Private ruling: Capital gains tax
Published: June 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will capital gains tax (CGT) event E5 occur when the trustee vests the property to the beneficiaries? | A1: No. | Q2: Will CGT event A1 occur when the trustee vests the property to the beneficiaries? | A2: Yes. | Q3: Does the disposal of an asset from a trust result in the same CGT event as when the beneficiary becomes absolutely entitled to the asset? | A3: No. | Q4: Can the trust apply the small business retirement exemption in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to any capital gain made on the sale of the property? | A4: Yes.

Relevant facts and circumstances: The Trust owns a commercial property which it acquired in 1988. The Trust is a family discretionary trust. A company 100% owned by the beneficiaries of the Trust operated its business from the commercial property for more than X years. The property has been rented to a third party for the remaining period. The net assets of the beneficiaries and their capital gains tax (CGT) affiliates are less than $6 million. The beneficiaries of the Trust are over 55 years of age. The beneficiaries are significant individuals of the trust and have been for the entire ownership period of the property. The trustee intends to vest the property to the beneficiaries as joint tenants. The trust will continue to exist and function as an investment trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20, | Income Tax Assessment Act 1997 section 104-75, | Income Tax Assessment Act 1997 section 152-110, and | Income Tax Assessment Act 1997 section 152-125.

Reasons for decision: Detailed Reasoning - Question 1:: Under section 104-75 of the ITAA 1997, CGT event E5 occurs when a beneficiary becomes absolutely entitled to a CGT asset of a trust. As per Taxation Ruling TR 2004/D25, if multiple beneficiaries hold an interest in a trust asset it is difficult for an individual beneficiary to establish that they are absolutely entitled to that asset for capital gains tax (CGT) purposes. If more than one beneficiary has an interest in the trust assets, absolute entitlement can only be established if the assets are fungible. Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets such as property are rarely fungible because they are not divisible and each piece of property is considered to be unique. In this case, the beneficiaries are not considered to be absolutely entitled to the property on the exercise of the trustee's discretion to vest the property. This is because the property is not considered to be a fungible or divisible CGT asset. Therefore, CGT event E5 will not occur as neither beneficiary is absolutely entitled to the property. | Detailed Reasoning - Question 2:: Section 102-20 of the ITAA 1997 provides that you can make a capital gain or loss if a CGT event happens to a CGT asset you own. Under section 104-10, CGT event A1 occurs when you dispose of your ownership interest in a CGT asset to someone else. In this case, CGT event A1 will occur when the property is actually transferred to the beneficiaries of the trust. The trustee will make a capital gain or loss as a result of CGT event A1 taking place. | Detailed Reasoning - Question 3:: As discussed in questions 1 and 2, a beneficiary becoming absolutely entitled to an asset and the disposal of an asset to a beneficiary will result in different CGT events occurring. | Detailed Reasoning - Question 4:: According to the Advanced guide to capital gains tax concessions for small business 2010-11, you can disregard a capital gain from a CGT event under the 15 year exemption if certain conditions are satisfied. To qualify for the small business CGT concessions, you must first satisfy several basic conditions. You must be a small business entity or you need to satisfy the maximum net asset value test. This test requires your net assets, plus those of any connected entities or affiliates to be less than $6 million. The basic conditions also require that the asset in question satisfies the active asset test. This test requires the asset to have been active for at least 7.5 years of the whole period of ownership. A trust can access the 15 year exemption provided the basic conditions are met, and the asset has been continuously owned for the 15 year period ending just prior to the CGT event. The trust must also have had a significant individual for a total of at least 15 years of the whole period of ownership. The individual who was a significant individual just before the CGT event must have been at least 55 years old at that time and the event must have occurred in connection with their retirement. In this case, the trust owns a property which is used in the business of a connected entity. The trust satisfies the basic conditions and the additional conditions for the 15 year exemption. Therefore, the trust can disregard the capital gain made on the sale of the property under the 15 year exemption. | Detailed Reasoning - Additional information: If a capital gain made by a trust is disregarded under the small business 15 year exemption, the trust must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further times as allowed by the Commissioner. More information regarding the small business concessions and the 15 year exemption can be found in the publication Advanced guide to capital gains tax concessions for small business 2010-11 (NAT 3359), which is available on our website www.ato.gov.au.

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