Private ruling: Transfer trust assets to beneficiaries
Published: October 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will a capital gains tax (CGT) event occur when the property is transferred to the beneficiaries? | A1: Yes | Q2: Will the entire capital gain or loss made by the trustee as a result of the transfer of the property be disregarded? | A2: No

Relevant facts and circumstances: The trust acquired a property prior to 20 September 1985. A number of buildings have been constructed on the property since 20 September 1985 The trustee intends to transfer the property to beneficiaries of the estate as a distribution. There is no intention to subdivide the property; the beneficiaries receiving the distribution will be joint owners.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Subsection 108-55(2)

Reasons for decision: Summary: At law, a fixture forms part of the land to which it is attached and, as a consequence, the legal owner of the land is the legal owner of the fixture. 'There is no doubt that the general maxim of the law is, that what is annexed to the land becomes part of the land…'( Eon Metals NL v Commissioner of State Taxation (WA) 91 ATC 4841; (1991) 22 ATR 601 ( Eon Metals )). Notwithstanding this, certain buildings may be treated as separate assets to the land they are constructed on for the purpose of determining if CGT is applicable. | Detailed Reasoning - When are buildings separate CGT assets to land: In accordance with subsection 108-55(2) of the ITAA 1997, a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if; · you entered into a contract for the construction of the building on or after 20 September 1985; or · if there is no contract, the construction started on or after 20 September 1985. | Detailed Reasoning - CGT event E5: When a beneficiary becomes absolutely entitled to a CGT asset of the trust as against the trustee, CGT event E5 happens under section 104-75 of the ITAA 1997. The time of the event is when the beneficiary becomes absolutely entitled to the asset. The trustee will make a capital gain in relation to CGT event E5 if the market value of the asset is more than its cost base. The trustee will make a capital loss is that market value is less than the asset's reduced cost base. Any capital gain made by the trustee is disregarded if the asset was acquired by the trustee before 20 September 1985. | Detailed Reasoning - Application to your circumstances: In this case, the trust acquired the land prior to 20 September 1985 and multiple buildings have been erected on the land. Although some of the construction costs were met by the beneficiaries, in accordance with the general law principal supported by the Eon Metal's case, the trustee is the legal owner of all of the buildings on the land. This will however, not prevent the buildings being treated as separate assets for the purposes of determining any CGT liability. CGT event E5 will occur when the trustee transfers the property to the beneficiaries as a distribution. Any capital gain or loss will be disregarded to the extent that it relates to the land. However, as the buildings that were constructed after 20 September 1985 (or the contact for their construction was entered into after that date) are treated as separate CGT assets, the trustee will make a capital gain or loss in relation those buildings. The capital gain or loss will be determined with reference to the market value of the buildings at the time of the CGT event. | Detailed Reasoning - Further issues for you to consider: Beneficiaries can also make a capital gain or loss as a result of CGT event E5 happening. A beneficiary will make a capital gain if the market value of the asset is more than the cost base of the beneficiary's interest in the trust capital to the extent that it relates to the asset. A beneficiary will make a capital loss if the market value of the asset is less than the reduced cost base of that beneficiary's interest in the trust capital to that extent that it relates to the asset. However, a beneficiary's capital gain or loss will be disregarded where: · the beneficiary acquired the relevant interest in the trust for no expenditure · the beneficiary acquired the relevant interest in the trust prior to 20 September 1985; or · the capital gain or loss is disregarded under the main residence exemption.