Private ruling: Absolute entitlement and CGT implications
Date of advice: 24 August 2017
Published: December 2017
Ruling period: 19AA to 30 June 20CC
Date scheme commenced: 19AA

Ruling: Q1: Is the applicant absolutely entitled to the property of the trust as required under section 106-50 of the Income Tax Assessment Act 1997 ? | A1: Yes | Q2: Is the applicant subject to CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997, when the property is transferred to her from the trust? | A2: No

Relevant facts and circumstances: 1. The Trustee is the trustee of the Trust. The Deed of Settlement that settled the Trust was dated 19BB. 2. The Trustee has been the trustee of the Trust at all relevant times from the Trust’s settlement. 3. The Settlor’s child passed away in 19xx and was survived by X children. 4. The Trust assets comprised shares. 5. The Deed of Settlement the trust vested. 6. The whole trust fund of the Trust was to be held for the children in equal share. 7. Since the Trust vested: (a) The Trustee has held the assets and income of the Trust on bare trust for the applicant and other beneficiary in equal shares. (b) the applicant has been absolutely entitled to half of the assets and income of the Trust; and (c) the other beneficiary has been absolutely entitled to half of the assets and income of the Trust. 8. The other beneficiary wished to realise their interest in the bare trust and, to that end, and in relation to half of the assets the Trustee then held, being all of the assets held absolutely for the sibling. (a) the Trustee sold some of the other beneficiary’s assets and distributed the proceeds to them; (b) the Trustee transferred the balance of other beneficiary’s assets to them; and (c) The other beneficiary accepted the distribution of cash and assets in accordance with paragraphs (a) and (b) above in full satisfaction of his rights. 9. From the time of the transfer to the other beneficiary Assets the only shares, cash or other assets held by the Trustee (the Applicants Assets) are assets to which the applicant is absolutely entitled. 10. Shares are the only assets and no assets are jointly owned. 11. The beneficiaries at all relevant times have been Australian residents for tax purposes. By the Deed of Acknowledgment: (a) The other beneficiary acknowledged that they have no rights to, or ability to call on the applicants Assets. (b) The applicant called on the Trustee to transfer to them all of their Assets (c) The parties entered the Deed of Acknowledgement to confirm that: i) the other beneficiary received their Assets, which provided them with all of the assets held by the Trustee against which they had any rights; ii) the Trustee will transfer the applicants assets to them, which will provide them with all of the assets held by the Trustee against which they had any rights; and iii) to the extent any of the Parties is liable to a tax obligation because of an amount received by another Party, that receiving Party will indemnify or reimburse the Party on whom the tax liability fell.

Relevant legislative provisions: Income Tax Assessment Act 1997, Section 106-50 | Income Tax Assessment Act 1997, Section 104-10

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset when a change of ownership occurs from you to another entity. However, a change of ownership does not occur if you stop being a legal owner of the asset but continue to be its beneficial owner. Further paragraph 10 of Draft Taxation Ruling 2004/D25 income tax: capital gains states: 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… Therefore, the applicant is not subject to CGT when the property is transferred to them from the trust as section 104-10 of the ITAA 1997 does not apply as a change of ownership did not occur. Additionally, as the trust vested in 19AA any capital gain or loss from a CGT event 1 is disregarded because the asset was acquired before 20 September 1985.

Reasons for decision: Where a beneficiary is absolutely entitled to an asset held by a trustee section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that any ‘act done by the trustee in relation to the asset’ is treated as if it had been an act of the person absolutely entitled. As a result if the act triggers a Capital Gains Tax (CGT) event, then the taxpayer will be the person subject to any CGT liability rather than the trustee. | A beneficiary is absolutely entitled to an asset of a trust as against the trustee for the purposes of section 106-50 of the ITAA 1997 if the beneficiary is: | ● absolutely entitled in equity to the asset and thus has a vested, indefeasible and absolute interest in the asset; and | ● able to direct the trustee how to deal with the asset. | The beneficiary has a vested, indefeasible and absolute interest in shares because they can call for the shares or direct their transfer. The trust fund was held in equal shares, no assets were jointly owned and the other beneficiary by deed acknowledged that they have no rights or ability to call on the applicants assets. Consequently, the applicant is absolutely entitled to the shares and solely assessable on any assessable income or capital gains that are derived from the shares. | Therefore, the applicant is absolutely entitled to the property as against the trustee of the trust being entitled to require the trustee to deal with the trust property as the beneficiary directs. | Question 2: Is the applicant subject to CGT event A1 under section 104-10 of the ITAA 1997 , when the property is transferred to you from the trust?