Private ruling: Income Tax - Capital Gains Tax
Published: September 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Did a Capital Gains Tax event arise upon the making of the court order vesting the property in the Applicant? | A1: Yes. | Q2: If a CGT liability arises when the property is sold by the Applicant does the CGT liability fall upon the Applicant? | A2: Yes. | Q3: If a CGT liability arises when the property is sold, will the Applicant be entitled to disregard a capital gain arising from the sale of the property held on trust for the benefit of the end beneficiaries in accordance with section 106-50 of the Income Tax Assessment Act 1997(ITAA 1997)? | A3: No. | Q4: If a CGT liability arises and the Applicant is not entitled to rely on section 106-50 of the ITAA 1997, will the cost base of the property in the hands of the Applicant be the market value of the property when the property was vested in the Applicant? | A4: Yes.

Relevant facts and circumstances: The property is owned by Individual A (50%), Individual B (25%) and Individual C (25%) (collectively the individuals). An application was made to appoint a statutory trustee for the sale of the property. The title to the property has since been transferred to the statutory trustee for the sale. A third party purchaser has been identified and wishes to purchase the property as soon as possible. The proceeds of sale will be distributed to the beneficiaries according to their share of ownership.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-55 | Income Tax Assessment Act 1997 Section 106-50 | Income Tax Assessment Act 1997 Section 116-20

Reasons for decision: Detailed Reasoning - Summary Question 1: When the Court Order was made and vested the property in the Applicant, as statutory trustee for the sale of the property, a new entity was created for taxation purposes. The making of the court order effects a disposal of the property from the co-owners to the trustee for sale by operation of law and CGT event A1 happens. | Detailed Reasoning - Detailed reasoning: ATO Interpretive Decision ATO ID 2009/129 provides that capital gains tax (CGT) event A1 occurs when property vests in a statutory trustee. 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. On the making of the court order the whole of the co-owners' interests in the property vested in the receivers appointed as trustee 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 trustee 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). 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. | Detailed Reasoning - Summary Questions 2, 3 and 4: The requirements of section 106-50 of the ITAA 1997 have not been met. Accordingly, CGT event A1 will happen to the trustee in respect of the disposal of the whole of the property. A capital gain or capital loss may arise to the trustee under subsection 104-10(4) of the ITAA 1997. The first element of the asset's cost base and reduced cost base in the trustee's hands is its market value when it was transferred to the trust. | Detailed Reasoning - Detailed Reasoning: CGT event A1 in section 104-10 of the ITAA 1997 happens if a CGT asset is disposed of, that is, when there is a change of ownership from one entity to another entity. In this case, the trustee are taking steps to dispose of the property. Under CGT event A1 you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-55(3) of the ITAA 1997). Under section 106-50 of the ITAA 1997, if someone is absolutely entitled to a CGT asset as against the trustee, then any act done by the trustee in relation to the asset is taken to be an act of the beneficiary. Whether section 106-50 applies in this case will depend on whether the beneficiaries are absolutely entitled to the trust asset (100% interest in the property) as against the trustee. | Detailed Reasoning - Core principle of absolute entitlement: The core principle underpinning the concept of absolute entitlement in the CGT provisions is 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. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115 (Saunders v. Vautier) applied in the context of the CGT provisions. | Detailed Reasoning - Rule in Saunders v. Vautier: Under the rule in Saunders v. Vautier , the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it. | Detailed Reasoning - Core principle: applying it in practice: The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. If there is more than one beneficiary with interests in the trust asset, then 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. This is because their entitlement is not to the entire asset. Where more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. If the assets are not fungible, but more than one beneficiary has an interest in them, then that is the clearest possible indication that, under the terms of the trust, individual beneficiaries are not entitled to particular assets to the exclusion of others. That is, if each asset is unique, but the trust does not clearly set out which beneficiary is to get which asset, this indicates an intention that each beneficiary is in fact to have an interest in each of the assets. | Detailed Reasoning - When are assets fungible?: Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets are fungible if they are of the same type (for example, shares in the same company and with the same characteristics), although assets within the class need not be exactly identical and in this regard it is enough that a beneficiary might reasonably be expected to be indifferent between them. However, land would rarely be fungible because each parcel of land is unique. | Detailed Reasoning - Application to your circumstances: An asset such as land raises particular problems where there are multiple beneficiaries because it is generally not possible to divide the land without prejudicing the interests of other beneficiaries. While each beneficiary has an interest in the land, the asset held by the trust is the whole of the land. Absolute entitlement cannot be established, as each beneficiary must be able to point to the particular asset that belongs to them. As mentioned, where a beneficiary is absolutely entitled to an asset of the trust as against the trustee, section 106-50 of the ITAA 1997 applies to treat any act done by the trustee as if the beneficiary had done it. Where section 106-50 applies, the disposal by the trustee is regarded as a disposal by the beneficiaries. In this case the requirements of section 106-50 of the ITAA 1997 have not been met. Accordingly, CGT event A1 will happen to the trustee in respect of the disposal of the whole of the property. A capital gain or capital loss may arise to the trustee under subsection 104-10(4) of the ITAA 1997. A capital gain will arise if the capital proceeds for the disposal are more than the cost base of the asset. The first element of the asset's cost base and reduced cost base in the trustee's hands is its market value when it was transferred to the trust.