Private ruling: Capital gains tax
Date of advice: 11 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a CGT exemption on the disposal of the assets where you have provided the proceeds from the sale to the special disability trust? | A1: No.

Relevant facts and circumstances: A Special Disability Trust (SDT) has been established by certain individuals on behalf of their disabled sibling, Individual A. The trust is an approved SDT. The deceased passed away in 20XX. The deceased stipulated in their Will that their assets were to be divided into equal shares among their X children, including assets in Trust B. It is the family’s intention to specifically set aside money from the estate of the deceased for Individual A. The investments of the deceased estate have been sold and X% of the proceeds will be transferred to the SDT. Trust B owned property for more than 12 months. This property was sold in the 20XX financial year and the proceeds of sale are currently held in the solicitor’s trust account yet to be disbursed to the beneficiaries including the SDT. The Trustees of Trust B have resolved via minute that the SDT is entitled to X% of the income and capital of the Trust. The deceased owned land for more than 12 months that was sold in the 20XX financial year, the proceeds of sale are currently held in the solicitors trust account and X% of these proceeds will be distributed to the SDT.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 118-85 | Income Tax Assessment Act 1997 Section 115-25

Reasons for decision: Summary: Generally, any assessable gain made from a capital gains tax (CGT) event is included in your assessable income in the income year in which the event happens. However, in some cases an exemption may apply that allows a taxpayer to reduce, or disregard and therefore not include in their assessable income, any gain or loss made as a result of a CGT event. Where applicable, such exemptions are provided for by the tax law. Where a CGT asset is transferred directly into a Special Disability Trust (SDT) for no consideration, section 118-85 of the Income Tax Assessment Act 1997 (ITAA 1997) allows the transferor to disregard a capital gain or capital loss made from the transfer. The purpose of this rule is to remove a tax barrier that might otherwise impede family members from making contributions to a special disability trust. For the exemption provided by section 118-85 of the ITAA 1997 to apply to the transfer of a CGT asset, the transfer must be to a ‘special disability trust’ within the meaning of the Social Security Act 1991 . The section 118-85 of the ITAA 1997 exemption can also apply if a CGT asset is transferred to a trust that is not an special disability trust at the time of the transfer, provided the trust becomes an special disability trust “as soon as practicable” after the transfer in accordance with paragraph 118-85(1)(b) of the ITAA 1997. A trust will satisfy this requirement if it applies to become a SDT in a reasonable time, and the application is later approved. Application to your situation In this case the assets from the estate and the Trust B have not been transferred directly to the SDT for no consideration. The CGT exemption in section 118-85 of the ITAA 1997 only applies where an asset has been transferred directly to a SDT. In this case it is capital proceeds from the sale of the land that are transferred to the SDT, not the land itself. Accordingly there is no capital gain when cash is transferred to the SDT and therefore no CGT exemption is required for the transfer of cash. However, the sale of the properties by the estate and Trust B are CGT events and section 118-85 of the ITAA 1997 does not apply in this case so any gain made on the sale of the land will be taxable. As the land was held for more than 12 months you may apply the 50% discount under section 115-25 of the ITAA 1997.