Private ruling: Income tax - trusts - CGT events
Date of advice: 26 April 2021
Published: July 2021
Ruling period: Income year ended 30 June 2020 | Income year ended 30 June 2021 | Income year ended 30 June 2022
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the proposed variation cause any of the CGT events in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen in relation to any of Trust A's CGT assets? | A1: No | Q2: Will section 112-20 of the ITAA 1997 apply to modify the first element of the cost base of the Units issued to the Unitholders? | A2: No | Q3: Will section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to include an amount in the assessable income of the Unitholders when the trustee issues the Units to the Unitholders as proposed? | A3: No

Relevant facts and circumstances: Trust A was established by Deed of Settlement dated DD/MM/YYYY, amended by Deed of Variation dated DD/MM/YYYY (together, the Original Deed). The sole trustee of the Trust A is Company A. The draft 'Variation of trust' deed sets out the proposed new terms, conditions and rules of Trust A (proposed variation).

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 99B | Subsection 99B(1) | Section 99C | Income Tax Assessment Act 1997 Subsection 102-25(1) | Section 103-5 | Section 103-15 | Division 104 | Section 104-35 | Subsection 104-35(1) | Paragraph 104-35(5)(d) | Section 104-55 | Section 104-60 | Subsection 104-65(1) | Section 104-70 | Subsection 104-70(1) | Subsection 104-70(2) | Subsection 104-75(1) | subsection 104-155(1) | paragraph 104-155(5)(d) | Subdivision 110-A | Subsection 110-25(2) | Division 112 | Section 112-15 | Section 112-20 | Subsection 112-20(1) | Paragraph 112-20(1)(a) | Paragraph 112-20(1)(b) | Paragraph 112-20(1)(c) | Subsection 112-20(2) | Subsection 112-20(3)

Reasons for decision: Summary: Based on the facts provided, the proposed variation will not cause any CGT event in Division 104 to happen in relation to any of the assets of Trust A. The first element of the cost base of a CGT asset is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value (MV) of any other property you gave, or are required to give, in respect of acquiring it (worked out at the time of the acquisition) (subsection 110-25(2)). For the purpose of subsection 110-25(2), you are required to pay money even if you do not have to pay it until a later time (section 103-15). Applying subsection 110-25(2), the first element of the cost base of each Unit is $X as this is the price the Unitholders will be required to pay for the Units. | Detailed Reasoning - Does section 112-20 apply?: Subsection 112-20(1) provides that the first element of the cost base of a taxpayer's CGT asset is substituted with the asset's MV at the time of acquisition if one of the situations in paragraphs (a) to (c) of the subsection occurs. However, in relation to paragraph 112-20(1)(c), where the taxpayer and another other entity did not deal at arm's length in connection with the acquisition, if the acquisition resulted from an act of the other entity that did not constitute a CGT event happening, the MV of the CGT asset at the time of acquisition is only substituted if what was paid to acquire the asset is more than that MV (subsection 112-20(2). Based on the facts and the assumption regarding the MV of the Units at the time of acquisition, it is considered: • paragraph 112-20(1)(a) will not be satisfied as the Unitholders will be required to pay for the Units. • paragraph 112-20(1)(b) will not be satisfied as this expenditure can be valued. • paragraph 112-20(1)(c) is satisfied as the Trustee and the Unitholders will not be dealing at arm's length in connection acquisition of the Units. • CGT event D1 will not happen as paragraph 104-35(5)(d) applies the trustee of a unit trust issues units in the trust. • the amount paid to acquire the Units will not be more than the MV of the Units at the time of acquisition. Consequently, when the Unitholders acquire the Units, as proposed, section 112-20 will not apply and the first element of the cost base will be $X per unit as determined under subsection 110-25(2). | Detailed Reasoning - Question 3: Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary. Section 99C of the ITAA 1936 explains what must be considered in determining whether trust property is 'applied for the benefit of' a beneficiary. It is considered that the proposed variation of Trust A does not satisfy the requirements of subsection 99B(1) of the ITAA 1936 and, as such, no amount will be included in the assessable income of the beneficiaries when the Original Deed is varied as proposed.

Reasons for decision: Note: All legislative references in these Reasons for decision are to the Income Tax Assessment Act 1997 unlessotherwise indicated.