Private ruling: CGT - beneficial ownership
Published: October 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Will there be a capital gains tax (CGT) event under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) on the transfer of investments from Y to Y as trustee for the Y Trust? | A1: No | Q2: Will there be a CGT event under Division 104 of the ITAA 1997 on the transfer of investments from Z to Z as trustee for the Z Trust? | A2: No | Q3: Will the Y Trust be assessed on: • all dividends and distributions received for investments held under portfolio 1 • any capital gain (if applicable) resulting from CGT event A1 that occurred in relation to investments held under portfolio 1; and • all interest income earned on the bank account that the dividends and distributions from portfolio 1 were paid? | A3: Yes | Q4: Will the Z Trust be assessed on: • all dividends and distributions received for investments held under portfolio 2 • any capital gain (if applicable) resulting from CGT event A1 that in relation to investments held under portfolio 2; and • all interest income earned on the bank account that the dividends and distributions from portfolio 2 were paid? | A4: Yes

Relevant facts and circumstances: Y and Z (children of the deceased) are executors of the deceased's estate. The deceased's will, provided that the balance of the estate would be distributed to two testamentary trust of which their children would be a primary beneficiary of each. The deceased's will, provided the terms of the testamentary trusts that were created under the will. Professionals were engaged to facilitate the transfer of the investments from the deceased estate to Y and Z in their capacity as trustee of their respective testamentary trusts. The investments have always been held separately to the personal assets of Y and Z. There has been no sale of any of the investments held by the deceased. Nor have there been any additional purchases. The only change to the investments has resulted from a restructure and merger of one of the companies which was beyond the control of Y and Z. Two separate bank accounts were opened for the receipt of dividends and distributions from the investments. However, during the transfer process there were a number of administrative errors that occurred whereby the trust account designations were incorrectly documented: • The share registry records indicate that the investments are held by the individuals rather than under the testamentary trusts • Y's and Z's personal TFNs were reported to the share registries rather than the testamentary trusts TFNs. • Y's and Z's personal TFNs were reported against the bank accounts rather than the testamentary trusts TFNs. The investment portfolios are reflected by the share registries as being held as follows: • Portfolio 1 - Y • Portfolio 2 - Z Following the appointment of your new accountants, your accountant undertook to have the account designations rectified to correctly show the holder of the investments as the testamentary trusts and to have the correct TFNs recorded against the investments. You have been advised that in order to rectify the account designations, an off-market transfer would need to be lodged with the share registries. The off-market transfers would show nil consideration.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 44(1) | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 100-20(1) | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 Subsection 104-10(2)

Reasons for decision: Detailed Reasoning - CGT Event: You only make a capital gain or capital loss if a CGT event happens to an asset that you own (subsection 100-20(1) of the ITAA 1997). CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you maintain beneficial ownership. The beneficial owner of an asset is the person who enjoys or who is entitled to the benefits of possession (Taxation Ruling IT 2486 and Taxation determination TD 92/106), this can differ from the person who has legal title. In this case, legal title to the investments is currently held by Y and Z as individuals. However, we consider that based on the terms of the will Y and Z could only ever have held the investments as trustees of the testamentary trusts created as a result of the deceased's will. Accordingly, Y and Z have never held the beneficial ownership of the investments in their individual capacity. Beneficial ownership is held by the Y Trust and the Z Trust. It follows that when the investments are transferred under an off-market transfer to rectify the administrative errors that have been made, no CGT event will occur as beneficial ownership will remain the same. | Detailed Reasoning - Income from investments: As determined above, the Y Trust and the Z Trust are the beneficial owners of the investments. This is because the two respective testamentary trusts are beneficially entitled to the investments and the benefits of possessing those investments. Such benefits include the dividends and distributions from those investments and any capital gains relating to them. Accordingly, the Y Trust will be assessed on all dividends and distributions received for investments held under portfolio 1 and any capital gain (if applicable) in relation to investments held under portfolio 1. Similarly, the Z Trust will be assessed on all dividends and distributions received for investments held under portfolio 2 and any capital gain (if applicable) in relation to investments held under portfolio 2. We accept that the money held in the respective bank accounts was held by Y and Z in their capacity as trustees of their respective testamentary trusts. It was held separately to their personal accounts and the money paid into the accounts was derived from the investments held on trust. Accordingly, any interest income earned on these accounts will also be assessable to the Y Trust and Z Trust respectively.