Private ruling: CGT - disposal of trust asset
Date of advice: 26 February 2024
Published: 15 April 2024
Ruling period: Year ending 30 June 20XX. | Year ending 30 June 20XX.
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a Capital Gains Tax (CGT) event occur for the Trustee of the Trust when it transfers its interest in the Property to Person A? | A1: Yes. | Q2: Is Person A or any beneficiary of the Trust absolutely entitled to the Property as against the Trustee of the Trust? | A2: No | Q3: Is the Trust entitled to apply the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: No. Summary A capital gains tax (CGT) event will happen on the transfer of the property from the Trustee of the Trust to Person A. Although Person A, who resides at the Property, is a beneficiary of the Trust, which is a discretionary Trust, they are not absolutely entitled to the Property. This is because the trustee of a discretionary Trust has absolute discretion with regard to beneficiary entitlements of income or capital, in whole or in part, to the exclusion of other beneficiaries in such proportions as the trustee may determine. Therefore, as no beneficiary is absolutely entitled to the Property, the relevant CGT event will happen to the Trust because it is the current owner of the property for CGT purposes when the property is transferred to Person A. Subsection 104-75(1) of the ITAA 1997 and the principles discussed in Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) apply such that CGT event E5 (Beneficiary becoming entitled to a trust asset) will not occur in this case. Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property occurs, and this is treated as a disposal for CGT purposes. CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. A main residence or partial main residence exemption pursuant to section 118-110 of the ITAA 1997 will not apply as the Property is owned by the Trust and not an individual. Person A as a beneficiary, would have a right to occupy the Property, which would be sufficient to satisfy the definition of ownership interest in section 118-130 of the ITAA 1997. However, the CGT event is not happening to their ownership interest being the right to occupy. It is happening to the dwelling and associated property which is owned by the Trust. The property is owned by the Trust and therefore cannot be an asset of person B's Deceased estate. Consequently, the exemption from CGT provided under subsection 128-15(3) of the ITAA 1997 on the passing of an estate asset to a beneficiary of the Deceased estate does not apply in this case.

Relevant facts and circumstances: The Trust is a discretionary trust established by the Trust Deed on DD MM 20XX. Person B, now deceased, was sole director of the corporate trustee and the sole appointer of the Trust. The Trust Deed provides: • the beneficiaries are referred to throughout as specified beneficiaries and general beneficiaries. Clause 1.4 states, Beneficiary will include any of the specified beneficiaries and general beneficiaries. • Person B and Person A are the specified beneficiaries of the Trust. In 20XX, The Property was purchased in the name of the Trust. The Deceased was a self-employed professional and the Property was placed in the Trust for asset protection. The property was not used as the business premises at any time. Between 20XX and 20XX the Property was used to derive rental income. In 20XX, Person B and Person A moved into the Property as their main residence. They had not previously resided at the Property. Person B passed away on DD MM 20XX. The business ceased upon their death. Person A, their spouse, did not have a role in the business. The Property is the main residence of Person A and has been since 20XX. Following Person B's death, Probate was granted to Person A who is the sole executor and sole beneficiary of Person B. In accordance with the Schedule of the Trust Deed, Person A will now assume position as Appointer of the Trust. Ownership of the property is to be transferred from the Trust to Person A.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 section 106-50 Detailed Reasoning | Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens to a CGT asset. All assets acquired since CGT started (20 September 1985) are subject to CGT unless specifically excluded. The Property is a CGT asset. | CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of a CGT asset to someone else. | CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part interest, in the trust capital (section 104-85 of the ITAA 1997). | Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property occurs, and this is treated as a disposal for CGT purposes. CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. If more than one event can happen, the one you use is the one that is the most specific to your situation (section 102-25 of the ITAA 1997). | Main residence exemption | Generally, you can disregard a capital gain or loss from a CGT event that happens to your ownership interest in a dwelling if: | • you are an individual (paragraph 118-110(1)(a) of the ITAA 1997) | • the dwelling was your main residence for the whole period it was owned | • you have not used the dwelling to produce assessable income, and | • any land on which the dwelling is situated on and adjacent to is two hectares or less | Absolute entitlement | The core principle underpinning the concept of absolute entitlement is the ability of the beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred at their discretion. However, if there is some basis upon which the trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled. This derives from the rule in Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust. | A CGT event in relation to an asset of a trust happens to the trustee on behalf of the trust unless a beneficiary is absolutely entitled to the asset. Where a beneficiary is absolutely entitled to a CGT asset as against the trustee, section 106-50 of the ITAA 1997 states that any act done in relation to the CGT asset by the trustee will be treated as if the act was done by the absolutely entitled beneficiary. | TR 2004/D25 discusses the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of a trust as against its trustee. | A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is: | • absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and | • able to direct the trustee how to deal with the asset. | Paragraph 23 of TR 2004/D25 states that if there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to be absolutely entitled to the asset. In such cases, absolute entitlement can only be established if the assets are fungible. A dwelling is not a fungible asset. | TR 2004/D25 provides if there is more than one beneficiary with interests in a trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. Paragraph 24 of TR 2004/D25 advises that there is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the asset, no one beneficiary can be considered absolutely entitled to the asset. The Trust Deed does not authorise any beneficiary alone to call for the Property to be transferred to them or be transferred at their sole direction. | Person A is a specified beneficiary of the Trust. A specified beneficiary is also a general beneficiary of the Trust. Following the death of Person B, Person A as Appointer of the Trust intends to distribute the Trust asset by way of transfer to Person A. For a beneficiary to have absolute entitlement, the trust asset must be a fungible asset and easily divisible. Real property is not a fungible asset and cannot be easily divided. Therefore, for the reasons outlined above, Person A as a beneficiary of the Trust is not absolutely entitled to the Property as against the trustee of the Trust. | Person A as a beneficiary, would have a right to occupy the Property which would be sufficient to satisfy the definition of ownership interest in section 118-130 of the ITAA 1997. However, the CGT event is not happening to their ownership interest being the right to occupy. It is happening to the dwelling and associated property which is owned by the Trust. | Therefore, as no beneficiary is absolutely entitled to the Property, the relevant CGT event will happen to the Trust as the current owner of the property for CGT purposes when the property is transferred to Person A. In your case, the entity disposing of the asset is a trust. A trust is not an individual and is not entitled to apply the main residence or partial main residence exemption under section 118-110 of the ITAA 1997. No beneficiary including Person A is absolutely entitled to the Property; therefore, they would have no ability to use the main residence or partial main residence exemption either. | The property is owned by the Trust and therefore cannot be an asset of Person B's Deceased estate. Consequently, the exemption from CGT provided under subsection 128-15(3) of the ITAA 1997 on the passing of an estate asset to a beneficiary of the Deceased Estate does not apply in this case. | trust assets for CGT purposes. This circumstance is where: | • the assets are fungible (for example, shares in the same company and with the same characteristics); | • the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and | • there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. | • Therefore, the circumstance where a beneficiary can be considered absolutely entitled to a specific number of trust assets for CGT purposes in paragraph 24 of Draft TR 2004/D25 does not apply. | Paragraph 54 of TR 2004/D25 states the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries for a single asset such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it. | Application to your circumstances | In this case, the Trust is a discretionary Trust, therefore the Trustee has direction in allocating income or property of the Trust. The Trust deed does not provide that one specific beneficiary has a vested and indefeasible interest in the Property. When the asset is not fungible and there is more than one beneficiary potentially entitled to the asset, no one beneficiary can be considered absolutely entitled to the asset. The Trust Deed does not authorise any beneficiary alone to call for the Property to be transferred to them or be transferred at their sole direction. | Person A is a specified beneficiary of the Trust. A specified beneficiary is also a general beneficiary of the Trust. Following the death of Person B, Person A as Appointer of the Trust intends to distribute the Trust asset by way of transfer to themselves. For a beneficiary to have absolute entitlement, the trust asset must be a fungible asset and easily divisible. Real property is not a fungible asset and cannot be easily divided. Therefore, for the reasons outlined above, Person A as a beneficiary of the Trust is not absolutely entitled to the property as against the Trustee of the Trust. | Person A as a beneficiary, would have a right to occupy the Property which would be sufficient to satisfy the definition of ownership interest in section 118-130 of the ITAA 1997. However, the CGT event is not happening to their ownership interest being the right to occupy. It is happening to the dwelling and associated property which is owned by the trust. | Therefore, as no beneficiary is absolutely entitled to the Property, the relevant CGT event will happen to the Trust as the current owner of the property for CGT purposes when the property is transferred to Person A. In your case, the entity disposing of the asset is a trust. A trust is not an individual and is not entitled to apply the main residence or partial main residence exemption under section 118-110 of the ITAA 1997. No beneficiary including Person A is absolutely entitled to the Property; therefore, they would have no ability to use the main residence or partial main residence exemption either. | The Property is owned by the Trust and therefore cannot be an asset of Person B's Deceased estate. Consequently, the exemption from CGT provided under subsection 128-15(3) of the ITAA 1997 on the passing of an estate asset to a beneficiary of the Deceased Estate does not apply in this case.