation of law. Therefore, CGT event A1 happens. A capital gain will be made as a result of CGT event A1 happening if the capital proceeds from the event are more than the asset's cost base. The capital proceeds for the event are the total of the money you receive or are entitled to receive in respect of the event happening and the market value of any other property you receive or are entitled to receive in respect of the event happening (refer to subsection 116-20(1) of the ITAA 1997). On the making of the court order each co-owner's interest in realty is converted to personalty. It is expected that the market value of this property will equate to the share of net proceeds received. CGT event E1 did not happen when the trust was created over the property. That event happens if you create a trust over a CGT asset by declaration or settlement: subsection 104-55(1) of the ITAA 1997.It is considered that this event has no application where the trust is created by order of a court, rather than by the actions of the owners of the property. That is, given the court's role, it is impossible to cast the co-owners in the role of 'you' for the purpose of CGT event E1.

Legislative references: Income Tax Assessment Act 1997 section 104-10 subsection 104-10(1) subsection 104-10(2) subsection 104-10(3) subsection 104-55(1) subsection 116-20(1)
Case references: Fletcher v Ashburner (1779) 1 Bro CC 497 28 ER 1259
Other references: Meagher, Gummow and Lehane, Equitable Doctrines & Remedies, Fourth edition (Meagher, Lehane and Leeming) Butterworths, Lexis Nexis, 2002 at [38-005] and [38-010]
Subject references: Capital gains CGT capital proceeds CGT event A1 - disposal of a CGT asset CGT event E1 -E9 - trusts Disposal of assets