Private ruling: Liquidator distribution
Date of advice: 3 June 2020
Published: July 2020
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2017

Ruling: Q1: Will CGT event A1 occur upon distribution of the capital amount to the selected beneficiaries? | A1: No | Q2: Will CGT event C2 occur upon distribution of the capital amount to the selected beneficiaries? | A2: Yes | Q3: Will the capital gain incurred upon CGT event C2 happening be disregarded? | A3: Yes | Q4: Will CGT event K6 occur upon distribution of the capital amount to the selected beneficiaries? | A4: No | Q5: Will CGT event E4 occur upon distribution of the capital amount to the selected beneficiaries?? | A5: No | Q6: Does CGT event E5 apply to the trustee or any of the selected beneficiaries upon distribution of the capital amount? | A6: No | Q7: Does CGT event E7 apply to the trustee or any of the beneficiaries upon distribution of the capital amount? | A7: No

Relevant facts and circumstances: Company X's land and building Company X acquired land and a building (the Property) pre-CGT. The Property comprised land and a commercial building. The Property was used for the purpose of producing rental income at all times from the date of acquisition by Company X up until the commencement of the post-CGT Refurbishment. Over the years, portions of the building were leased to various arm's length tenants. Company X commenced a major refurbishment of the building situated on the land owned by Company X. The building was vacated so as to permit construction of the Refurbishment. After completion of the refurbishment the building was reopened for the leasing of the redeveloped floors or parts thereof to third party tenants. New third party leases for separate portions of the new building were entered into. On or about XX XXXX XXXX, Company X acquired the Laneway post-CGT adjoining the Property (excluding GST and other settlement adjustments). No capital improvement was made to the laneway. The laneway provided access to the Property. By contract of sale dated XX XXXX XXXX, made between Company X and the purchaser settled on XX XXXX XXXX, Company X sold each of · The Property as a going concern · The laneway as a taxable supply The laneway was an asset used by Company X in carrying on the commercial leasing business within the Property. It was supplied to the Purchaser to enable the purchaser to continue the operation of the business acquired from Company X. After the completion of the Refurbishment, Company X continuously carried on the business of renting out the building on the Property under commercial leases to third parties until the date of settlement of the sale. The Contract of Sale provides for the sale to be subject to existing tenancies. At settlement, all the four building levels were occupied by tenants. The refurbishment is to be considered a separate asset and is deemed to have been acquired by Company X on the date the construction contract was executed (section 100-20(3) ITAA 1997). Shareholdings Company X.'s issued capital comprises X ordinary shares each fully paid to $X per share. Company X's issued capital has, at all material times since a date pre-CGT, been beneficially owned by Company Y. The issued capital of Company Y comprises X Ordinary Shares each fully paid to $X per share. The Company Y issued capital has at all material times been held by you in your capacity as Trustee of the W Trust created by deed dated pre-CGT. Trust deed The list of beneficiaries has not been changed since the creation of the W Trust. There is no person existing capable of appointing additional beneficiaries in terms of the Trust Deed; so the range of Beneficiaries as detailed in the Schedule to the Trust Deed has been locked in since XX XXXX XXXX. Your director's have decided that all distributions of capital from the W Trust are to be made in a manner consistent with the provisions of the Will of their mother, and in the proportions stated in that Will (the Will Concept). You have at all relevant times since the creation of the W Trust, administered the W Trust solely for the benefit of the same family. Distribution from Company Y The liquidator of Company X proposes to distribute, by way of a specific liquidator's capital distribution, the amount $X out of the Capital Profit Reserve Pre 1985 account to Company Y. This distribution will not be considered to be a dividend as it comprises the profits from the sale of a pre-CGT asset. Company X will be deregistered in terms of subsection 509(5) of the Corporations Act 2001 . The liquidator of Company U will then distribute the same amount to you ("Capital amount"). This distribution will not be considered a dividend. This distribution from Company X will not be considered to be an assessable dividend as it comprises the profits from the sale of a pre-CGT asset. This will not be considered to be a dividend upon distribution to you. Company Y will be deregistered in terms of subsection 509(5) of the Corporations Act 2001 . You will then make a capital distribution of this amount to the selected beneficiaries of the W Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 100-10(1) | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 102-25(2) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 paragraph 104-25(5)(a) | Income Tax Assessment Act 1997 section 104-70 | Income Tax Assessment Act 1997 subsection 104-70(1) | Income Tax Assessment Act 1997 paragraph 104-70(1)(a) | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 subsection 104-75(1) | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 subsection 104-85(1) | Income Tax Assessment Act 1997 section 104-230 | Income Tax Assessment Act 1997 subsection 104-230(1) | Income Tax Assessment Act 1997 subsection 104-230(2) | Income Tax Assessment Act 1997 subsection 118-20(1) | Income Tax Assessment Act 1997 subsection 118-20(1A)

Reasons for decision: Detailed Reasoning - Question 1: CGT event A1: CGT event A1 occurs when there is disposal of a CGT asset (subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). You are taken to dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. In this instance, there is no change of ownership of a CGT asset. The asset in question has already been sold by another entity. The distribution of the proceeds of this disposal to another entity through the liquidation process does not represent a change of ownership for the purposes of CGT event A1. | Detailed Reasoning - Question 2: CGT event C2: Under section 108-5 of the ITAA 1997, an asset for CGT purposes is any form of property or a legal or equitable right that is not property. Under section 102-20 of the ITAA 1997, you make a capital gain or capital loss as a result of a CGT event. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: a) being redeemed or cancelled b) being released, discharged or satisfied c) expiring; or d) being abandoned, surrendered or forfeited; or .... The time of the event is when you enter into the contract that results in the asset ending or if there is no contract, when the asset ends: subsection 102-25(2) ITAA 1997. Taxation Determination TD 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? (TD 2001/27) considers how Parts 3-1 and 3-3 of the ITAA 1997 treat a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to be a dividend. Paragraph 1 of the ruling states that: The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4). If all or part of a final distribution made by a liquidator of a company is deemed by subsection 47(1) of the ITAA 1936 to be a dividend paid out of profits, and to be assessable income of a shareholder under subsection 44(1) of the ITAA 1936, this does not alter the position stated in paragraph 1 of TD 2001/27. However, subsection 118-20(1) of the ITAA 1997, when read with subsection 118-20(1A), ensures that no part of the final liquidator's distribution is taxed both as a dividend and as a capital gain. Subsection 118-20(1) of the ITAA 1997 states that a capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this part) includes an amount (for any income year) in: a) your assessable income or exempt income; or b) if you are a partner in a partnership, the assessable income or exempt income of the partnership. Subsection 118-20(1A) of the ITAA 1997 states that subsection (1) applies to an amount that, under a provision of this Act (outside of this part), is included in: a) your assessable income or exempt income; or b) if you are a partner in a partnership, the assessable income or exempt income of the partnership; in relation to a CGT asset as if it were so included because of the CGT event referred to in that subsection if the amount would also be taken into account in working out the amount of a capital gain you make. The distribution made to you in the course of the voluntary liquidation, to the extent to which it is made out of a reserve that represents a capital gain that has been reduced to nil (due to it being profits from the sale of a pre-CGT asset), will not be deemed a dividend paid by the company out of profits under subsection 47(1) of the ITAA 1936. It will instead form part of the capital proceeds for the ending of your shares on liquidation. As per TD 2000/7 at paragraph 4, it is considered that when a company is deregistered under subsection 509(5) of the Corporations Act 2001 , a CGT event (usually being C2) happens to the member's shares. In this case C2 occurs when the company is deregistered. This deregistration occurs three months after the liquidator lodges a return of the holding of the final meeting of members or of members and creditors. | Detailed Reasoning - Question 3: Will the capital gain that results from CGT event C2 happening be disregarded?: Under paragraph 104-25(5)(a) ITAA 1997, a capital gain or loss you make as a result of CGT event C2 is disregarded if you acquired the asset before 20 September 1985. All the shares were acquired pre-CGT and they have remained pre-CGT. Therefore any capital gain that results from CGT event C2 occurring will be disregarded. | Detailed Reasoning - Question 4: CGT Event K6: CGT event K6 is an anti-avoidance measure designed to prevent the possible avoidance of CGT where the owners of interests in a company or trust, acquired prior to 20 September 1985, dispose of these interests, rather than actual property of the company or trust acquired after 20 September 1985. Specifically under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens when: · you own shares in a company or an interest in a trust you acquired before 20 September 1985, · CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 (the Other CGT Event) happens in relation to the shares or interest in the trust, · there is no roll-over for the Other CGT Event, and · the 75% test in subsection 104-230(2) of the ITAA 1997 is satisfied. The 75% test in subsection 104-230(2) of the ITAA 1997 is satisfied when just before the Other CGT Event happened: · the market value of property of the company or trust (that is not trading stock) that was acquired on or after 20 September 1985, or · the market value of interests in the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985, must be at least 75% of the net value of the company or trust. As detailed above, CGT event C2 occurs at the time of deregistration. Subsection 104-25(2) of the ITAA 1997 states that the time at which CGT event C2 happens is: a) when you enter into the contract that results in the asset ending; or b) if there is no contract - when the asset ends. For CGT purposes, shares in a company or units in a unit trust are treated in the same way as any other assets. Shares and units acquired on or after 20 September 1985 are a CGT asset. The principal asset in Company X was purchased pre-CGT and this asset has remained pre-CGT. The asset was sold prior to deregistration, leaving only cash at bank. No other property was acquired by the entity post 20 September 1985. No other interests were acquired by interposed companies post 20 September 1985. Therefore the 75% test in subsection 104-230(2) of the ITAA 1997 is not satisfied and CGT event K6 does not apply. | Detailed Reasoning - Question 5: CGT Event E4: Subsection 104-70(1) of the ITAA 1997 states that CGT event E4 happens if: a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and b) some or all of the payment (the non-assessable part ) is not included in your assessable income. In Taxation Determination TD 2003/28 Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to: a) a mere object; or b) a default beneficiary?, the Commissioner stated that: 1. (a) No, CGT event E4 does not happen if a trustee of a discretionary trust makes a non-assessable payment to a mere object in respect of their interest in the trust... 2. In this context, a mere object refers to a member of the class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee (i.e. a discretionary beneficiary)... 3. CGT event E4 does not happen in the circumstances described in paragraph 1 because a mere object or default beneficiary is not considered to have an 'interest in the trust' of the nature or character required in paragraph 104- 70(1)(a). 4. The meaning to be given to the words 'interest in the trust' depends on the context in which they are used, see for example Leedale v. Lewis [1982] 3 All ER 808 and Gartside v. IRC [1968] AC 553. In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests. 5. The interest that a mere object has in a trust is not one in which another person can invest - such an interest, being a bare right of action, cannot be purchased or assigned... The W Trust is a discretionary trust. The Trust Deed provides that the trustee in their absolute discretion can choose to distribute the income of the trust to one of the beneficiaries of the trust. The Trust Deed also provides that the trustee in their absolute discretion can choose to distribute the capital of the trust to one of the beneficiaries of the trust. The beneficiaries of the W Trust are discretionary beneficiaries. In line with the view in TD 2003/28, the beneficiaries will not have an interest in the trust of the nature or character required in paragraph 104-70(1)(a) of the ITAA 1997. The beneficiaries are mere objects. Therefore CGT event E4 will not occur to the trustee of the trust upon a payment being made to the beneficiaries. | Detailed Reasoning - Question 6: CGT Event E5: Subsection 104-75(1) of the ITAA 1997 states that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under). The trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. A capital gain or capital loss the trustee makes is disregarded if it acquired the asset before 20 September 1985. The beneficiary makes a capital gain if the market value of the asset (at the time of the event) is more than the cost base of the beneficiary's interest in the trust capital to the extent that it relates to the asset. The beneficiary makes a capital loss if that market value is less than the reduced cost base of that beneficiary's interests in the trust capital to the extent that it relates to the asset. A capital gain or capital loss the beneficiary makes is disregarded if: a) the beneficiary acquired the CGT asset that is the interest (except by way of assignment from another entity) for no expenditure; or b) the beneficiary acquired it before 20 September 1985; or c) all or part of the capital gain or capital loss the trustee makes from the CGT event is disregarded under Subdivision 118-B (about main residence). The beneficiaries in this situation will receive a pre-CGT capital distribution in the form of a liquidator distribution. They have not been appointed a CGT asset. Therefore there is no CGT asset for which the beneficiaries can be absolutely entitled to. CGT event E5 will not occur in upon distribution of the capital amount to the beneficiaries. Even if CGT event E5 occurs, then all the beneficiaries acquired their interest for no expenditure and the trustee would have acquired any interest pre-1985. Therefore the gain would be disregarded for both trustee and the beneficiaries in any event. | Detailed Reasoning - Question 7: CGT Event E7: Subsection 104-85(1) of the ITAA 1997 states that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) 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. The trustee makes a capital gain if the market value of the asset (at the time of disposal) is more than its cost. It makes a capital loss if that market value is less than the asset's reduced cost base. A capital gain or capital loss the trustee makes is disregarded if it acquired the asset before 20 September 1985. The beneficiary makes a capital gain if the market value of the asset (at the time of disposal) is more than the cost base of the interest, or the part of it, being satisfied. The beneficiary makes a capital loss if that market value is less than the reduced cost base of that interest or part. A capital gain or loss the beneficiary makes is disregarded if the beneficiary acquired the CGT asset that is the interest for no expenditure. In line with the reasoning for CGT event E5, the trustee is not disposing of a CGT asset to the beneficiaries. The amount constitutes a pre-CGT capital reserve. The distribution of this to the beneficiaries will not be an appointment of an asset nor will it be the disposal of a CGT asset for the purposes of CGT event E7. Again similar to the interpretation of CGT event E6, even if there was a CGT event, the beneficiaries acquired their interest in any 'asset' for no expenditure. CGT event E7 will not occur upon distribution of the capital amount to the beneficiaries.