Private ruling: Absolute entitlement
Date of advice: 6 November 2018
Published: January 2019
Ruling period: Income year ended 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Will a capital gains tax event occur on the transfer of the Property from the Company to X and Y? | A1: Yes.

Relevant facts and circumstances: The Company was incorporated in the 19XXs. Its share capital comprises ordinary shares held by X and Y equally. During the 19XXs a contract for the purchase of the Property was entered into. The Company is listed on the contract as the purchaser, with X and Y signing the contract. X and Y paid the deposit on the purchase of the Property. The balance of the purchase price was funded by a loan and mortgage, with the Company listed as the mortgagor and X and Y as the guarantors. The Property has been held in the name of the Company since its acquisition. The Property was purchased in the Company’s name as X and Y had sought advice from their friends who believed that putting the Property in the name of the Company would provide them with asset protection. They did not seek any financial or legal advice at that time. Shortly after the Property was purchased, a building permit was issued to ‘Owner X and Y’ for the construction of a dwelling and garage/carport on the Property. X and Y entered into a building contract to construct a dwelling on the Property. X, Y and their family moved into the dwelling when construction of the dwelling on the Property was completed. X and Y continue to reside at the Property and regard it as their main residence and permanent home. Their now adult children also continue to reside at the Property. X and Y assumed full responsibility for and incurred the following costs: the initial deposit; all mortgage repayments; construction costs of the dwelling; building permit fees; land tax: council rates; insurance and maintenance. The Company did not charge X and Y any rent in relation to their use of the Property. The Company did not trade, have any other assets, or receive any income. It is proposed that the Company transfer the Property into the names of X and Y. X and Y’s accountants had questioned why the Property was registered in the Company’s name when their family lived at the Property. The accountants recommended to X and Y that they seek independent legal advice. The legal advice they received was that the Property should be transferred into X and Y’s names.

Relevant legislative provisions: Income tax Assessment Act 1997 section 106-50. | Income tax Assessment Act 1997 section 104-10. | Income tax Assessment Act 1997 section 104-85. | Income tax Assessment Act 1997 section 102-25.

Reasons for decision: Summary: All the legislative references that follow are to the Income Tax Assessment Act 1997 . Draft Taxation Ruling TR 2004/D25 states that where more than one beneficiary has an interest in a trust asset, it is not possible for the beneficiaries to be absolutely entitled to the asset, except in one particular circumstance that involves multiple trust assets which are fungible. In the present case, the trust only has one asset being the Property. Applying TR 2004/D25, it is clear that X and Y are not absolutely entitled to the Property. Consequently, section 106-50 does not apply to treat X and Y as being the owners of the Property. Therefore, the proposed transfer of the Property by the Company to X and Y will result in a capital gains tax (CGT) event occurring. | Detailed Reasoning - Detailed reasoning: CGT events A1 and E7 are relevant in the present case. The former happens on the disposal of a CGT asset (section 104-10) while the latter happens if a trustee 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 (section 104-85). Where more than one CGT event can happen, the one you use is the one that is the most specific to the situation (section 102-25). A CGT event happens to a CGT asset’s owner. However, section 106-50 states that where you are absolutely entitled to a CGT asset as against the trustee of a trust, the asset is treated as being your asset instead of being an asset of the trust. Consequently, if a beneficiary is absolutely entitled to a CGT asset as against the trustee of the trust, a transfer of the asset from the trustee to the beneficiary would not result in a CGT event as section 106-50 treats the asset as being the beneficiary’s asset even before the transfer. | Detailed Reasoning - Absolute entitlement: Draft Taxation Ruling TR 2004/D25 explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. The coversheet for TR 2004/D25 confirms that although it is a draft, it represents the ATO view on the matter of absolute entitlement. The cover sheet states: The Tax Office is consulting with Treasury in relation to absolute entitlement and in particular the problem areas of joint and multiple beneficiaries, and the trustee`s indemnity. TR 2004/D25 will not be finalised while this consultation is occurring. TR 2004/D25 will not be withdrawn and still represents the Tax Office view of the law. Law Administration Practice Statement PS LA 2003/3 states that a precedential ATO view is the ATO's documented view about the application of any of the laws administered by the Commissioner in relation to a particular interpretative issue. It also states that precedential ATO views are set out in certain documents including draft public rulings. Therefore, it can be seen that TR 2004/D25 sets out the ATO view with respect to absolute entitlement. TR 2004/D25 states: 10. The core principle underpinning the concept of absolute entitlement in the CGT 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. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40). … 20. … Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. … | Detailed Reasoning - More than one beneficiary with interests in a trust asset: 23. If there is more than one beneficiary with interests 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. This is because their entitlement is not to the entire asset. 24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where: ● the assets are fungible; ● the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and ● there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. 25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. See Explanation paragraphs 80-126 … 40. … the existence of a bare trust does not automatically mean a beneficiary of the trust is absolutely entitled. There may be multiple beneficiaries with interests in the trust property in which case other factors need to be considered. It may be that despite the trust being a bare trust, no one beneficiary is absolutely entitled to the trust property. | Detailed Reasoning - Application to the current circumstances: You contend that the Company has always held the Property upon bare trust for X and Y, and consequently the two beneficiaries were and are absolutely entitled to the Property as per section 106-50. However, as per TR 2004/D25, for X and Y to be absolutely entitled to the Property, it is not sufficient for the Company to hold the Property upon bare trust for them. TR 2004/D25 states that where more than one beneficiary has an interest in a trust asset, it is not possible for the beneficiaries to be absolutely entitled to the asset, except in one particular circumstance that involves multiple trust assets which are fungible. An example of trust assets which may be fungible are shares which have the same characteristics, that is, shares which are essentially identical. In the present case, the purported trust only has one asset being the Property. Applying TR 2004/D25, it is clear that X and Y are not absolutely entitled to the Property. Consequently, section 106-50 is not applicable in this case. As section 106-50 does not apply, X and Y are not treated as being the owners of the Property. Therefore, the proposed transfer of the Property by the Company to X and Y will result in a CGT event occurring. It was not necessary for us to conclusively determine whether or not a trust exists as even if one does, as explained above, X and Y cannot be absolutely entitled to the Property as it is not fungible.