Edited version of private ruling

Authorisation Number: 1011710202920

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Ruling

Subject: Capital Gains Tax on shares transferred from a hybrid trust

Question 1

Will you have assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) on the transfer of shares from the Hybrid Trust to you?

Answer

No

Question 2

Will the capital gains tax provisions in Part 3-1 of the ITAA 1997 apply to you on the transfer of shares from the Hybrid Trust and the associated cancellation of the units?

Answer

Yes

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Hybrid Trust holds shares in an unlisted company.

The Hybrid Trust holds one share for each unit held in the Hybrid Trust.

The Trust is an investment trust.

You hold some units in the Hybrid Trust. This is the only asset that the Trust holds.

You are not the sole unit holder in the Hybrid Trust.

You have requested to have the shares transferred from the Hybrid Trust to you.

The shares are to be transferred 'in specie' as an off market transaction.

The trust deed for the Hybrid Trust states that beneficiaries are not entitled to any particular assets.

Unit certificate states that you are the holder of some units in the Hybrid Trust. It stipulates that the Hybrid Trust holds one share per unit held in the Hybrid Trust.

The units you currently hold in the Hybrid Trust are to be cancelled on the transfer of the shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1,

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Subsection 100-25(2),

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-5,

Income Tax Assessment Act 1997 Section 106-50.

Income Tax Assessment Act 1997 Section 109-5.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated

Question 1

Summary

You will not have assessable income under section 6-5 on the transfer of shares from the Hybrid Trust to you.

Detailed reasoning

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income. Paragraph 6 of TR 92/3 states:

Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Your stated intention is to remove an interposed entity (the Hybrid Trust). You are not entering into the transaction in order to make a profit or gain.

As you have not satisfied both the conditions in TR 92/3, then the proposed transfer of shares would not result in income according to ordinary concepts.

Question 2

Summary

The transfer of the shares to you from the Hybrid Trust and the cancellation of the units held in the Hybrid Trust would be CGT events. These transactions would need to be included in your calculation of your net capital gain in your income tax return.

Detailed reasoning

You can make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20).

Subsection 100-25(2) specifically lists shares and units as examples of CGT assets.

When considering the disposal of an asset, the most important element in the application of the CGT provisions is ownership. It must be determined who is the beneficial owner of the asset.

A beneficial owner is defined as a person or entity that is beneficially entitled to the income and proceeds from the asset. A legal owner is the individual who has their name on the legal documents associated with a CGT asset. It is the beneficial owner of a CGT asset that is liable for CGT upon sale of the asset.

If the beneficiary of a trust is absolutely entitled to a CGT asset as against a trustee, any act done by the trustee is treated as if it was carried out by the beneficiary (section 106-50).

The core principle underpinning the concept of absolute entitlement 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.

It is considered that a beneficiary is absolutely entitled to a CGT asset of a trust as against the trustee 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 how that asset shall be dealt with.

Taxation Ruling TR 2004/D25 discusses the meaning of 'absolutely entitled' in regards to CGT assets and trusts. Paragraph 134 of TR 2004/D25 explains that the concept of absolute entitlement is not relevant to the holder of units in a unit trust. This also applies for hybrid trusts.

In your case

It needs to be determined if you currently have beneficial ownership of the shares.

The trust deed for the Hybrid Trust states that beneficiaries are not entitled to any particular assets.

Unit certificate states that you are the holder of some units in the Hybrid Trust. It points out that the Hybrid Trust holds one share per unit held in the Hybrid Trust. It does not indicate that the shares are held for the sole benefit of you.

TR 2004/D25 states that absolute entitlement is not applicable to unit holders.

You have no absolute entitlement to the shares. You do have ownership rights to the units in the hybrid trust. The proposed transfer of the shares from the Hybrid Trust to you would be a change in beneficial ownership. Therefore the shares would be disposed of by the Hybrid Trust and acquired by you.

The shares are a CGT asset. You acquiring the shares would be CGT event E7 (section 109-5).

The units that you currently hold in the Hybrid Trust are to be cancelled or redeemed. The trust deed explains that the effect of redemption is that the units will be cancelled. Cancelation or redemption of the units would be CGT event C2. The unit price received for each unit redeemed would be the proceeds and a capital gain or a capital loss calculated accordingly.

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