Edited version of private advice

Authorisation Number: 1051846672943

Date of advice: 15 June 2021

Ruling

Subject: CGT - trust asset

Question

Will capital gains tax be payable when the trustee transfers the trust asset to the beneficiaries in equal shares?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired property in 20XX.

In 20XX you established a Declaration of Trust for the trust asset, to benefit beneficiaries aged 18 years and over.

You intend to distribute the trust asset by way of transfer to the beneficiaries in equal shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

Capital gains tax and absolute entitlement

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 Commissioner's view about the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' is contained in Draft Taxation Ruling TR 2004/D25 (TR 2004/D25) and refined in the Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 (Kafataris).

When considering the disposal of your interest in the property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property.

In the absence of information to the contrary, a property is considered to be legally and beneficially owned by the person/s registered on the title.

It is possible for the legal ownership to differ from the beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

The creation of a trust falls within the jurisdiction of equity.

According to G. Teh and B. Dwyer, Introduction to Property Law, at paragraph 606:

A trust exists whenever legal title to real or personal property is vested in one person, called a trustee, for the benefit of another person, called a beneficiary.

There may be various kinds of trust: express, constructive, resulting or implied and bare.

CGT event E7

CGT event E7 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part interest, in the trust capital: section 104-85 of the ITAA 1997. Either or both the trustee and the beneficiary of the trust may make a gain or loss.

Both CGT event A1 and CGT event E7 will happen if the transfer of legal ownership of the property occurs and this is treated as a disposal for CGT purposes. CGT event A1 is a general provision about disposals but CGT event E7 is a specific provision related to a form of disposal from a trust to a beneficiary. CGT event E7 is more specific to this situation.

Bare trusts

A bare trust is one where the trustee has no active duties to perform. Gummow J said in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281:

Today the usually accepted meaning of bare trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them, for example, on sale to a third party.

However, it is not the existence of a bare trust that is the crucial concept. It is the establishment of absolute entitlement to the asset by the beneficiary as against the trustee. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that 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.

Under a bare trust the beneficiary is entitled to possession of the trust assets and the trustees must act in accordance with the direction of the beneficiary. Ultimately the trustees must deal with the property as directed by the beneficiary.

More than one beneficiary

Generally, 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 be absolutely entitled to it, unless the asset is fungible.

TR 2004/D25 further states in the following paragraphs:

9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5, neither is the CGT asset to which the relevant provisions refer.

Core principle

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).

One beneficiary with all the interests in a trust asset

21. A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries).

22. Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction (see Explanation paragraphs 76 to 79).

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.

Application to your circumstances

The trustee in the trust holds the trust asset for the benefit of the beneficiaries, who have an equal share in the interest of the asset.

For a beneficiary to have absolute entitlement the trust asset is to be a fungible asset and easily divisible. Property is not a fungible asset.

The Declaration of Trust does not provide either beneficiary with a vested an indefeasible interest in the whole of the property. Nor does the Declaration of Trust authorise either beneficiary alone to call for the property to be transferred to them or be transferred at their sole direction.

Consequently, the beneficiaries are not absolutely entitled to the property as against you the trustee.

Therefore, CGT event E7 will happen when the trustee transfers the property to the beneficiaries.

A beneficiary makes a capital gain under CGT event E7 if the market value of the interest it acquires is more than the cost base of their interest in the trust. A beneficiary makes a capital loss if the market value of the interest is less than the reduced cost base of their interest in the trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).