ATO Interpretative Decision

ATO ID 2003/559

Income Tax

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Issue

For the purposes of subsection 102-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is CGT event A1 in section 104-10 of the ITAA 1997 the most specific CGT event that happens, rather than CGT event E2 in section 104-60 of the ITAA 1997, as a result of a taxpayer disposing of an asset to a trust that is not connected with the taxpayer in any way?

Decision

Yes. CGT event A1 in section 104-10 of the ITAA 1997 is the most specific event that happens (and not CGT event E2) in these circumstances.

Facts

The taxpayer owned land which they acquired after 19 September 1985.

They engaged a real estate agent to sell the land.

They entered into a contract of sale with an entity introduced to them by the agent. The taxpayer was aware of the fact that the purchasing entity was acting in the capacity of trustee of a trust.

Ownership of the land changed from the taxpayer to the trustee.

The taxpayer and the trustee dealt with each other at arm's length. Apart from this dealing, neither the taxpayer nor their associates have any connection with the trustee or the trust.

Reasons for Decision

CGT event A1 happens if the ownership of a CGT asset changes (section 104-10 of the ITAA 1997). CGT event E2 happens if a CGT asset is transferred to an existing trust (section 104-60 of the ITAA 1997).

If more than one CGT event happens in respect of a transaction, the most specific event is to be used (subsection 102-25(1) of the ITAA 1997).

There may be different tax outcomes for a taxpayer depending on which CGT event happens. For example, CGT event A1 does not happen if the asset was disposed of because the asset vests in a bankruptcy trustee (subsection 104-10(7) of the ITAA 1997). There is no similar exception for CGT event E2. On the other hand, CGT event E2 does not happen if one of the two exceptions in subsection 104-60(5) of the ITAA 1997 apply. Those exceptions look to the connection between the transferor and transferee. There are no similar exceptions for CGT event A1.

Also, CGT event A1 happens on the contract date whereas CGT event E2 happens when the ownership change occurs. This may affect the income year in which a capital gain or capital loss is taken to be made.

On its face, CGT event E2 happens whenever an asset is transferred to a trust and is therefore the applicable event in this case. However, it is considered that CGT event A1 (rather than CGT event E2) is the most specific event where, as in this case, an asset is transferred to another party and the transferor is indifferent as to the identity of that party. That is, CGT event A1 is the most specific event where the parties are completely unconnected and are dealing with each other at arm's length.

In this case, the vendor knew that the purchaser was acting in a trustee capacity. But that will not always be the case. For example, the purchaser may be a nominee company formed for the purpose of acquiring property on behalf of others who do not want their identity revealed. Clearly, CGT event A1 is the most specific event in that case. There can be no question of CGT event E2 being the most specific event if the vendor does not know that the asset has been disposed of to a person acting in a trustee capacity.

Consistent with that outcome, CGT event A1 is considered the most specific event whenever the parties are unconnected. It would be inappropriate for a different CGT event to apply depending on whether the vendor knew the capacity in which the purchaser was acquiring the asset.

On the other hand, CGT event E2 will be the most specific event if, for example, an asset is transferred to a trust of which the transferor or an associate is a beneficiary or object.

The two exceptions to CGT event E2 suggest that event is applicable when the parties are connected. The first exception applies if the transferor is the sole beneficiary of the trust and is absolutely entitled to the transferred asset as against the trustee (paragraph 104-60(5)(a) of the ITAA 1997). The second exception applies if the asset is transferred from one trust to another trust and the beneficiaries and terms of both trusts are the same (paragraph 104-60(5)(b) of the ITAA 1997).

Accordingly, CGT event A1 is the most specific event that happens where an asset is sold to the trustee of a trust that has no connection with the vendor or the vendor's associates.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 102-25(1)
   section 104-10
   subsection 104-10(7)
   section 104-60
   subsection 104-60(5)
   paragraph 104-60(5)(a)
   paragraph 104-60(5)(b)

Keywords
CGT event A1-disposal of a CGT asset
CGT events E1-E9 - trusts
Connected entity
Disposal of assets
Trusts

Siebel/TDMS Reference Number:  3557068

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  11 July 2003

ISSN: 1445-2782