Private ruling: CGT - Transfer to assets from Trust 1 to taxpayer and then on to Trust 2

Ruling: Q1: Will the transfer/vesting of the shares in listed companies by the trustees of Trust 1 to the taxpayer be a CGT event? | A1: No | Q2: Will the transfer of the shares in listed companies by the taxpayer to the trustees of Trust 2 be a CGT event? | A2: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The trustee of Trust 1, hereon referred as the "first trust", hold assets including shares in a listed company, hereon referred as "the shares", on trust. The taxpayer is the sole beneficiary and is absolutely entitled to all of the assets, including the shares, held by the trustee of the first trust. The first trust was established for the purposes of the taxpayer's spouse complying with the relevant authority and limit the potential for any appearance of the possibility of conflict of interest. All of the shares transferred to the first trust were acquired after 19 September 1985. The taxpayer is not a share trader. The final paragraph of Clause xx of the first trust deed states: … AND it is further provided that the Trustees shall not disclose to the beneficiary or any relevant person details of the investments held by the trust from time to time. As a result of property details held by the first trust being known to the taxpayer, the trustees have formed Trust 2, hereon referred as the "second trust". The terms of the first and second trusts are identical except to the names of the trusts and the dates of establishment. That is the second trust has the same trustees and it is proposed that the taxpayer will be the sole beneficiary and will be presently entitled to all of the assets of the second trust as per the first trust. The taxpayer proposes that, following on from the vesting of the shares from the first trust to the taxpayer, they will transfer all of their interests in the shares globally to the second trust (without the taxpayer enquiring as to the details of the shares).

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95, | Income Tax Assessment Act 1997 Subsection 102-25(1), | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 104-60 , | Income Tax Assessment Act 1997 Subsection 104-60(1), | Income Tax Assessment Act 1997 Subsection 104-60(5), | Income Tax Assessment Act 1997 Paragraph 104-60(5)(a), | Income Tax Assessment Act 1997 Subsection 104-80(1), | Income Tax Assessment Act 1997 Subsection 104-85(1) and | Income Tax Assessment Act 1997 Section 106-50. Question 1 | Summary | No CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. | Detailed reasoning | CGT event E5 | A CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against a trustee (subsection 104-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The taxpayer is currently the sole beneficiary and absolutely entitled to the assets (shares) currently held in the first trust; according, they are not "becoming" entitled to a trust asset. Therefore, CGT event E5 does not apply. | CGT event E7 | A CGT event E7 happens if a trustees of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital (subsection 104-85(1) of the ITAA 1997). | Taxation Ruling (TR) 2004/D25 states: | Beneficiary is already absolutely entitled | A beneficiary that is absolutely entitled to a CGT asset as against the trustee will be the relevant taxpayer if a CGT event happens to the asset. This is the effect of section 106-50 of the ITAA 1997 which provides that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset. | Therefore, the beneficiary (and not the trustee) will be required to account for any capital gain or loss that arises on disposal of the asset in the calculation of their net capital gain or net capital loss and hence their taxable income. This is so regardless of whether the beneficiary has always been absolutely entitled to the asset or they became absolutely entitled to it at some time after the trust commenced. | Because the beneficiary is the relevant taxpayer, and the capital gain or loss is included in the beneficiary's income calculations, it is not included in the net income of the trust under section 95 of the ITAA 1936. | Also, no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. | In this instance, paragraph 144 of TR 2004/D25 provides the answer; no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. | Question 2 | Summary | CGT events E1 and E2 in sections 104-55 and 104-60 (which can happen when an asset is transferred to a trust) do not happen if the transferor is the sole beneficiary of the trust and is absolutely entitled as against the trustee to the asset they transferred, provided the trust is not a unit trust. | Detailed reasoning | CGT event A1 | A CGT event A1 under section 104-10 of the ITAA 1997 happens if the ownership of a CGT asset changes. While a CGT event E2 under section 104-60 of the ITAA 1997 will occur if a CGT asset is transferred to an existing trust. | Where more than one CGT event is capable of applying to a transaction, then the most specific event applies (subsection 102-25(1) of the ITAA 1997). Furthermore, no other CGT event will apply if the most specific event is taken not to have happened because of an exception. | It is considered that CGT event A1, rather than CGT event E2, happens when an asset is transferred to another party and the parties are completely unconnected and are dealing with each other at arm's length. Conversely, CGT event E2 will happen if an asset is transferred to a trust of which the transferor or an associate is a beneficiary or object. | In this instance, the taxpayer will be transferring an investment of shares to a trust of which they will be the sole beneficiary and absolutely entitled to the assets of the second trust, therefore it is considered that CGT event E2 will apply rather than CGT event A1. | CGT event E2 | A CGT event E2 happens if you transfer a CGT asset to an existing trust (subsection 104-60(1) of the ITAA 1997). The time of the event occurs when the asset is transferred (subsection 104-60(2) of the ITAA 1997). When the investment shares held by the taxpayer are transferred to the trust, a CGT event E2 occurs unless one of the two exceptions in subsection 104-60(5) of the ITAA 1997 applies. | The first exception to CGT event E2 occurs where: | · you transfer the assets to an existing trust | · you are the sole beneficiary of the trust | · you are absolutely entitled to the asset as against the trustee (disregarding any legal disability), and | · the trust is not a unit trust (paragraph 104-60(5)(a) of the ITAA 1997). | In this instance, the taxpayer will transfer investment shares held in a number of companies to the trust. At the time of the transfer, the taxpayer will be the sole beneficiary of the trust, be absolutely entitled to the asset as against the trustee and the trust is not a unit trust. | Therefore the exception in paragraph 104-60(5)(a) of the ITAA 1997 applies. Because the exception in paragraph 104-60(5)(a) applies, then CGT event E2 in section 104-60 of the ITAA 1997 does not happen. | In short, CGT events E1 and E2 in sections 104-55 and 104-60 (which can happen when an asset is transferred to a trust) do not happen if the transferor is the sole beneficiary of the trust and is absolutely entitled as against the trustee to the asset they transferred, provided the trust is not a unit trust. | Conclusion | Neither, the transfer of the shares from the first trust to the taxpayer, or the subsequent transfer of the same shares from the taxpayer to the second trust, gives rise to a CGT event.


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