Private ruling: Appointment of assets of a trust to a beneficiary
Date of advice: 17 December 2018
Published: April 2019
Ruling period: 1 July 2017 to 30 June 2018. | 1 July 2018 to 30 June 2019.
Date scheme commenced: 31 August 2017.

Ruling: Q1: Does CGT event E5 under section 104-75 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) happen to Beneficiary One when the Trust A’s assets, being the shares in Company A, are appointed to Beneficiary One? | A1: Yes. | Q2: Will any capital gain arising under CGT event E5 for Beneficiary One be disregarded? | A2: Yes. | Q3: Will the liquidator’s distribution paid to Beneficiary One be deemed to be a dividend paid to them under section 47 of the Income Tax Assessment Act 1936 (‘ITAA 1936’)? | A3: No. | Q4: If the liquidator’s distribution to Beneficiary One is not deemed to be a dividend under section 47 of the ITAA 1936, will the distribution be included in Beneficiary One’s assessable income by virtue of the following provisions: a. Section 44 of the ITAA 1936? b. Division 7A of the ITAA 1936? c. Section 6-5 of the ITAA 1997? d. Part 3-1 of the ITAA 1997? | A4: Yes, the distribution will be included in Beneficiary One’s assessable income by virtue of Part 3-1 of the ITAA 1997.

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. 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 A. 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. In the 2017 income year, the trustee of Trust A exercised its discretion and appointed the shares it held in Company A to Beneficiary One. Company A During the 2017 income year, Company A disposed of its shares in Company B. Company A acquired its shares in Company B before 20 September 1985. Company A is being liquidated and a final distribution from the liquidator will be made to Beneficiary One. All of the final distribution arises as a result of pre-CGT gains made by Company A. At the time of liquidation, Beneficiary One is the sole member of Company A.

Relevant legislative provisions: Subsection 6(1) of the Income Tax Assessment Act 1936 | Section 44 of the Income Tax Assessment Act 1936 | Section 47 of the Income Tax Assessment Act 1936 | Division 7A of the Income Tax Assessment Act 1936 | Subsection 6-5(1) of the Income Tax Assessment Act 1997 | Part 3-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: CGT event E5 happens if a beneficiary becomes ‘absolutely entitled’ to a CGT asset of a trust as against the trustee. 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. The time of the event is when the beneficiary becomes absolutely entitled to the asset. Conclusion Trust A’s assets comprise the shares in Company A, and those shares were appointed to Beneficiary One by Trust A. Consequently, CGT event E5 happened to Beneficiary One at the time when Beneficiary One became absolutely entitled to the assets Trust A as against the trustee. Generally both the trustee and beneficiary would make a capital gain or loss as a result of a CGT event E5 happening. However, any capital gain or loss made by the beneficiary is disregarded if the beneficiary acquired their interest in the trust for no expenditure. Conclusion Beneficiary One’s interest in Trust A arose from the settlement of Trust A, and as such Beneficiary One did not pay anything for their interest in Trust A’s assets. Consequently, any capital gain or loss arising as a result of CGT event E5 occurring is disregarded under paragraph 104-75(6)(a) of the ITAA 1997. Subsection 47(1) of the Income Tax Assessment Act 1936 (‘ITAA 1936’) provides that: distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. Subsection 47(1A) of the ITAA 1936, extends the meaning of ‘income derived by the company’ in subsection (1) to include: (a) an amount (except a net capital gain) included in the company’s assessable income for a year of income; or (b) a net capital gain that would be included in the company’s assessable income for a year of income if the ITAA 1997 required a net capital gain to be worked out as follows: Method statement Step 1. Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Step 2. Total the capital gain or gains worked out under Step 1. The result is the net capital gain for the year of income. The effect of section 47 of the ITAA 1936 is to treat certain distributions by a liquidator to be dividends paid out of profits when they otherwise would have been treated as a capital distribution. The meaning of ‘income derived by the company’ in subsection 47(1) of the ITAA 1936 is income according to ordinary concepts. The meaning of ‘income derived by the company’ was extended by the insertion of subsection 47(1A) of the ITAA 1936 to include the assessable income of a company. Where a shareholder receives a distribution that relates to a pre-CGT asset, section 47 of the ITAA 1936 would not deem the distribution to be a dividend, as no part of the distribution would represent income derived by the company. Conclusion Company A is being liquidated and a final distribution payment will be made by the liquidator to Beneficiary One, who is the sole shareholder. The amount of the distribution consists entirely of gains resulting from the disposal of pre-CGT assets. The distribution will not be a deemed dividend under section 47 of the ITAA 1936 because the distribution does not contain any amount that would represent income derived by the company. | Detailed Reasoning - Question 4a: The assessable income of a resident shareholder in a company includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source. A dividend is ‘ any distribution made by a company to any of its shareholders, whether in money or other property; and any amount credited by a company to any of its shareholders’ [emphasis added]. Consequently, the term ‘dividend’ anticipates a broad definition of dividend, wide enough to include distributions made by the liquidation of a company to its shareholders. However, section 44 provides that if another provision of the ITAA 1936 includes or excludes some or all of the dividend from the shareholder’s income, section 44 will not apply to that amount so included or excluded. Conclusion In Question 3 , the Commissioner has determined that section 47 of the ITAA 1936 will not operate to deem the liquidator’s distribution to be a dividend. Consequently, section 44 will not apply to the final distribution to Beneficiary One from the liquidator of Company A. | Detailed Reasoning - Question 4b: Division 7A of the ITAA 1936 deems certain payments, loans and debts forgiven to be dividends paid by a private company to a shareholder. This treatment makes the amount assessable income of the shareholder under section 44 of the ITAA 1936. A private company is not taken to pay a dividend under section 109C or 109D because of a distribution made in the course of the winding-up of the company by a liquidator. Conclusion A liquidator’s distribution will be made to Beneficiary One in the course of the winding-up of Company A. That distribution is not taken to be a dividend and consequently will not form part of the Beneficiary One’s assessable income by virtue of section 44 of the ITAA 1936. | Detailed Reasoning - Question 4c: Assessable income includes income according to ordinary concepts, which is called ordinary income. Income according to ordinary concepts is defined at common law, and the High Court in FC of T v The Myer Emporium has stated: …periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. It is an established principle that payments that are capital in nature are not income according to ordinary concepts. At common law, a distribution to a shareholder by a liquidator is treated as capital, and not income according to ordinary concepts, in the hands of the shareholder since it is a realisation of the shareholder’s interest in the company. Conclusion Beneficiary One will receive a distribution from a liquidator which will be capital in nature. Consequently, the payment to Beneficiary One from the liquidator is not ordinary income and will not form part of the shareholder’s assessable income by virtue of section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 4d: Section 100-20 of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens. CGT event C2 happens if your ownership of an intangible CGT asset ends by cancellation, surrender, release or similar ending. You make a capital gain if the capital proceeds from the ending of the asset are more than the asset’s cost base. You make a capital loss if those capital proceeds are less than the asset’s reduced cost base. CGT event C2 happens in respect of a member’s shares when a company ceases to exist following voluntary deregistration in accordance with the Corporations Act 2001 . The Commissioner considers the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the member’s shares for the purpose of calculating the capital gain or loss made when CGT event C2 happens. This position accords with the position taken by the High Court of Australia in C of T (NSW) V Stevenson (1937) 59 CLR 80 , where it was stated: In the liquidation the excess of [the company’s] assets over its external liabilities is distributed among the shareholders in the extinguishment of their shares…the shareholder simply receives his proper proportion of a total net fund…and he receives it in replacement for his share. Conclusion Company A is being wound up in accordance with the Corporations Act 2001 , and Beneficiary One will receive a final distribution from the liquidator. CGT event C2 will occur when Company A ceases to exist in accordance with the Corporations Act 2001 . Consequently, any capital gain Beneficiary One makes because CGT event C2 happened will form part of the shareholder’s ass essable income pursuant to section 6-10 of the ITAA 1997.