Private ruling: Capital Gains tax event - trust losses of an unlisted very widely held trust
Date of advice: 11 June 2019
Published: August 2019
Ruling period: 1 July 19XX to 30 June 20XY

Ruling: Q1: Is 31 August 20XZ the date of the capital gains tax (CGT) event for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, the CGT event occurred on 31 August 20XZ for the purposes of Part 3-1 of the ITAA 1997. Issue 2 | Q2: Does the Trustee for the unit trust (the Unit Trust) pass the loss recoupment tests for unlisted very widely held trusts in Schedule 2F to the ITAA 1936? | A2: Yes, the Unit Trust passes the loss recoupment tests for unlisted very widely held trusts in Schedule 2F to the ITAA 1936.

Relevant facts and circumstances: The Unit Trust was created in late October 19XX. Shortly after, it purchased land and building on which it carried on a business of holiday making. The Unit Trust is a public unit trust with over 3,000 fully paid units on issue and approximately 1,500 different unitholders. In mid-20XW a resolution was passed by the members resolving to end the Unit Trust and a Put and Call Option Agreement (Put and Call Option) was entered into for the sale of the land and property (the Property) on which the business operates in late December 20XW. The Property was sold by contract on 31 August 20XZ (Contract of Sale). The Unit Trust will make a capital gain on the sale of the land and property. Following the sale a liquidator will be appointed to wind up the Unit Trust. The liquidator will make an interim distribution to the unitholders paid solely from the capital of the Unit Trust. Following the sale of the land and property, the Unit Trust will have net income available for distribution to unitholders, after the application of losses carried forward from previous years. The Unit Trust is not being acquired or merged with another trust. It is selling the Property to end the business. Put and Call Option The Put and Call Option was used to facilitate the sale by providing time for the buyer to complete due diligence and arrange finance. The Put and Call Option would be terminated on certain requirements not being met or would expire if the Put Option or Call Option was not exercised. Additional facts The losses of the Unit Trust are revenue losses. No more than 5% of the units in the Unit Trust have been traded in one transaction. Assumptions

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1936 Schedule 2F | Income Tax Assessment Act 1936 section 266-165 | Income Tax Assessment Act 1936 section 269-15 | Income Tax Assessment Act 1936 section 272-105 | Income Tax Assessment Act 1936 section 272-110 | Income Tax Assessment Act 1936 section 272-120

Reasons for decision: Summary: The contract of sale provides the date of the capital gains tax event. | Detailed Reasoning - Mere realisation of a capital asset: Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss results from a CGT event occurring. Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. A 'disposal', as defined in subsection 104-10(2) of the ITAA 1997, occurs when there is a change of ownership from one entity to another. A CGT asset, as provided in section 108-5 of the ITAA 1997, is any kind of property or a legal or equitable right that is not property. The mere realisation of a capital asset has been described as "liquidating or realising the old assets" ( Commissioner of Taxes v Melbourne Trust Limited [1914] AC 1001). In the High Court of Australia case of Federal Commissioner of Taxation v NF Williams 72 ATC 4188; (1972) 127 CLR 226, at ATC 4194-4195; CLR 249, Gibbs J explained mere realisation of land as follows: An owner of land who holds it until the price of land has risen and then subdivides and sells it is not thereby engaging in an adventure in the nature of trade, or carrying out a profit-making scheme. The situation is not altered by the fact that the landowner seeks and acts upon the advice of an expert as to the best method of subdivision and sale or by the fact that he carries out work such as grading, levelling, road-building and the provision of reticulation for water and power to enable the land to be sold to its best advantage. The proceeds resulting from the mere realization of a capital asset are not income either in accordance with ordinary concepts...even though the realization is carried out in an enterprising way so as to secure the best price... In the Federal Court of Australia case of Casimaty v Federal Commissioner of Taxation 97 ATC 5135, at 97 ATC 5152, Ryan J described a salient characteristic of the mere realisation of land as follows: ...[to not] undertake any works on, or development of, the land beyond what was necessary to secure the approval by the municipal authorities of the successive plans of subdivision and enhance the presentation of individual allotments for sale as vacant blocks. Miscellaneous Taxation Ruling MT 2006/1 [1] provides a list of specific factors relevant to isolated transactions and sales of real property. If several of the factors are present, it may be an indication that a business or concern in the nature of trade is being carried on. These factors include borrowing to acquire additional property, changes in the purpose for which land is held, business manner or having a coherent plan for subdivision of land. In determining whether activities relating to isolated transactions are an enterprise or are the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. No single factor will be determinative; rather it will be a combination of factors that will lead to a conclusion as to the character of the activities. The Unit Trust operated a holiday making business. It did not have plans to further develop the Property or subdivide it. The sale of the Property in late 20XZ is the only time land was sold by the taxpayer. This sale was necessary to wind up the business. On the balance, the above principles would support the conclusion that the sale of the Property was a mere realisation of a capital asset. | Detailed Reasoning - Capital Gains Tax: The Property was a pre-CGT asset as it was acquired in 19XX. Division 149 of the ITAA 1997 provides that an asset stops being a pre-CGT asset when more than 50 percent of the underlying ownership changes. The membership is considered to be the beneficial interest held by its ultimate owners, the members of the unit trust. It is known by the taxpayer that more than 50 percent of the membership in the unit trust has changed the since the Property was acquired originally. The taxpayer accepts that the pre-CGT status has been lost and will obtain a market valuation of the Property when the majority underlying interest in the Property changed. | Detailed Reasoning - Date of the CGT event: The Put and Call Option was signed prior to the Contract of Sale and was needed to facilitate any potential sales and was only tentative, in that it only operated in certain conditions. The Contract of Sale for the Property was executed on 31 August 20XZ. Where the parties enter into an initial agreement and later enter into an amending agreement, there is a question as to which is the relevant contract/agreement in determining the capital gains (i.e. whether the disposal contract is the initial agreement or the amending agreement). This issue was considered in by the High Court in FCT v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520. In a joint judgment it was summarised at paragraph 49, Where there are two or more contracts which affect the rights and obligations of the parties to a disposal of assets, the identification of the contract under which the assets were disposed of, for the purpose of applying s 160U of the Act, requires a judgment as to which of the contracts is properly to be seen as the source of the obligation to effect the disposal. The Put and Call Option was not the source of the rights and obligations of the vendor and purchaser. Those rights were governed by the Contract of Sale that was executed on 31 August 20XZ. Hence the date of the CGT event is 31 August 20XZ. | Summary: The Unit Trust passes the loss recoupment tests for an unlisted very widely held trust. | Detailed Reasoning - Detailed reasoning: The losses of the Unit Trust are revenue losses. All trusts must apply the trust loss rules in Schedule 2F to the ITAA 1936 if they wish to use a tax loss to reduce the trust's net income. The Unit Trust falls within the definition of an unlisted very widely held trust under section 272-120 of the ITAA 1936 because: · It satisfies the widely held unit trust definition because it is a fixed trust that is a unit trust and it is not closely held because there are more than 20 individual members and no dividual has between them more than 75% of the trust income, directly or indirectly (section 272-105 of the ITAA 1936) · It is not listed on an approved stock exchange (section 272-110 of the ITAA 1936) · the Unit Trust is an unlisted widely held trust with at least 1,000 unit holders · all of the Unit Trusts units carry the same rights · the Unit Trust engages an investment or business activity conducted at arm's length in accordance with the trust deed which are 'qualifying activities', and · all units carry the same rights and are redeemable for a price determined on the basis of the Unit Trust's net asset value. Under section 266-165 of the ITAA 1936 an unlisted very widely held trust may only deduct prior year losses if there was no abnormal trading in the trust's units, or if there was abnormal trading in the trust's units, the trust passes the 50% stake test immediately after there was abnormal trading in the trust's units. Subdivision 269-B of the ITAA 1936 states that abnormal trading in the units of a trust will occur when: a) the trading is part of an acquisition of the trust or merger with another trust; b) 5% of the units are traded in one transaction; c) the trustee is aware that a person, along with their associates, have acquired 5% or more of the units in two or more transactions, and would not have done so if the trust did not have a tax loss or other deduction; or d) more than 20% of the units were traded in any 60 day period. Section 269-15 of the ITAA 1936 requires a consideration of various factors to determine whether the trading is abnormal, including: a) the timing of the trading b) the number of units traded c) any connection with other trading, and d) any connection with the existence of a tax loss or other deduction. The records show that no more than 5% of the units in the Unit Trust have been traded in one transaction in the relevant period. The Unit Trust is not being acquired or merged with another trust. The change in the registration of the trustee did not constitute an acquisition or a merger. No person along with their associated has acquired 5% of the units in two or more transactions. No more than 20% of the units were traded in a 60 day period. It can be concluded that the Unit Trust passed the trust loss tests for unlisted very widely held trusts because no abnormal trading occurred in the relevant period. [1] The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number

No person along with their associated has acquired 5% of the units in two or more transactions; and would not have done so if the trust did not have a tax loss.