Private ruling: Capital gains tax
Date of advice: 24 May 2016
Published: July 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Is an amount received from C's Fund following the sale of the property included in your assessable income? | Yes

Relevant facts and circumstances: You have been an Australian resident and citizen for many years. You were previously a resident of Country A until you moved to Australia. Your parent lived in Country A where they passed away more than 20 years ago. Your parent's estate was divided between you and your sibling with your share known as 'C's Fund'. This Fund was put into a trust named the C Trust in Country A, with more than one trustee being appointed, being residents of Country A. The clauses of your parent's will that created 'C's Fund' identified your spouse and your children as having an interest in the Trust property, your children being the remaindermen. You used money from C's Fund to buy a block of land in Australia in order to build a family home (property). You have been living in the home with your spouse and children for many years. Your children have moved out and now you and your spouse wish to move to a smaller property. The title deed for the property has always been held in the names of the trustees to protect the interests of your children who are successive beneficiaries to the will of your parent. All of your children have signed a letter of consent, agreeing to the property being sold, C's Fund being terminated, and the proceeds from the sale of the property being given to you and your spouse.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 20-25(2) | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Subsection 110-40(3) | Income Tax Assessment Act 1997 Section 112-20 | Income Tax Assessment Act 1997 Section 115-228 | Income Tax Assessment Act 1997 Section 116-30 | Income Tax Assessment Act 1997 Subsection 121-20(5) | Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Section 97

Reasons for decision: Summary: Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a capital gains tax event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The most common capital gains tax event is capital gains tax event A1 which happens when you dispose of an asset to another party, for example disposal of a dwelling (section 104-10 of the ITAA 1997). | Detailed Reasoning - C's Fund: Your parent's estate was divided between you and your sibling with your share known as 'C's Fund'. This Fund was put into a trust named the C Trust in Country A. Money from C's Fund was used to buy a block of land in Australia in order to build a family home (property). The title deed for the property has always been held in the names of the trustees to protect the interests of your children who are successive beneficiaries to your parent's will. | Detailed Reasoning - Disposal of property and legal ownership: When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and or beneficial owner of the property. Generally, the owner of the property is the person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership. In this case the trustees of C's Fund are the legal owners of the property. Thus on sale of the property, it is the trustees who will make a capital gain, unless it can be shown there is beneficial ownership by another party, for example absolute entitlement. | Detailed Reasoning - Absolute entitlement of trust property: If a beneficiary is absolutely entitled to a trust asset, the asset is treated for capital gains tax purposes as if it is owned directly by the beneficiary and not the trustee. Any actions taken by the trustee in relation to the asset are taken to have been done by the beneficiary directly. This means that if a capital gains tax event happens in relation to the asset, any capital gain or loss will be made directly by the beneficiary and doesn't form part of the trust's net income. A beneficiary is absolutely entitled to an asset of a trust if they have a 'vested and indefeasible' interest in the entire trust asset - that is, they can direct the trustee to immediately transfer the asset to themselves or to someone else. Where the trust is established by deed, (which in the case of a deceased estate is the will), the trustee must deal with the trust property in line with the intentions of the settlor as set out in the trust deed. They must also act in accordance with the relevant state or territory law regulating trusts, and with any other applicable law, including tax law. The core principle underpinning the concept of absolute entitlement in the capital gains tax provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. It is the Commissioner's view that in order to be deemed 'absolutely entitled' an individual must have the sole and exclusive right to instruct trustees with regard to the management of assets held in trust. The clauses of your parent's will that created 'C's Fund' identified your spouse and your children as having an interest in the Trust property and so we do not consider that you have absolute entitlement over the property. It then follows that the Trust will be the entity that will realise any capital gain or loss upon the disposal of the property. | Detailed Reasoning - Specifically entitled beneficiaries: Subdivision 115-C of the ITAA 1997 sets out the rules for calculating a beneficiary's net capital gain if they are entitled to a distribution from a trust that includes a net capital gain. As mentioned, when the property is sold, the trustees of C's Fund will make a capital gain. Section 115-228 of the ITAA 1997 sets out the requirements for distributing or streaming a capital gain to a particular beneficiary. For streaming to be effective for tax purposes, the beneficiary must be specifically entitled to all or part of the capital gain. A beneficiary is specifically entitled to a capital gain if the following two conditions are satisfied: • The first condition for a beneficiary to be specifically entitled to a capital gain is that the beneficiary receives, or is reasonably expected to receive, an amount equal to their share of the net financial benefit that is referable to the capital gain. A beneficiary's entitlement can be expressed as a dollar amount, a share of the trust gain, such as 25% of the trust capital gain realised on the sale of asset X, or using a known formula provided it refers to the capital gain. • The second condition for a beneficiary to have a specific entitlement to a capital gain is that the beneficiary's entitlement to the amount is recorded in its character as referable to the capital gain. This record must be contained in the accounts or records of the trust, such as the trust deed, trust accounts, resolutions and distribution statements, including schedules and notes attached to, or intended to be read with, these documents. A record for tax purposes only does not create specific entitlement. A resolution to distribute a specified amount of trust income, a percentage of the trust income or the balance of the trust income does not create a specific entitlement if there is no reference to a capital gain. However, if the capital gain is clearly referred to in another document, such as the trust accounts, the recording requirement may be satisfied. When a beneficiary is specifically entitled to a capital gain, the beneficiary is assessed on the capital gain, with all the associated tax consequences in respect of that distribution applying. Capital gains to which no beneficiary is specifically entitled flow proportionally to beneficiaries and/or the trustee based on their proportional share of the income of the trust estate. Accordingly, a specifically-entitled beneficiary will not be assessed on any share of the trust's net income over and above the amount of the specific entitlement unless they have a present entitlement to other income of the trust. The trustees of C's Fund will sell the property and in accordance with the letter of consent which has been signed by each of the remaindermen (your children). The proceeds will be distributed equally between you and your spouse, who are now the beneficiaries as your children have given up their interest in the trust. The proceeds will include the capital gain made by the trustees. As the two conditions mentioned above are satisfied, you and your spouse will be specifically entitled to the capital gain made by the trustees. You will need to show your half share of the capital gain in your tax return. | Detailed Reasoning - Distribution from non-resident trust: Non-residents are subject to capital gains tax in Australia in relation to assets that are 'taxable Australian property'. This includes real property in Australia. 'Real property' broadly consists of land and interests in land including fixtures, which, by definition, constitute part of the land. As the trustees of 'C's Fund are residents of Country A, C's Fund is a non-resident trust. And as you are a specifically entitled beneficiary, you will receive a distribution from a non-resident trust. There are special rules that apply to resident beneficiaries who receive a distribution from a non-resident trust. Subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary. Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents: • the corpus of the trust • amounts that would not have been included in the assessable income of a resident taxpayer, and • amounts previously included in the beneficiaries income under section 97 of the ITAA 1936. | Detailed Reasoning - Section 97 of the ITAA 1936: Section 97 of the ITAA 1936 applies to include in the assessable income of a beneficiary of a trust estate, who is not under a legal disability and is presently entitled to a share of the income of a trust estate, their share of the net income of the trust estate. Subsection 97(1) of the ITAA 1936 applies in your case to the distribution of your share of the capital gain you will receive from C's Fund. In addition, you need to include income which is assessable under section 99B of the ITAA 1936. What this in effect means for you is that you can exclude any corpus you receive from the trust under subsection 99B(2) of the ITAA 1936. | Detailed Reasoning - Conclusion: When the property is sold, the trustees of C's Fund will make a capital gain. As you and your spouse are specifically entitled beneficiaries, you will receive a distribution of your share of the capital gain. You cannot make a separate calculation of the capital gain as you are a beneficiary and your capital gain arises from the operation of section 115-228 of the ITAA 1997 and not from the happening of a CGT event. For the same reason, you cannot apply the main residence exemption even though you and your spouse have been living in the property as your main residence since it was built.