Private ruling: Capital gain event
Published: August 2011
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Will there be a capital gains tax event under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) on the transfer of investments from the 'Company' to the 'Company as trustee for the Trust'? Advice/Answers No



Reasons for decision: Summary: As the transfer of the shares into the trust will not constitute a change of ownership for the purposes of section 104-10 of the ITAA 1997, there will be no assessable capital gain or capital loss as a result of the transfer. | Detailed Reasoning - Detailed reasoning: A capital gain or capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset is any kind of property, or a legal or equitable right that is not property. One of the most common CGT events, and the one that is applicable in your case, is CGT event A1 - disposal of an asset. Under section 104-10 of the ITAA 1997 you dispose of an asset when a change of ownership occurs from you to another entity. However, the section further goes on to say that a change of ownership does not occur if you stop being the legal owner but continue to be the beneficial owner or if there is merely a change of trustee. In most cases, when an entity acquires an asset, they become both the legal and beneficial owner of that particular asset. Their name is listed on the title deed or other legal papers, and they collect and declare any income that may arise from ownership of that asset. However, there are circumstances under which the legal and beneficial ownership of an asset may be held by different people. One example of this is a trust. Under a trust, the trustee holds an asset in trust for another entity. The person in whose name the asset is registered holds the asset as trustee and would have the legal interest in that asset. The entity for whom the asset is held in trust would have the beneficial interest in that asset. They are entitled to any income made by that asset and any action taken by the trustee is taken to have been made on behalf of the beneficiary. This means that not only does the beneficiary collect the income from that action, but they are also liable for any tax that may arise as well. A beneficial owner is defined in Taxation Ruling IT 2486 and Taxation Determination 92/106. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset. IT 2486 states that the essential question that must be asked is: "Whose money (or asset) is it?" For capital gains tax purposes, the disposal or acquisition of an asset is only recognised if there is a change in the legal and beneficial ownership of an asset. Paragraph 104-10(2)(a) of the ITAA 1997 provides that a change of legal ownership without the change in beneficial ownership does not constitute a change in ownership under section 104-10 of the ITAA 1997. If there is a distinction between legal and beneficial ownership, as there would be in the case of a valid trust, a transfer of a CGT asset from the trustee to the beneficiary would not, unless an exception applied, result in the disposal of that asset in accordance with section 104-10 of the ITAA 1997. Therefore, in order to determine whether there is any capital gains tax implications arising from the transfer of the shares we need to establish the legal and beneficial owner when the asset was originally acquired. | Detailed Reasoning - Legal owner: The transfer of the shares from the 'Company' to the 'Company as trustee for the Trust' does not constitute a change of ownership. The company retains legal ownership of the shares, the difference only in that it owns the shares in its capacity as trustee. | Detailed Reasoning - Beneficial owner: You advise the share trading accounts were purchased by the company in its capacity as trustee only. All income from the shares has been reported in the income tax returns of the trust. The company itself does not trade, does not lodge an income tax return, and does not have a tax file number. The facts indicate the trust is the beneficial owner of the share account. As the transfer of title does not change the legal or beneficial ownership of the shares there will be no CGT implications. Section 104-10 of the ITAA 1997 does not apply.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | The Company is the corporate trustee of the Trust. The Company has never traded in any capacity and does not have a tax file number. | The Trust has been a share trader for almost 20 years. | The trust has reported all investment and share trading activity in its accounts and income tax returns. | You have recently become aware that due to an administrative error, shares have been issued in the name of the Company instead of the Company as trustee for the Trust. The tax file number recorded by the stockbroker for these shares is that of the Trust. | You seek assurance that there will be no capital gain consequences if this administrative error is corrected. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.