Private ruling: Capital gains tax
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will a capital gain tax (CGT) event happen if the trust is terminated and the legal titles in assets held on the vesting day are transferred to the residual beneficiaries? | A1: No. | Q2: Do the relevant acquisition date and cost transfer from the trust to the individual residual beneficiaries for use by them when a subsequent CGT event happens? | A2: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: the application for private ruling, and the documents provided with the application for private ruling. Consideration is being given to terminating the trust. The trustee has no intention of acquiring assets of a type other than those already held. The trustee has no intention of declaring an interest in the assets by beneficiaries other than the residual ones. The assets are fungible. There is no issue in halving each asset to satisfy the interests of each beneficiary. The trust deed states that on the vesting day, assets are to be split evenly between the two residual beneficiaries, so there is a clear understanding by all involved parties. By the trust deed, each of the two residual beneficiaries is absolutely entitled to half the existing assets on the vesting day of the trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20, and | Income Tax Assessment Act 1997 section 106-50.

Reasons for decision: Summary: If there is more than one beneficiary with interest in the 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. According to Taxation Ruling TR 2004/D25 (TR 2004/D25), a beneficiary with a vested and indefeasible interest in trust assets where one or more other beneficiaries also have an interest in those assets will nonetheless be considered absolutely entitled to a specific number of the trust's assets if certain factors are present. These factors are, the assets must be fungible, equity would permit the beneficiary to have their interest satisfied and there must be a very clear understanding on the part of all relevant parties. If these factors are present, then the beneficiary will be considered absolutely entitled to that specific number of the trust's assets for CGT purposes. As per paragraph 144 of TR 2004/D25, no CGT event happens when the legal title of an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. In this case, the factors outlined in paragraph 24 of TR 2004/D25 are present. The beneficiaries are considered absolutely entitled to the assets. Therefore, in accordance with paragraph 144 of TR 2004/D25, a CGT event will not occur when the legal title is passed from the trust to the beneficiary. Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) indicates that you make a capital gain or loss if and only if a capital gain tax event happens to a CGT asset in which you have ownership interest. It is considered that a beneficiary is absolutely entitled to a CGT asset as against the trustee if the beneficiary is absolutely entitled in equity to the asset and therefore has a vested, indefeasible and absolute interest in the asset, and able to direct how that asset shall be dealt with. In this case, the date the assets had a declaration of trust made over them is the date on which the trustee would have acquired the assets. As the beneficiaries are absolutely entitled to the assets, they are considered the beneficial owner and would have acquired their interest at this time. Therefore, the acquisition date and cost can transfer from the trust to the individual residual beneficiaries for use by them when a subsequent CGT event happens. | Detailed Reasoning - Additional information: For information regarding what records you are required to keep for capital gains tax purposes, please refer to the Guide to capital gains tax 2010-11 available at www.ato.gov.au.

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