ATO ID 2003/559: Disposal of a CGT asset to a trust: application of CGT event A1 or CGT event E2
Date of decision: 25 June 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
For the purposes of subsection 102-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is CGT event A1 in section 104-10 of the ITAA 1997 the most specific CGT event that happens, rather than CGT event E2 in section 104-60 of the ITAA 1997, as a result of a taxpayer disposing of an asset to a trust that is not connected with the taxpayer in any way?

Decision
Yes. CGT event A1 in section 104-10 of the ITAA 1997 is the most specific event that happens (and not CGT event E2) in these circumstances.

Facts
The taxpayer owned land which they acquired after 19 September 1985. They engaged a real estate agent to sell the land. They entered into a contract of sale with an entity introduced to them by the agent. The taxpayer was aware of the fact that the purchasing entity was acting in the capacity of trustee of a trust. Ownership of the land changed from the taxpayer to the trustee. The taxpayer and the trustee dealt with each other at arm's length. Apart from this dealing, neither the taxpayer nor their associates have any connection with the trustee or the trust.

Reasons for decision
Summary: CGT event A1 happens if the ownership of a CGT asset changes (section 104-10 of the ITAA 1997). CGT event E2 happens if a CGT asset is transferred to an existing trust (section 104-60 of the ITAA 1997). If more than one CGT event happens in respect of a transaction, the most specific event is to be used (subsection 102-25(1) of the ITAA 1997). There may be different tax outcomes for a taxpayer depending on which CGT event happens. CGT event E2 does not happen if the exception in subsection 104-60(5) of the ITAA 1997 applies. That exception looks to the connection between the transferor and transferee. There is no similar exception for CGT event A1. Also, CGT event A1 happens on the contract date whereas CGT event E2 happens when the ownership change occurs. This may affect the income year in which a capital gain or capital loss is taken to be made. On its face, CGT event E2 happens whenever an asset is transferred to a trust and is therefore the applicable event in this case. However, it is considered that CGT event A1 (rather than CGT event E2) is the most specific event where, as in this case, an asset is transferred to another party and the transferor is indifferent as to the identity of that party. That is, CGT event A1 is the most specific event where the parties are completely unconnected and are dealing with each other at arm's length. In this case, the vendor knew that the purchaser was acting in a trustee capacity. But that will not always be the case. For example, the purchaser may be a nominee company formed for the purpose of acquiring property on behalf of others who do not want their identity revealed. Clearly, CGT event A1 is the most specific event in that case. There can be no question of CGT event E2 being the most specific event if the vendor does not know that the asset has been disposed of to a person acting in a trustee capacity. Consistent with that outcome, CGT event A1 is considered the most specific event whenever the parties are unconnected. It would be inappropriate for a different CGT event to apply depending on whether the vendor knew the capacity in which the purchaser was acquiring the asset. On the other hand, CGT event E2 will be the most specific event if, for example, an asset is transferred to a trust of which the transferor or an associate is a beneficiary or object. The exception to CGT event E2 suggests that event is applicable when the parties are connected. That exception applies if the transferor is the sole beneficiary of the trust and is absolutely entitled to the transferred asset as against the trustee and the trust is not a unit trust (section 104-60(5) of the ITAA 1997).Accordingly, CGT event A1 is the most specific event that happens where an asset is sold to the trustee of a trust that has no connection with the vendor or the vendor's associates.

Legislative references: Income Tax Assessment Act 1997 subsection 102-25(1) section 104-10 section 104-60 subsection 104-60(5)
Subject references: CGT event A1-disposal of a CGT asset CGT events E1-E9 - trusts Connected entity Disposal of assets Trusts