Private ruling: Appointment of assets of a trust to a beneficiary
Date of advice: 20 December 2018
Published: April 2019
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: A day in the 2017 income year.

Ruling: Q1: Did CGT event E5 under section 104-75 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) happen for Company A as trustee for Trust A (‘the trustee of Trust A’) when the shares in Company B held by the trustee of Trust A were appointed to Beneficiary One of Trust A? | A1: Yes. | Q2: Did CGT event A1 under section 104-10 of the ITAA 1997 happen for the trustee of Trust A when the shares in Company B held by the trustee of Trust A were appointed to Beneficiary One as a beneficiary of Trust A? | A2: Yes. | Q3: If CGT event A1 or E5 did happen for the trustee of Trust A, did CGT event K6 under section 104-230 of the ITAA 1997 happen for the trustee of Trust A, on the basis that more than 75% of the underlying assets of each underlying entity were considered to be acquired after 19 September 1985 when the trustee of Trust A appointed the shares in Company B to Beneficiary One? | A3: No. | Q4: If CGT event A1 or E5 did happen for the trustee of Trust A, will any capital gain arising under CGT event A1 or E5 be disregarded? | A4: Any capital gain made on the disposal of the shares in Company B that Trust A acquired before 20 September 1985 will be disregarded.

Relevant facts and circumstances: Trust A Trust A was settled multiple decades ago under the terms set out in the deed of settlement between the settlor and the trustee. Company A was the trustee for Trust A. Trust A is a discretionary trust, and the trustee of Trust A must exercise its discretion to make a beneficiary presently entitled to capital or income. Beneficiary One is part of the eligible class of beneficiaries. Trust A held shares in Company B. Beneficiary One’s interest in Trust A arose as a result of the settlement of Trust A. Beneficiary One acquired their interest in the trust for no expenditure. Trust A held shares in Company B, part of the shares were acquired before 20 September 1985, the remaining were acquired after 20 September 1985. In the 2017 income year, the trustee of Trust A exercised its discretion and appointed all the shares it held in Company B to Beneficiary One. Company B Just before the shares held by Trust A in Company B were appointed to Beneficiary One, the market value of the post-CGT property of Company B is less than 75% of the net value of the property, and the market value of interests Company B owned through interposed companies or trusts in post-CGT property are less than 75% of the net value of the net value of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 102-25(1) | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(3) | Income Tax Assessment Act 1997 Subsection 104-75(1) | Income Tax Assessment Act 1997 Subsection 104-75(2) | Income Tax Assessment Act 1997 Subsection 104-75(4) | Income Tax Assessment Act 1997 Subsection 104-230(1) | Income Tax Assessment Act 1997 Subsection 104-230(2) | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Division 128

Reasons for decision: Summary: CGT event E5 happened for the trustee of Trust A when the shares in Company B held by Trust A were appointed to Beneficiary One. | Detailed Reasoning - Detailed reasoning: Section 100-20 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) states that you can make a capital gain or loss only if a CGT event happens. This section also makes it clear that the specific time when the CGT event happens is important, particularly for working out in which income year a capital gain or loss occurred. CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. The timing of the event is when the beneficiary becomes absolutely entitled to the asset. A CGT asset is any kind of property or a legal or equitable right that is not property. Shares in a company are a CGT asset. The Commissioner has expressed his view that a beneficiary is ‘absolutely entitled to a CGT asset of a trust as against the trustee’ when that beneficiary, who has a vested and indefeasible interest in the trust asset, has the ability to call for the asset to be transferred to them or to be transferred at their direction. Pursuant to the powers available under Trust A’s deed, the trustee of Trust A appointed the shares Trust A held in Company B to Beneficiary One. Beneficiary One became absolutely entitled to those shares at that time because as a result of the appointment, Beneficiary One had a vested and indefeasible interest in those shares, and had the ability to call for them to be transferred to him or otherwise transferred as directed. Consequently, CGT event E5 happened for Company A as trustee for Trust A at the time when Beneficiary One became absolutely entitled to the shares in Company B. | Summary: CGT event A1 happened for the trustee of Trust A when the shares held in Company B by Trust A were appointed to Beneficiary One. | Detailed Reasoning - Detailed reasoning: CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset when a change of ownership occurs from you to another entity. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. The time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. Trust A stopped being the owner of the shares in Company B when those shares were appointed to Beneficiary One. Consequently, Trust A disposed of those shares and CGT event A1 happened for Trust A at that time. | Summary: CGT event K6 did not happen for the trustee of Trust A when the trustee of Trust A appointed the shares in Company B to Beneficiary One. | Detailed Reasoning - Detailed reasoning: CGT event K6 happens when a relevant CGT event happens to shares in a company or an interest in a trust you acquired before 20 September 1985, there is no roll-over for the relevant CGT event, and: ● the market value of the post-CGT property of the company or trust is 75% or more of the net value of the property just before the relevant CGT event occurs, or ● the market value of interests the company or trust owned through interposed companies or trusts in post-CGT property (except trading stock) are 75% or more of the net value of the company or trust just before the relevant CGT event occurs. A ‘relevant CGT event’ includes CGT events A1 and E5. Trust A acquired part of the shares in Company B before 20 September 1985 and disposed of these shares after 20 September 1985 when they were appointed to Beneficiary One. CGT events A1 and E5 occurred at this time. Consequently, it is necessary to calculate the market value of the post-CGT property of Company B and the interests it owned through interposed companies or trusts in post-CGT property to determine if CGT event K6 happened for the trustee of Trust A. Just before the relevant CGT event occurs, the market value of the post-CGT property of Company B is less than 75% of the net value of the property, and the market value of interests Company B owned through interposed companies or trusts in post-CGT property are less than 75% of the net value of the net value of the property. The conditions under subsection 104-230(2) of the ITAA 1997 are not satisfied and therefore CGT event K6 did not happen for the trustee of Trust A at the time when the shares were appointed to Beneficiary One. | Summary: The capital gain or loss calculated for CGT event E5 upon the disposal of the shares in Company B acquired before 20 September 1985 will be disregarded. | Detailed Reasoning - Detailed reasoning: CGT events A1 and E5 happen when the shares in Company B held by Company A as trustee for Trust A were appointed to Beneficiary One in the 2018 income year. Where more than one CGT event can happen, the one you use is the one that is the most specific to your situation. In this case, CGT event E5 is more specific and therefore Trust A will make a capital gain or loss under event E5. No capital gain or loss is calculated for CGT event A1. If the trustee of a trust acquired an asset before 20 September 1985, any capital gain or loss the trustee makes as a result of a beneficiary becoming absolutely entitled to the asset is disregarded. In this case, Trust A acquired part of the shares in Company B before 20 September 1985. Trust A acquired further shares in Company B after 20 September 1985. The capital gain or loss calculated for event E5 upon the disposal of the shares acquired before 20 September 1985 will be disregarded. The capital gain or loss calculated for event E5 upon on the disposal of the shares acquired after 20 September 1985 will not be disregarded.