Private ruling: Income tax - Assessable income - Ordinary income
Date of advice: 28 March 2019
Published: May 2019
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: The year ending 30 June 20XX

Ruling: Q1: Will the receipt of the X% interest in VW, the Y% interest in the Australian companies and the cash gift to X1 result in any amount being included in the assessable income of X1? | A1: No | Q2: Will the transfer of the X% interest in VW by X1 to Company F for market value consideration, satisfied by the issue of shares in Company F to X1 and the creation of X1’s receivable from Company F, result in any amount being included in the assessable income of X1? | A2: No | Q3: Will the transfer by X1 to the Z6 Trusts, in equal shares, of the shares in Company F and the Y% interest in the Australian companies for no consideration result in any amount being included in the assessable income of X1? | A3: No | Q4: Will the assignment by X1 of the Company F receivable and the transfer by X1 of the foreign currency that comprises the cash gift to Z4 Trust, for no consideration, result in any amount being included in the assessable income of X1? | A4: No

Relevant facts and circumstances: Gift to X1 – Background 1. Individual X1 ( X1 ) is an Australian resident. 2. Individual X2 ( X2 ) is not a resident of Australia. 3. X1 and X2 have been friends for about 50 years. Their friendship commenced when both were classmates in an overseas country. Both also served in this overseas countries’ National Service together for approximately five years. X1 provided assistance to X2 when X2 first established X2’s business and they were members of the wedding party at each other’s weddings. Further, X1 and X2 have been on many holidays together and been involved in business dealings together over the course of their friendship. 4. X2 issued a ‘Letter of Wishes’ dated late 20XX ( Letter of Wishes ) to the Board of the Y1 Foundation outlining how X2 wished X2’s wealth to be owned, administered and ultimately distributed. The Letter of Wishes expresses X2’s desire to give X1 Z% of X2’s share of the Group’s interest as held by the Y1 Foundation ( gift to X1 ) in “ recognition of [X1’s] friendship and loyalty that …has [been] shown to [X2] since [their] school days and the support that [X1] has given to [X2] ’s family over the years ”. The Letter of Wishes also indicated the time at which X2 wished this gift to be made. 5. After suffering a period of illness, X2 became incapacitated and it became apparent that X2 would be unable to contribute anything to the way in which the Z1 Trust was managed. It was at this time that the Y2 Foundation (as trustee of the Z1 Trust) decided to “accelerate” the intentions expressed by X2 in their Letter of Wishes. 6. The Y1 Foundation warehouses the assets that X2 has accumulated over X2’s life. 7. X2 has also expressed consistent support and favour for the proposed gift to X1, in conversations with the trustees of the trusts that X2 has established. The most recent of such conversations had occurred in late 20XX. 8. The Letter of Wishes asks the Board of the Y1 Foundation to consult with and obtain the guidance of an ‘Advisory Committee’ in carrying out X2’s wishes (in administering and dealing with the affairs of the Y1 Foundation). This Advisory Committee is currently the ‘Advisory Council’ contemplated in the Supplementary Regulations of the Y1 Foundation. 9. The Letter of Wishes indicated that the gift to X1 was to occur upon X2’s death. 10. However, the Legal Opinion dated early 20XX stated in relation to when the gift to X1 could be made, that “it seems justifiable to treat the incapacity as equivalent to the death of [X2] ” and that “it is justified to make distributions to other parties after [X2] has officially been declared incompetent” . Gift to X1 – Z% portion 11. The Letter of Wishes contemplates the gift to X1 being made by way of either a transfer of a X% interest via a “ direct shareholding of X% in Company V ” (pursuant to paragraph 5.1 in the Letter of Wishes), or a Z% interest in Company A. 12. After considering the Letter of Wishes, the Y2 Foundation (as trustee of the Z1 Trust) has come to an independent view that: a. the gift to X1 that was contemplated by X2 was a Z% share of X2’s interest in the Group. This Z% interest of X2’s interest in the Group also includes Z% of the Group’s Australian interests and any dividends paid by Company V on shares held by Company C (between the time Company C acquires those shares and the time it gifts them to X1); and b. the circumstances are now such that the gift to X1 should be made as soon as practically possible. 13. As the Australian restructure of the Group (outlined at paragraphs 79-83 below) was not contemplated at the time the Letter of Wishes was drafted, there is no mention of this restructure in the Letter of Wishes. However, as the Australian interests sit beneath the VW and Company A structures, Y2 considers that these Australian interests clearly fall within the interests that X2 had in contemplation when X2 referred to the gift to X1. 14. The other considerations given by the trustees to the remainder of the Letter of Wishes (aside from the gift to X1) are not relevant to the current private ruling other than to support the timing matters about when X1 receives X1’s share of the Z% interest in the Group. 15. The current estimated market value of the gift to X1 is approximately $AUDxxm, with approximately $AUDxxm relating to the X% interest in VW, $AUDxxm relating to the Y% interest in the Australian companies and $AUDxxm relating to cash that will be received by X1. A formal valuation will be conducted at the time that the gift to X1 will be made. Gift to X1 – entities involved The Group The Group is made up of the entities described at Appendices B and C of the private binding ruling ( PBR ) application. The X2 holding structure 16. The X2 holding structure includes the entities listed below. Y1 Foundation 17. Y1 Foundation is not a resident of Australia and is a foundation that was established overseas in late 19XX. The Y1 Foundation warehouses the assets that X2 has accumulated over X2’s life. It is governed by the ‘Regulations of the Y1 Foundation’ dated late 20XX and the ‘Supplementary Regulations of the Y1 Foundation’ dated late 20XX. 18. The Y1 Foundation’s beneficiaries are X2, X2’s children, X2’s parent, X2’s siblings and such other persons as may “ be designated by the Board [of the Y1 Foundation] at the request or with the approval of the Advisory Council ”. 19. X1 is not a beneficiary of the Y1 Foundation. 20. The Y1 Foundation has established an Advisory Council to provide guidance to the Board of the Y1 Foundation so that it operated appropriately both during X2’s life, and if X2 were to die before late 20XX, during the period to late 20XX. 21. X1 is one of the two current members of the Y1 Foundation’s Advisory Council. The only other current member of the Y1 Foundation’s Advisory Council is Individual X3 ( X3 ). Until a few years ago, X2 was also a member of the Y1 Foundation’s Advisory Council (along with X1 and X3). Therefore, X1 performs a fiduciary role in being a member of the Y1 Foundation’s Advisory Council. 22. The Letter of Wishes asks the Board of the Y1 Foundation to consult with and obtain the guidance of the Y1 Foundation’s Advisory Council in carrying out X2’s wishes (as explained above at paragraph 7). 23. Once the Y1 Foundation’s assets are split into separate funds for X2’s children, X2 then directs the Board of the Y1 Foundation to be guided by X2’s children’s preferences. Company A 24. Company A is not an Australian resident company. All of Company A’s shares are held by Y2 Foundation. 25. Going forward, the shares in Company A will also ultimately be transferred to the three new X2 Trusts. Y2 Foundation 26. The Y2 Foundation is trustee of the Z1 Trust and is not an Australian resident. It was established overseas (in late 20XX) and was formed to provide trusteeship services for X2 and X2’s family members. 27. Under the overseas countries’ foundation laws, a foundation must have a ‘Guardian’ if the foundation is created for a purpose without beneficiaries. 28. The Guardian of the Y2 Foundation fulfils a protective oversight role in relation to the conduct of the Y2 Foundation. The Guardian of the Y2 Foundation also holds power to remove Councillors, appoint additional Councillors and appoint a replacement Guardian. 29. From late 20XX, Company E will be the Guardian of the Y2 Foundation. Prior to this date, X1 was appointed in this role. 30. X1 is also not a Councillor (who performs a role similar to that of a director) of the Y2 Foundation. Z1 Trust 31. The Z1 Trust is not an Australian resident and is the legal owner of the bulk of wealth associated with X2. The Z1 Trust was established overseas and settled in early 19XX. The current beneficiaries of the Z1 Trust are X2, the Y1 Foundation, the trustee/s of the Z7 Trust and Charitable Entity 1. 32. The Z7 Trust is a discretionary trust associated with X2 and is not an Australian resident. 33. From late 20XX, Company E will be the Primary Beneficiary of the Z1 Trust. Prior to this date, X1 was in this role. 34. X1 is also not a beneficiary of the Z1 Trust. 35. In this ruling, the term ‘Primary Beneficiary’ is not referring to a person who benefits under a trust (according to the terms of a trust deed) but rather a person who is independent of the trustees (usually a long-standing friend or professional advisor of the settlor) who acts as a check on the activities of the trustee. The term ‘Protector’ (or sometimes referred to as the ‘appointer’) is the usual term given to the person appointed in this role. Therefore, the Primary Beneficiary or Protector also performs a fiduciary role. 36. As Primary Beneficiary of the Z1 Trust, Company E holds the powers set out in Clause 7.10 of the Declaration of the Z1 Trust (dated early 19XX), including: a. has power to remove the trustee of the trust; b. requiring the consent of Company E for the appointment of a new trustee. Z3 Trust 37. The Z3 Trust is not an Australian resident and was established overseas (in late 20XX). The trustee of Z3 Trust is the Y2 Foundation. The beneficiaries of Z3 Trust are X2, the trustee/s of Z7 Trust, the Y1 Foundation and Charitable Entity 2. 38. The Charitable Entity 2 is a foundation associated with X2. 39. From late 20XX, Company E will be the Protector of the Z3 Trust. Prior to this date, X1 was in this role. 40. X1 is not a beneficiary of the Z3 Trust. 41. Going forward, Z3 Trust will assign its rights under the Promissory Note (see below paragraphs 63 - 67) to the three new X2 Trusts. Entities connected with X1 42. The relevant entities connected with X1 are listed below. Company E 43. The directors of Company E are: a. X1; b. X3 (X3 is a foreign resident and one of the two members of the Y1 Foundation’s Advisory Council); c. Individual X4 ( X4 ) (X4 is a resident of the Country A and an employee of the Group). 44. X1 is one of four equal shareholders in Company E. The other three shareholders are not related to X1 and are X2’s three children (or entities controlled by them). 45. Company E permits X2’s children to advance part way towards collectively taking over a sole oversight role in the Group’s holding structure, by allowing their involvement in the structure as shareholders. It also helps to address any conflict of interest that could arise between X1’s and X2’s interests following the making of the gift to X1. 46. On X2’s death, arrangements have been put in place such that the X2 children will be able to, if they wish, to replace the directors of Company E and X1 will relinquish X1’s shares in Company E to them or X1’s shares will be cancelled. Company F 47. Company F is not an Australian resident for tax purposes. 48. Company F is incorporated in and is a tax resident of a jurisdiction outside of Australia. 49. Company F will not ‘carry on a business in Australia’ and its ‘central management and control’ will also not be in Australia. Z4 Trust 50. The Z4 Trust is an Australian resident discretionary trust of which X1 and X1’s immediate family members (among others) are discretionary beneficiaries. 51. Company G is the trustee for Z4 Trust. 52. X1 is the sole shareholder and director of Company G. Z6 Trusts 53. The Z6 Trusts are three newly settled Australian discretionary trusts which are being established to provide family investment vehicles for the benefit of both resident and non-resident members of X1’s family. As X1 has three children, the use of the three Z6 Trusts further facilitates X1 and X1’s partner’s estate planning objectives. 54. X1 and X1’s immediate family members (among others) will be discretionary beneficiaries of each Z6 Trust. 55. It is intended that the trustee of each Z6 Trust will be a newly incorporated Australian resident company called Company H. X1 will be the sole shareholder and director of Company H and will be named as the initial ‘Appointor’ of each Z6 Trust. 56. Company H would have discretion to appoint trust income and capital to the discretionary objects of each Z6 Trust in whatever manner it determines, subject to the terms of the Z6 Trusts. X1’s Family 57. X1 and X1’s partner are both Australian residents for tax purposes. 58. X1 has three children: a. Child 1 is not an Australian resident for tax purposes and has lived overseas since 20XX; b. Child 2 is an Australian resident for tax purposes; c. Child 3 is an Australian resident for tax purposes. Gift to X1 - process 59. Company V is not an Australian resident company. It is a company registered and resident outside of Australia. 60. Company W is also not an Australian resident company. It is a company registered and resident outside of Australia. 61. Company V and Company W are together referred to as “ VW ”. 62. VW currently have one class of shares on issue and two shareholders, as detailed below: a. Company A holds X% of shares in each of Company V and Company W. b. The trustee of the Z2 Trust holds the remaining X% of shares in each of Company V and Company W. The trustee of the Z2 Trust is Individual X5 ( X5 ). The Z2 Trust is not a resident of Australia and is a discretionary trust. Promissory Note 63. In late 20XX, the Y2 Foundation made an “appointment and distribution” of shares in Company A (including all currently attached economic benefits as well as economic benefits accruing on or after late 20XX), held by it as trustee of the Z1 Trust, to Z3 Trust. This transaction will occur by means of a Promissory Note effective as at late 20XX ( Promissory Note ). 64. The above share transfer will not occur until the relevant regulatory approvals are obtained by the Y2 Foundation. 65. The terms of the Promissory Note also contemplates that, prior to the share transfer, Company A ‘intends to dispose by way of gift, X% of the shares in [VW]’. Establishment of new X2 Trusts 66. Since the Z3 Trust appointment was made and the Promissory Note was entered into, the trustees have established three new X2 Trusts to replace the role of the Z1 Trust and Z3 Trust. 67. Once regulatory approval has been obtained, the trustee of the Z3 Trust will resolve to assign its rights under the Promissory Note to the three new X2 Trusts. 68. The shares in Company A will also be ultimately transferred to the three new X2 Trusts. Establishment of new company – Company C 69. Since the Z3 Trust appointment was made and the Promissory Note was entered into, the trustees have also established a new company, Company C, in which the Y2 Foundation (as trustee of the Z1 Trust) will hold all of the issued shares. 70. The function of Company C will be to ‘silo’ assets currently held by Company A that are not ultimately intended to be owned and controlled by the three new X2 Trusts. X% interest in VW 71. Company A will transfer to Company C X% of the shares in each of Company V and Company W that are intended to be the subject of the gift to X1. 72. The power of the Y2 Foundation to cause Company A to gift a X% interest in VW to X1 is dealt with in the legal advice dated late 20XX (X legal advice ). The X legal advice states that where X2 is not able to directly gift to X1, the Y2 Foundation (as trustee of the Z1 Trust) is able to effect the gift to X1 according to the powers conferred on it by the Z1 Trust Deed. 73. While it is now contemplated that Company C (instead of Company A) will transfer the shares in VW, together with the Y% interest in the Australian companies and the cash gift to X1, the X legal advice (which applied to Company A) applies equally to Company C. 74. Further, the legal advice dated late 20XX ( Y legal advice ) dealing with the power of Company A to make a gift to X1 which applies to Company A, will also equally apply to Company C. Cash gift 75. The cash gift is the portion of the dividends that is contemplated that Company C will receive from VW after it acquires X% of the shares in each of Company V and Company W from Company A that will not be offset against the payable of Company C (as arising from Company C’s acquisition of the Y% interest in the Australian companies). 76. Soon after X% of the shares in each of Company V and Company W are owned by Company C, but before the gift to X1 is made, Company V and Company W will declare a dividend. This dividend will be sourced from the surplus cash that is available following a disposal of approximately W% of the Group’s overseas operations. The dividend will be in foreign currency and Company C’s share of those dividends will be $AUDxxm. Company C will deposit this dividend amount into one or more foreign currency denominated bank accounts opened in the name of Company C. 77. The dividend mentioned above (at paragraph 75and 78) will be paid after XX late 20XX, the date of effect of the Promissory Note (which contemplates that Company A will transfer a X% interest in VW by way of a gift). 78. The Y2 Foundation considers that if X2 had these events in contemplation, X2 would have intended X1 to receive the benefit of the whole of the dividends to be paid to Company C (and any returns made from its investment in the period before the gift to X1 is made) and not just the part of them that will be applied to satisfy the payable of Company C that will arise from its acquisition of the Y% interest in the Australian companies. Group restructure 79. The Group has decided to restructure the manner in which its Australian interests are held to enable its ultimate shareholders to have increased flexibility in the event that a liquidity event happens in relation to one of the Australian companies (as defined below in paragraph 80) and to simplify the insurance regulatory obligations that the Group currently need to comply with. 80. The Australian interests consist of shares in the Australian companies, which are currently held indirectly by Company V via Company I. 81. Company I is not an Australian resident company. 82. The Group restructure will take place before the time that the gift to X1 is made, but after the introduction of Company C (to the Group’s holding structure) and the transfer to Company C by Company A of the shares representing a X% interest in VW. Following the restructure by the Group of its Australian interests, Company C will hold a Y% direct interest in the Australian companies, Company A will hold a U% direct interest in the Australian companies and the Z2 Trust will hold a V% direct interest in the Australian companies. Y% interest in Australian companies 83. Another dividend will be received by Company C from Company V as a result of Company I’s disposal of, and Company C’s acquisition of a direct holding of, a Y% interest in each of the following Australian resident companies: a. Company J b. Company K c. Company L d. Company M. 84. The above four Australian companies will be together known as ‘ the Australian companies ’. 85. The Y% interest in each of the Australian companies will be referred to as ‘ the Y% interest ’. 86. This further dividend, mentioned above at paragraph 84, will be offset against a payable of the same amount that will be owed (by that time) by Company C to Company V. This payable will arise from Company C’s acquisition of the Y% interest, as the purchase price is proposed to be satisfied by way of the creation of a receivable owed by Company C to Company I. It is proposed that Company I will distribute this receivable by way of a dividend to Company V. 87. Company V will then declare a dividend to its shareholders – Company A, Company C and the Z2 Trust. Company F receivable 88. X1 intends to transfer the X% interest in VW ( the X% interest ) to Company F for market value consideration (currently valued at around $AUDxxxm to Company F). 89. The market value consideration payable by Company F to X1 for the X% interest will be partly satisfied by Company F issuing shares in itself to X1 with the remaining balance (of $AUDxxm) being an $AUDxxm debt owed to X1 by Company F ( the Company F receivable ). 90. The Company F receivable will carry an arm’s length interest rate and be repayable as Company F has funds available with any balance repayable after 10 years from the time the debt arises. 91. The Company F receivable will also be supported by appropriate transfer pricing documentation (and independently benchmarked). 92. The issue of the shares to X1 and creation of the receivable will take place at the same time that the X% interest in VW is transferred to Company F. X1 on-gifting X1’s X% interest in VW 93. Just prior to the time that X1 transfers the X% interest in VW to Company F, all of the shares in Company F will be held in equal shares by the trustee of each of the three newly settled Australian discretionary trusts (that is, the Z6 Trusts). 94. Immediately following the issue of Company F shares to X1 and the creation of Company F’s liability to X1, X1 will gift: a. all of X1’s shares in Company F together with the Y% interest, in equal shares, to three newly formed Australian discretionary trusts (the Z6 Trusts). Therefore, each Z6 Trust will have transferred to it one third of X1’s shares in Company F and shares in each of the Australian companies that represent a 1/3 of Y% interest in each of them); b. the Company F receivable and the cash gift to Company G as trustee for the Z4 Trust. This will be achieved by X1 assigning the Company F receivable to Z4 Trust and transferring the foreign currency that comprises the cash gift (from X1’s foreign currency denominated bank account/s) to one or more foreign currency bank account/s of Z4 Trust. 95. Given that X1 will be immediately ‘on-gifting’ X1’s interests in the Company F shares, the Y% interest in the Australian companies, the Company F receivable and the cash gift, there will be no material difference in the market value of these assets from when X1 on-gifted (disposed) of them. 96. The Z6 Trusts are being established to provide family investment vehicles for the benefit of both residents and non-resident members of X1’s family and to cater for X1 and X1’s partners estate planning needs. As X1 has three children, the use of the three Z6 Trusts further facilitates X1 and X1’s partner’s estate planning objectives. 97. X1 and X1’s immediate family members (among others) will be discretionary beneficiaries of each Z6 Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-1(1) | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 subsection 6-10(1) | Income Tax Assessment Act 1997 subsection 6-10(2) | Income Tax Assessment Act 1997 subsection 6-10(4) | Income Tax Assessment Act 1997 subsection 6-15 | Income Tax Assessment Act 1997 section 6-20 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 15-2 | Income Tax Assessment Act 1997 subsection 83A-10 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 paragraph 104-10(3)(b) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 109-5 | Income Tax Assessment Act 1997 paragraph 112-20(1)(a) | Income Tax Assessment Act 1997 subsection 116-30 | Income Tax Assessment Act 1997 subdivision 768-A | Income Tax Assessment Act 1997 subsection 974-75(1) | Income Tax Assessment Act 1997 section 974-120 | Income Tax Assessment Act 1997 subsection 995(1) | Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 subsection 6BA(5) | Income Tax Assessment Act 1936 sections 23AI | Income Tax Assessment Act 1936 sections 23AJ | Income Tax Assessment Act 1936 sections 23AK | Income Tax Assessment Act 1936 section 43B | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 subsections 44(1A) | Income Tax Assessment Act 1936 subsection 44(1B) | Income Tax Assessment Act 1936 section 94L | Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1936 section 109BA | Income Tax Assessment Act 1936 section 109BB | Income Tax Assessment Act 1936 section 109BC | Income Tax Assessment Act 1936 section 109C | Income Tax Assessment Act 1936 section 109CA | Income Tax Assessment Act 1936 section 109D | Income Tax Assessment Act 1936 section 109F | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 318 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Detailed Reasoning - Question One: Will the receipt of the X% interest in VW, the Y% interest in the Australian companies and the cash gift to X1 result in any amount being included in the assessable income of X1? | Summary: No, the receipt of the X% interest in VW, the Y% interest in the Australian companies and the cash gift to X1 will not result in any amount being included in the assessable income of X1. | Detailed Reasoning - What is a gift?: 1. The term ‘gift’ is not defined in the Income Tax Assessment Acts (of 1936 or 1997). However, the Commissioner’s views on the essential elements of a gift are set out in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift ( TR 2005/13 ) and the courts have, in a number of cases, considered whether particular circumstances give rise to a gift. 2. Paragraph 12 of TR 2005/13 states: ...[as] the term “gift” is not defined…the word ‘gift’ has its ordinary meaning. 3. Paragraph 13 of TR 2005/13 states: Rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features: ● there is a transfer of the beneficial interest in property ● the transfer is made voluntarily ● the transfer arises by way of benefaction, and ● no material benefit or advantage is received by the giver by way of return. 4. Paragraph 14 of TR 2005/13 then states: …the courts have recognised that the criteria may not be absolute and may involve a matter of degree. 5. Further, paragraph 15 of TR 2005/13 states: In determining whether a transfer is a gift it is necessary to consider the whole set of circumstances surrounding the transfer and this may include consideration of parties other than the giver… It is the substance and reality of the transfer that has to be ascertained. It is therefore necessary to take account of those acts, transactions, arrangements and circumstances that provide the context and the explanation for the transfer. 6. Paragraph 74 of TR 2005/13 provides, in relation to the transfer of the beneficial interest of property that: As a result of the transfer, the giver loses and the [recipient] receives the benefits associated with ownership (that is custody and control) and/or equitable interest in the property transferred. Where the giver only transfers a nominal or legal title to the property, there is no gift of that property. 7. Paragraphs 23 - 24 of TR 2005/13 states, in relation to transfers made voluntary: 23. In order for a transfer of property to be a gift, it must be made voluntarily, that is, it must be the act and will of the giver, and there must be nothing to interfere with or control the exercise of that will. However, a transfer made under a sense of moral obligation is still made voluntarily. 24. A transfer is not made voluntarily if it is made for consideration or because of a prior obligation imposed on the giver by statute or by contract. Nonetheless, a transfer which has the other attributes of a gift will not fail to be considered a voluntary transfer merely because the means used to give effect to the benefaction have contractual or similar features. 8. Paragraphs 27 - 30 of TR 2005/13 provides, in relation to the ‘benefaction’ aspect of a gift that: 27. An essential attribute of a gift is that benefaction is intended, and in fact conferred on the recipient. Conferring benefaction means that the [recipient] is advantaged in a material sense, to the extent of the property transferred to them, without any countervailing detriment arising from the terms of the transfer. 28. Where the giver is aware that the transfer of property will result in detriments, disadvantages, obligations, liabilities or limitations to the recipient, the attribute of benefaction may be missing. Whether benefaction is in fact conferred will depend to a large extent on the proportion which the detriment, disadvantage, obligation, liability or limitation bears to the value of the property transferred. 29. However, detriments, disadvantages, obligations, liabilities, or limitations borne by the recipient which are not within the knowledge and intention of the giver at the time of the transfer, and which do not arise from the terms of the transfer of property by the giver, do not necessarily preclude a finding that the conferral of benefaction was associated with the transfer. 30. Detriments that are immaterial in comparison with the value of the transfer will not preclude a finding that the transfer arises from benefaction. 9. Paragraph 37 of TR 2005/13 states, in relation to any material benefit or advantage not being received that, this material benefit may come from the recipient or another party: In order to constitute a gift, the giver must not receive a benefit or an advantage of a material nature by way of return. It does not matter whether the material benefit or advantage comes from the [recipient] or another party. 10. Paragraphs 40 – 42 of TR 2005/13 further provides in relation to the aspect of no material benefit or advantage being received that: 40. The giver may still be regarded as having received a material benefit in a case where the value of the benefit to the giver is less than the value of the property transferred. In these circumstances it is not accepted that the value of the benefit received can be notionally deducted from the value of the property transferred and the net balance claimed as a gift. No part of the property transferred is considered a gift. 41. Only advantages or benefits that are material will disqualify a transfer of property from being regarded as a gift. This excludes advantages or benefits of a de minimis nature. 42. It is a question of fact in each case whether any benefit or advantage is considered material. A benefit or advantage can be material if there is a link between the benefit and the transfer, and the benefit is sufficiently significant in relation to the value of the transfer. 11. Paragraphs 58 - 59 of TR 2005/13 additionally states in relation to the characteristics of a ‘gift’ that: 58. The courts have described a gift as having certain specified attributes. If a transfer fails to have one or more of these attributes, the transfer will not ordinarily be considered a gift. 12. Taxation Ruling IT 2674 Income tax: gifts to missionaries, ministers of religion and other church workers - are the gifts income? ( IT 2674 ) provides guidelines for determining whether gifts received by church workers (including missionaries and ministers of religion) are assessable income under the ITAA 1936. 13. Paragraph 4 of IT 2674 provides that: …the principles that apply in determining whether gifts received by church workers are assessable income are no different from those which apply in determining whether gifts received by taxpayers in other callings or occupations are assessable income. 14. Paragraph 11 of IT 2674 provides that: Whether a gift is assessable income depends on the quality or the character of the gift in the hands of the recipient. Consideration is necessary of the whole of the circumstances in which the gift is received. For example, the following factors need to be taken into account: (a) how, in what capacity, and for what reason the recipient received the gift; and (b) whether the gift is of a kind which is a common incident of the recipient's calling or occupation; and (c) whether the gift is made voluntarily; and (d) whether the gift is solicited; and (e) if the gift can be traced to gratitude engendered by some service rendered by the recipient to the donor, whether the recipient had already been remunerated fully for that service; and (f) the motive of the donor (but it is seldom, if ever, decisive); and (g) whether the recipient relies on the gift for regular maintenance of himself or herself and any dependants. | Detailed Reasoning - Applying the law to your circumstances: 15. According to the indicia identified in TR 2005/13 (as stated above in paragraph 3), the gift to X1 has the following characteristics of a gift: ● there is a transfer in beneficial interest from X2 to X1 as the transfer of the gift to X1 (comprising X% interest in VW, the Y% interest in the Australian companies and the cash gift) gives X1 the beneficial ownership over these specified property interests as the proposed transaction has not yet taken place; ● there is nothing to indicate that X2’s gift to X1 was anything other than voluntary and it is stated at paragraph 30 of the PBR application that it was motivated by ‘[X1’s] friendship and loyalty that …has [been] shown to [X2] since [their] school days and the support that [X1] has given to [X2]’s family over the years’; ● paragraph 42 of TR 2005/13 recognises that ‘the benefit is sufficiently significant in relation to the value of the transfer’. The legal advice states that the Y2 Foundation (as trustee of the Z1 Trust) has the power to make the gift to X1 (even though X1 is not a beneficiary), because it is benefitting X2 (who is a beneficiary of the Z1 Trust).; ● the transfer of the gift to X1 advantages and does not appear to bear any countervailing detriment when looked at in context of the substance and reality of the overall transaction. Further, any detriment appears to be immaterial in comparison with the value of the transfer and the benefit (being, $AUDxxxm); ● X2 receives no material benefit or advantage in return for X2’s gift to X1. 16. Consistent with what has been expressed in IT 2674, the gift to X1: ● was unsolicited and given voluntarily. Paragraph 30 of the PBR application provides that ‘X1 did not request X2 make this (or any other) gift to X1 and X1 has not taken any other action that may be said to have solicited the gift’ ● was made voluntarily in recognition of X1 and X2’s ‘close friendship’ and in recognition of X1’s ‘friendship and loyalty’ ● was a one-off contribution ● was given for personal reasons and did not have any connection with any income-producing activity or employment service/s performed by X1. Appendix I of the PBR application states that ‘…at all previous times that X1 was involved with X2’s business, X1 has been remunerated on a market value basis via salary or an opportunity to acquire shares in companies within the Group…’. ● was not 'earned' as it was not directly related to any services that were performed by X1 and clause 5.3 of the Letter of Wishes states that [the gift to X1] ‘has nothing to do with [X1’s] past or future employment or services, but is a personal gesture from me based on our close personal relationship’ ● is not a common incident of X1’s occupation ● X1 does not rely on the gift for regular maintenance of X1 or any dependants. | Detailed Reasoning - Assessable income: 17. Subsection 6-1(1) of the Income Tax Assessment Act 1997 ( ITAA 1997 ) provides that: Assessable income consists of ordinary income and statutory income. 18. Subsection 6-15(1) of the ITAA 1997 provides that: If an amount is not * ordinary income, and is not * statutory income, it is not assessable income (so you do not have to pay income tax on it). | Detailed Reasoning - Ordinary income: 19. Subsection 6-5(1) of the ITAA 1997 provides that a taxpayer’s assessable income includes income according to ordinary concepts (that is, ordinary income). 20. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident will include the ordinary income derived directly or indirectly from all sources, whether in or out of Australia. 21. Ordinary income is not included in a taxpayer’s assessable income if it is exempt income (pursuant to section 6-20 of the ITAA 1997), or is non-assessable income (pursuant to section 6-15 of the ITAA 1997). 22. There is no specific guidance or legislative definition of what is meant by income according to ‘ordinary concepts’. Typical examples of ordinary income include salaries, wages, proceeds of carrying on a business, rent, interest and dividends. Examples of items which are not generally income include lottery prizes, proceeds from a mere hobby, loans and gifts. Profits from the sale of a capital asset are generally not income, although they may be assessable as statutory income (for example, under the capital gains provisions). 23. The case law on this topic has identified various factors which may be relevant in determining whether an amount is ordinary income and includes: ● whether the amount has the characteristics of periodicity, recurrence or regularity ( FC of T v The Myer Emporium Ltd (1987) 163 CLR 199) ● whether it is convertible into money or money’s worth ( FC of T v Cooke & Sherden (1980) 10 ATR 696) ● whether it is associated with business activities or services rendered, as distinct from the mere sale of property ( FC of T v The Myer Emporium Ltd (1987) 163 CLR 199), and ● whether it is solicited, as distinct from a windfall. 24. Presence of these factors will assist in a conclusion that the amount is more likely to be ordinary income. However, no single factor is determinative of the receipt’s character, but some factors may be more relevant than others in light of the circumstances of the case ( Federal Commissioner of Taxation v. Montgomery (1999) 198 CLR 639). Further, the High Court in Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 stated that the nature of the receipt should be considered in light of the nature of the payment in the hands of the recipient. | Detailed Reasoning - Applying the law to your circumstances: 25. Paragraph 22 above states that gifts are generally not considered to be income according to ordinary concepts. 26. According to the factors identified by case law (as outlined at paragraph 23 above), the gift to X1: ● appears to be a ‘one off’ and will not be recurring on a periodic or regular basis ● is able to be converted to money or money’s worth ● not associated with business activities or employment services rendered by X1 ● appears to be given freely and voluntarily by X2 without solicitation. 27. Therefore, we consider that the gift to X1 does not appear to be ordinary income pursuant to subsection 6-5(1) of the ITAA 1997. | Detailed Reasoning - Statutory income: 28. Subsection 6-10(1) of the ITAA 1997 provides that a taxpayer’s assessable income also includes some amounts that are not ordinary income. 29. Subsection 6-10(2) of the ITAA 1997 provides that an amount which is not ordinary income but which is included in assessable income by a statutory provision is ‘statutory income’. 30. Subsection 6-10(4) of the ITAA 1997 provides that the statutory income of an Australian resident will include the statutory income derived from all sources, whether in or out of Australia. 31. Section 10-5 of the ITAA 1997 lists the different types of statutory income. | Detailed Reasoning - Applying the law to your circumstances: 32. Paragraph 28 of the PBR application provides that X1 developed a personal friendship with X2 before X1 was employed in any capacity by the Group. Their friendship commenced when both were attending high school overseas and has continued through to the present, with both also spending a number of vacations together. 33. It is stated at paragraph 29 of the PBR application that the gift to X1 was given by X2 due to ‘close friendship and not in any way because of X1’s employment relationships’. 34. The overall circumstances in which X1 received the gift leads to the conclusion that this was a gift made voluntarily by X2 to X1. It does not have a sufficient link to employment services rendered by X1 to the Group and was made without solicitation by X1. There is no material benefit to be gained by X2 from making this gift to X1. 35. Therefore, according to subsection 6-10(2) and section 10-5 of the ITAA 1997, the gift to X1 is not classified as statutory income. | Detailed Reasoning - Allowances and other payments provided in respect of employment or services: 36. Section 15-2 of the ITAA 1997 provides that: 15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums *provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force). 15-2(2) This is so whether the things were *provided in money or in any other form. 37. However, subsection 15-2(3) of the ITAA 1997 relevantly provides that: …the value of the following are not included in your assessable income under this section [15(2)]: (c) a *dividend or *non-share dividend; (d) an amount that is assessable as *ordinary income under section 6-5; (e) *ESS interests to which Subdivision 83A-B or 83A-C (about employee share schemes) applies. 38. According to subsection 995(1) of the ITAA 1997: dividend has the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the Income Tax Assessment Act 1936 . non-share dividend has the meaning given by section 974-120 [of ITAA 1997]. ordinary income has the meaning given by section 6-5 [of ITAA 1997]. provide a *fringe benefit or economic benefit includes allow, confer, give, grant or perform the benefit. Note: This is based on the definition of provide in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 . 39. Information about ‘ESS interests’ can be found below at paragraphs 74 – 84. 40. Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees ( TR 2005/16 ) considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of that term. 41. In particular, paragraph 64 of TR 2005/16 states: The employment relationship does not necessarily have to be between the entity making the payment and the individual. …The essential element is the nature of any connection between the payment and the individual's employment with the payer or any other entity. 42. Paragraph 66 of TR 2005/16 states: Where the payment is a reward for services provided by the employee to the employer in the capacity of employee, the payment would be incidental to the employment regardless of whether the payment is made by the employer or another entity. | Detailed Reasoning - Applying the law to your circumstances: 43. According to section 15-2 of the ITAA 1997, for an amount to be statutory income there must be a connection between the payment and the employment. The receipt of the payment must be a product of the employment. 44. As noted in Appendices I and J of the PBR application, X1 is currently employed by the Group in various capacities. Further, it is noted at Appendix I and documented at Annexures 2 and 3 of Appendix J of the PBR application that X1 has been remunerated at market value for X1’s employment services to the Group. 45. Therefore, as the gift to X1 was not payment for any employment or services rendered by X1, it is not assessable as statutory income under section 15-2 of the ITAA 1997. | Detailed Reasoning - Division 7A of ITAA 1936: 46. Division 7A of the ITAA 1936 ( Division 7A ) is intended to prevent profits or assets being provided to shareholders, former shareholders, their associates or former associates without being taxed. 47. Under Division 7A, amounts paid, lent or forgiven by a private company to shareholders or to their associates (including former shareholders or former associates) are treated as dividends, unless they come within specified exclusions. 48. Division 7A generally applies to amounts paid, lent or forgiven on or after 4 December 1997. It applies to non-share equity interests and non-share dividends in the same way that it applies to shares and dividends (pursuant to section 109BA of the ITAA 1936). 49. Division 7A applies to private companies that are Australian residents and to non-resident private companies with an Australian resident shareholder or associate (pursuant to section 109BC of the ITAA 1936). 50. Division 7A also expressly applies to relevant distributions by a corporate limited partnership (from 1 July 2009, pursuant to section 109BB of the ITAA 1936). 51. The Division 7A provisions apply where the recipient of the payment, loan or forgiven amount is: (a) a shareholder; (b) an associate of a shareholder; or (c) a former shareholder or former associate (where a reasonable person would conclude that the amount is paid, lent or forgiven because of that former status). 52. An ‘associate’ has the meaning given in section 318 of the ITAA 1936, which covers a broad range of entities that are associates of natural persons, companies, partnerships and trustees. 53. For the purposes of Division 7A: ● ‘payment’ is defined in section 109C of the ITAA 1936 ● ‘loan’ is defined in s 109D of the ITAA 1936, and ● section 109F of the ITAA 1936 defines when a debt is forgiven. 54. The scope of Division 7A was broadened to include as a ‘payment’, the provision of a private company asset for use by a shareholder or an associate pursuant to section 109CA of the ITAA 1936 (on or after 1 July 2009). ‘ Associate’ definition 55. The term ‘associate’ is defined in section 318 of the ITAA 1936. 56. Section 318 of the ITAA 1936 defines ‘associates’ of an entity (either a natural person or a company) to mean: ● a relative (as defined in subsection 6(1) of the ITAA 1936 to mean: (a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of the individual’s spouse; and (b) the spouse of that individual or of any other person mentioned in (a) above. It should be noted that a ‘spouse’ does not include a person who is legally married to the individual but is living separately and apart from the individual on a permanent basis, or a spouse within a registered relationship who is living separately and apart from the person on a permanent basis), ● a partner (and the spouse and child of a partner), ● a partnership in which the entity is a partner, ● a trustee of a trust of which the entity (or an associate of the entity) is a beneficiary, ● a company which is sufficiently influenced by the entity (or an associate of the entity) or a majority voting interest in which is held by the entity (or an associate of the entity). 57. The term ‘associates of a trustee’ (pursuant to subsection 318(3) of the ITAA 1936) are the beneficiaries under the trust and their associates. The term ‘associates of a partnership’ (pursuant to subsection 318(4) of the ITAA 1936) are the partners in the partnership and their associates. | Detailed Reasoning - Applying the law to your circumstances: 58. As stated in paragraph 25 of the PBR application, X1 is not a beneficiary of the Y1 Foundation. However, X1 is one (of two) current members of the Y1 Foundation’s Advisory Council. 59. As stated in paragraph 26 of the PBR application, the Y1 Foundation Advisory Council’s role is to provide guidance to the Board of the Y1 Foundation to ensure that it is appropriately operated and to ensure that it is consulted when carrying out the objectives outlined in the Letter of Wishes. 60. According to paragraphs 19 and 23 of the PBR application, X1 is also not the Guardian of the Y2 Foundation (effective from XX late 20XX). 61. According to the information provided in the PBR application: ● X1 does not appear to be a shareholder, associate of a shareholder, former shareholder or associate of a former shareholder of any of the entities in the X2 Group. ● X1 does not currently appear to be a beneficiary of any trusts or foundations within the X2 Group ● X1 appears to be performing a fiduciary role only within the X2 Group (for example, in X1’s capacity as a member of the Y1 Foundation’s Advisory Council). 62. Therefore, we consider that Division 7A does not apply in relation to the gift to X1. | Detailed Reasoning - Dividends: 63. Subsection 44(1) of the ITAA 1936 is the key provision dealing with taxation of distributions by companies to shareholders and equity holders. Subsection 44(1) of the ITAA 1936 makes certain ‘dividends’ and ‘non-share dividends’ assessable. 64. Paragraph 44(1)(a) of the ITAA 1936 provides that a resident shareholder’s assessable income includes dividends paid to the shareholder out of a company’s profits regardless of whether the company is a resident or non-resident and regardless of the source of the profits. 65. Subsection 44(1) of the ITAA 1936 provides that: The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes: (a) if the shareholder is a resident: (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and (ii) all non-share dividends paid to the shareholder by the company… 66. Section 43B of the ITAA 1936 provides that: 43B(1) [Applications] This Subdivision: (a) applies to a non-share equity interest in the same way as it applies to a share; and (b) applies to an equity holder in the same way as it applies to a shareholder; and (c) applies to a non-share dividend in the same way as it applies to a dividend. … 43B(3) [Section 44(1) not covered] Paragraph (1)(c) does not apply to subsection 44(1). 43B(4) [Effect of s 44(1)] Subsection (1) has effect subject to the special provision that is made for non-share dividends in subsection 44(1). 67. Subsections 44(1A) and 44(1B) of the ITAA 1936 facilitates the application of subsection 44(1) of the ITAA 1936 by deeming certain dividends to be paid out of profits. 68. The term ‘equity holder’ is defined in subsection 995(1) of the ITAA 1997 as: equity holder in a company means an entity that holds an *equity interest in the company. 69. In relation to a company, ‘equity interest’ has the meaning given by subsection 974-75(1) of the ITAA 1997 and includes: …an interest in the company as a member or stockholder of the company. | Detailed Reasoning - Exclusions from subsection 44(1) of the ITAA 1936: 70. Subsection 44(1) of the ITAA 1936 expressly does not apply to a dividend or non-share dividend to the extent to which it is included in, or excluded from, assessable income under another provision in the tax legislation. 71. Examples of provisions that override subsection 44(1) of the ITAA 1936 are: ● sections 23AI, 23AK of the ITAA 1936; and subdivision 768-A of the ITAA 1997. These provisions treat certain foreign dividends as non-assessable non-exempt income ● section 128D of the ITAA 1936 which treats most dividends and non-share dividends paid by resident companies to non-resident shareholders as non-assessable non-exempt income ● subsection 44(5) of the ITAA 1936 which treats certain demerger dividends as non-assessable non-exempt income. | Detailed Reasoning - Applying the law to your circumstances: 72. X1 will be paid a dividend from the surplus cash of the Group’s overseas operations according to the terms outlined at paragraphs 75 - 77 above. At the time that this dividend is paid, X1 is not yet a shareholder of VW. 73. As X1 is not yet a shareholder of VW at the time that this dividend is paid, X1 will not be liable under subsection 44(1) of the ITAA 1936 to be assessed on the dividend income received. | Detailed Reasoning - Employee share schemes: 74. Under an employee share scheme (ESS), a company provides its employees (or their associates) with interests in the company such as shares, stapled securities, rights to shares or rights to stapled securities. 75. Subsection 83A-10(2) of the ITAA 1997 defines an ESS as: …a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees' employment. 76. ‘Associate’ is defined in subsection 995(1) of the ITAA 1997 as: …the meaning given by section 318 of the Income Tax Assessment Act 1936 . 77. Please refer above to paragraphs 55 – 57 for further explanation in relation to the section 318 ITAA 1936 definition of ‘associate’. 78. ‘Scheme’ is defined in subsection 995(1) of the ITAA 1997 as: (a) any * arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. 79. Subsection 83A-10(1) of the ITAA 1997 defines an ‘ESS interest’ (in a company) as: …a beneficial interest in: (a) a *share in the company; or (b) a right to acquire a beneficial interest in a share in the company. 80. ‘Subsidiary’ is defined in subsection 995(1) of the ITAA 1997 as: the question whether a company is a subsidiary of another company is to be determined in the same way as the question whether a corporation is a subsidiary of another corporation is determined under the Corporations Act 2001 . 81. ‘Share’ (in relation to a company) is defined in subsection 995(1) of the ITAA 1997 as ‘…a share in the capital of the company, and includes stock…’. 82. The ESS interests can: ● be from an Australian company or a foreign company ● relate to your employment inside or outside Australia ● relate to a work relationship other than employment (for example, sub-contracting). 83. Division 83A of the ITAA 1997 governs the taxation of ESSs and provides that an employee’s assessable income includes discounts on shares, rights and stapled securities that you (or your associate) acquire under an ESS. 84. If participating in an ESS, you may be entitled: (a) to have the amount included in your assessable income reduced, or (b) to have the income year in which it is included deferred, provided that certain conditions are met. | Detailed Reasoning - Applying the law to your circumstances: 85. The gift to X1 includes the transfer of a X% interest (that is, shares) in VW and a Y% interest (that is, shares) in the Australian companies. 86. As the X% interest in VW and the Y% interest in the Australian companies have not yet been transferred to X1, X1 is not yet the legal owner of these shares. However, due to X1’s entitlement to these shares in the future, X1 may be considered the beneficial owner of this X% interest in VW and the Y% interest in the Australian companies. 87. It is stated at paragraph 29 of the PBR application that the gift to X1 was given by X2 due to their ‘close friendship and not in any way because of X1’s employment relationships’. 88. Further, in clause 5.3 of the Letter of Wishes it is stated that the gift of the X% interest in VW and the Y% interest in the Australian companies ‘has nothing to do with [X1’s] past or future employment or services’ and Appendix I of the PBR application also states that X1 has already been remunerated at market value for the employment services provided to the Group. 89. According to subsection 83A-10(1) of the ITAA 1997, an ESS interest includes ‘a beneficial interest in...a share in [a] company’. 90. Therefore, as the gift to X1 of the X% interest in VW and the Y% interest in the Australian companies is not in relation to X1’s employment, Division 83A of the ITAA 1997 will not apply. | Detailed Reasoning - Question 2: Will the transfer of the X% interest in VW by X1 to Company F for market value consideration, satisfied by the issue of shares in Company F to X1 and the creation of X1’s receivable from Company F, result in any amount being included in the assessable income of X1? | Summary: No, the transfer of the X% interest in VW by X1 to Company F for market value consideration, satisfied by the issue of shares in Company F to X1 and the creation of X1’s receivable from Company F, will not result in any amount being included in the assessable income of X1. | Detailed Reasoning - Overview: 91. A capital gains tax (CGT) asset is defined in subsection 108-5(1) of the ITAA 1997 as: (a) any kind of property; or (b) a legal or equitable right that is not property. 92. Note 1 to subsection 108-5(2) of the ITAA 1997 provides that ‘shares in a company’ and ‘foreign currency’ are examples of CGT assets. 93. According to subsection 104-10(1) of the ITAA 1997, CGT event A1 (that is, disposal of a CGT asset) happens if you dispose of a CGT asset. 94. Subsection 104-10(2) of the ITAA 1997 provides that a taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity, whether because of some act, event or by operation of law. 95. Subsection 104-10(2) of the ITAA 1997 also states that a change in the ownership of a CGT asset does not occur if the taxpayer stops being the legal owner of the CGT asset but continues to be its beneficial owner. 96. Pursuant to paragraph 104-10(3)(b) of the ITAA 1997, the time that CGT event A1 happens when there is no contract, is the time when ownership of the CGT asset changes. 97. The market value substitution rule in paragraph 112-20(1)(a) of the ITAA 1997 provides that the first element of the cost base or reduced cost base of a CGT asset that you acquire from another entity will be the market value of the asset if the taxpayer did not incur expenditure to acquire it. The exception where the acquisition of the asset resulted from either CGT event D1 happening (that is, creating contractual or other rights) or another entity doing something that did not constitute a CGT event happening will not apply here. 98. Subsection 109-5(1) of the ITAA 1997 states that a taxpayer generally acquires a CGT asset when the taxpayer becomes its owner, and the time when the taxpayer acquires the asset is when the taxpayer becomes its legal owner. 99. That said, we note there is a specific rule for CGT event A1 as set out in the table at subsection 109-5(2) of the ITAA 1997, which provides that if an entity disposes of a CGT asset to you (except where you compulsorily acquire it), it is acquired by you ‘when the disposal contract is entered into or, if none, when the entity stops being the asset’s owner.’ | Detailed Reasoning - Applying the law to your circumstances: 100. According to subsection 109-5(2) of the ITAA 1997, Company F acquires the X% interest in VW at the time the legal ownership of the X% interest in VW passes from X1 to Company F (that is, when X1 stops being the assets’ legal owner). 101. Pursuant to subsection 104-10(1) of the ITAA 1997, the transfer of the X% interest in VW by X1 to Company F will result in CGT event A1 happening. X1 will make a capital gain for Australian income tax purposes if the ‘capital proceeds’ X1 receives from the disposal of the X% interest in VW at the time X1 transfers it to Company F exceeds X1’s cost base in the X% VW interest. X1 will make a capital loss if the market value of the X% interest in VW is less than the cost base of the X% interest in VW. 102. X1’s capital proceeds will be the market value consideration X1 receives (satisfied by way of creating the Company F receivable of $AUDxxm and Company F issuing shares in itself to X1) in return for the disposal of the X% interest in VW. 103. As X1 did not incur any expenditure to acquire the X% interest in VW, X1 has a market value cost base for CGT purposes under paragraph 112-20(1)(a) of the ITAA 1997. 104. Assuming that the transfer of the X% interest in VW to Company F will happen immediately following the time X1 is taken to acquire the X% interest in VW (from Company C), any movement in the market value of the X% interest in VW would be negligible. 105. Therefore, we consider that X1 should make no capital gain as a result of the transfer of the X% interest in VW to Company F. This is because the market value of the X% interest in VW at the time X1 acquired it (which is equal to X1’s cost base in it) should be the same as the market value of the X% interest in VW at the time X1 transfers it to Company F (that is, the amount of the Company F receivable). | Detailed Reasoning - Question 3: Will the transfer by X1 to the Z6 Trusts, in equal shares, of the shares in Company F and the Y% interest in the Australian companies for no consideration result in any amount being included in the assessable income of X1? | Summary: No, the transfer by X1 to the Z6 Trusts, in equal shares, of the shares in Company F and the Y% interest in the Australian companies for no consideration will not result in any amount being included in the assessable income of X1. | Detailed Reasoning - Overview: 106. The market value substitution rule in subsection 116-30 of the ITAA 1997 provides that if a taxpayer does not receive any capital proceeds from a CGT event, the taxpayer is taken to have received the market value (as at the time of the CGT event) of the relevant CGT asset. | Detailed Reasoning - Transfer of Y% interest in Australian companies to the Z6 Trusts: 107. According to paragraph 112-20(1)(a) of the ITAA 1997, X1’s cost base for the Y% interest in the Australian companies will be equal to the market value of the Y% interest in the Australian companies at the time X1 acquires this (as X1 did not incur any expenditure to acquire the Y% interest in the Australian companies and was gifted this interest by X2 via Company C). 108. Pursuant to subsection 109-5(2) of the ITAA 1997, X1 acquires the Y% interest in the Australian companies at the time the legal ownership of the Y% interest in the Australian companies passes to X1 (from Company C). 109. According to subsection 104-10(1) of the ITAA 1997, the transfer of the Y% interest in the Australian companies by X1 to the Z6 Trusts will result in CGT event A1 happening. X1 will make a capital gain for Australian income tax purposes if the ‘capital proceeds’ X1 receives from the disposal of the Y% interest in the Australian companies exceeds X1’s cost base in the Y% interest. X1 will make a capital loss if the market value of the Y% interest in the Australian companies is less than the cost base of the Y% interest in the Australian companies. 110. As X1 is transferring the Y% interest in the Australian companies to the Z6 Trusts for no consideration, the market value substitution rule in section 116-30 of the ITAA 1997 will apply as X1 has not received any capital proceeds from this transfer and X1 will be taken to have received the market value of the Y% interest in the Australian companies (at the time that the Y% interest in the Australian companies have been transferred to the Z6 Trust). 111. On the basis that the transfer of the Y% interest in the Australian companies to the Z6 Trusts will happen immediately following the time X1 is taken to acquire this interest, the market value of the Y% interest in the Australian companies should not change between when X1 acquires the interest and when X1 disposes of it. 112. As such, X1 should make no capital gain as a result of the transfer of the Y% interest in the Australian companies to the Z6 Trusts. This is because the market value of the Y% interest in the Australian companies at the time X1 acquired it (which is equal to X1’s cost base in it) should be the same as the market value of the Y% interest in the Australian companies at the time X1 transfers it to the Z6 Trusts (that is, the amount of the capital proceeds X1 is deemed to receive for the transfer). 113. This is because the market value of the Y% interest in the Australian companies at the time X1 acquired it (which is equal to X1’s cost base in it) should be the same as the market value of the Y% interest in the Australian companies at the time X1 transfer this to the Z6 Trusts (that is, the amount of the Company F receivable). | Detailed Reasoning - Transfer of Company F shares to the Z6 Trusts: 114. According to paragraph 112-20(1)(a) of the ITAA 1997, X1’s cost base for the Company F shares will be equal to the market value of the Company F shares at the time X1 acquires them (as X1 did not incur any expenditure to acquire the Company F shares). 115. Pursuant to subsection 109-5(2) of the ITAA 1997, X1 acquires the Company F shares at the time the legal ownership of the Company F shares passes to X1. 116. According to subsection 104-10(1) of the ITAA 1997, the transfer of the Company F shares by X1 to the Z6 Trusts will result in CGT event A1 happening. X1 will make a capital gain for Australian income tax purposes if the ‘capital proceeds’ X1 receives from the disposal of the Company F shares exceeds X1’s cost base in these shares. X1 will make a capital loss if the market value of the Company F shares is less than the cost base of the Company F shares. 117. As X1 is transferring the Company F shares to the Z6 Trusts for no consideration, section 116-30 of the ITAA 1997 will apply as X1 has not received any capital proceeds from this transfer and X1 will be taken to have received the market value of the Company F shares (at the time that the Company F shares have been transferred to the Z6 Trusts). 118. On the basis that the transfer of the Company F shares to the Z6 Trusts will happen immediately following the time X1 is taken to have acquired this interest, the market value of the Company F shares between when X1 acquires this interest and when X1 disposes of this should be the same. 119. As such, X1 should make no capital gain as a result of the transfer of the Company F shares to the Z6 Trusts. This is because the market value of the Company F shares at the time X1 acquired them (which is equal to X1’s cost base in it) should be the same as the market value of the Company F shares at the time X1 transfers it to the Z6 Trusts (that is, the amount of the capital proceeds X1 is deemed to receive for the transfer). | Detailed Reasoning - Question 4: Will the assignment by X1 of the Company F receivable and the transfer by X1 of the foreign currency that comprises the cash gift to Z4 Trust, for no consideration, result in any amount being included in the assessable income of X1? | Summary: No, the assignment by X1 of the Company F receivable and the transfer by X1 of the foreign currency that comprises the cash gift to Z4 Trust, for no consideration, will not result in any amount being included in the assessable income of X1. | Detailed Reasoning - Applying the law to your circumstances: 120. According to paragraph 112-20(1)(a) of the ITAA 1997, X1’s cost base for the Company F receivable and the cash gift will be equal to the market value of the Company F receivable and the cash gift at the time X1 acquires these interests (as X1 did not incur any expenditure to acquire these interests). 121. Pursuant to subsection 109-5(2) of the ITAA 1997, X1 acquires the Company F receivable and the cash gift at the time the legal ownership of the receivable and the cash gift passes to X1. 122. According to subsection 104-10(1) of the ITAA 1997, the assignment of the Company F receivable and the cash gift to Z4 Trust will result in CGT event A1 happening in both instances. X1 will make a capital gain for Australian income tax purposes if the ‘capital proceeds’ X1 receives from the disposal of the Company F receivable and the cash gift exceeds X1’s cost base in these interests. X1 will make a capital loss if the market value of the Company F receivable and the cash gift is less than the cost base of these interests. 123. As X1 is assigning the Company F receivable and the cash gift to Z4 Trust for no consideration, we consider that section 116-30 of the ITAA 1997 will apply as X1 has not received any capital proceeds from this assignment and X1 will be taken to have received the market value of the Company F receivable and the cash gift (at the time that the Company F receivable and the cash gift have been assigned to Z4 Trust). 124. On the basis that the transfer of the Company F receivable and the cash gift to the Z4 Trust will happen immediately following the time X1 is taken to have acquired these interests, the market value of the Company F receivable and the cash gift should not change between when X1 acquired these assets and transferred them to Z4 Trust. 125. As such, X1 should not make a capital gain as a result of the assignment of the Company F receivable and the cash gift to the Z4 Trust. This is because the market value of the Company F receivable and the cash gift at the time X1 acquired these interests (which is equal to X1’s cost base in the interests) should not differ from the market value of the Company F receivable and the cash gift at the time X1 assigns these to the Z4 Trust (that is, the amount of the capital proceeds X1 is deemed to receive for the transfer). 126. The above analysis has been conducted on the basis that the foreign currency amount (relating to the cash gift) is transferred to Z4 Trust’s foreign currency denominated bank account(s) immediately following the time it is deposited in one or more bank account(s) of X1 (that is, immediately following the making of the cash gift) and the market value of the foreign currency amount would not have varied materially over such a short timeframe. As such, X1 will make no capital gain (or forex realisation gain) as a result of the transfer of the foreign currency amount.