Private ruling: Capital gains tax event E5
Date of advice: 19 October 2016
Published: November 2016
Ruling period: Year ended 30 June 20XX | Year ending 30 June 20YY
Date scheme commenced: 1 July 20WW

Ruling: Q1: Did capital gains tax (CGT) event E5 happen when the beneficiary became absolutely entitled to the trust's CGT assets? | A1: Yes.

Relevant facts and circumstances: The Trust was established several years ago. The Trust has one beneficiary. The beneficiary did not incur any expenditure to acquire their interest in the Trust. Under the Trust Deed, the Trust vests when the beneficiary reaches 25 years of age. The beneficiary turned Z during the 20XX income year. The Trust Deed states: In the event that the Beneficiary dies before attaining a vested interest herein and irrespective of the fact that the Beneficiary is then survived by issue, the whole of the Trust Fund and all Undistributed Income of which the Trustees then stand possessed and hold in trust shall be paid to Y or in the event of their death to the executor or administrator of their estate who shall be required to hold same in trust for the beneficiaries of their estate if more than one in equal shares as tenants in common and the receipt thereof by the executor or administrator of the said estate shall be a sufficient discharge of all of the obligations imposed upon the Trustees pursuant to the provisions of this deed. Prior to the vesting date, the trustees hold the assets in trust and have absolute discretion as to the payment of income and capital of the trust to the beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 Subsection 104-75(3) | Income Tax Assessment Act 1997 Paragraph 104-75(6)(a)

Reasons for decision: Detailed Reasoning - CGT event E5: Under section 104-75 of the Income Tax Assessment Act 1997 (ITAA 1997) CGT event E5 happens if a beneficiary of a trust (other than a unit trust or a trust to which Division 128 applies) becomes absolutely entitled to a CGT asset of the trust as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset. As per subsection 104-75(3) of the ITAA 1997 the trustee makes a capital gain if the market value of the asset at the time of the event is more than its cost base. The beneficiary makes a capital gain if the market value of the asset at the time of the event is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset (subsection 104-75(5) of the ITAA 1997). However, a capital gain the beneficiary makes under CGT event E5 is disregarded if the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure (subsection 104-75(6) of the ITAA 1997). Absolute entitlement The circumstances in which a beneficiary of a trust is considered to be absolutely entitled to an asset of the trust for the purpose of the CGT provisions are set out in Draft Taxation Ruling TR 2004/D25. 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 (paragraph 10 TR 2004/D25). In respect of beneficiaries who cannot be absolutely entitled, paragraph 14 of Draft Taxation Ruling TR 2004/D25 states: Also, a beneficiary with an interest in the trust's assets cannot be absolutely entitled if that interest is contingent or defeasible (see Explanation paragraphs 73 to 75). Paragraph 75 of TR 2004/D25 provides the example where: assets are held on trust for X should X attain the age of 25, but if X does not attain 25, then the assets are to pass to Y. This is referred to as a 'gift over' and its existence means that X's interest will be defeated if he does not attain 25. Application to your circumstances In this case, the Trust is not a unit trust and it is not a deceased estate to which Division 128 of the ITAA 1997 applies. Therefore the exceptions in CGT event E5 do not apply. A review of the information provided indicates that once the beneficiary attained the age of 25 the trustees were no longer obliged to hold the funds in the event of the beneficiary's death in trust for Y or their estate upon their death. This means that the beneficiary's interest in the trust cannot be defeased and it is at this point the beneficiary became 'absolutely entitled' and CGT event E5 occurred. Further, the capital gain the beneficiary made under CGT event E5 is disregarded under paragraph 104-75(6)(a) of the ITAA 1997 as the beneficiary acquired an interest in the Trust at no cost. Therefore CGT event E5 happens to the Trustees of the Trust and any capital gain will be assessed under subsection 104-75(3) of the ITAA 1997. For tax purposes, a trustee can stream capital gains or franked distributions provided it has the power, either express or implied, under the trust deed. Capital gains of a trust are allocated to beneficiaries and the trustee in accordance with the rules in Subdivision 115-C of the ITAA 1997.