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1 Was the Beneficiary "absolutely entitled" to the Property held by the Trustee on trust for the sole benefit of the Beneficiary for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The Property is treated as having been the Property of the Beneficiary for CGT purposes, since it was acquired by the Trustee. Question 2 Did the capital gains tax provisions contained in Parts 3-1 and 3-3 of the ITAA 1997 apply to the Trustee when the Property was transferred to Individual C in accordance with the Beneficiary's Will? Answer No. This ruling applies for the following period : •       income year ending 30 June xxxx The scheme commenced on: 1 July xxxx

-    On xx xx xx, Individual A (Beneficiary) caused contracts for the sale of real property, xx xx xx, xx (Property) to be exchanged by which the Property would be purchased for $xx. -    The named purchaser of the property was Individual B (Trustee). -    The Beneficiary provided all funds for the purchase of the Property. No mortgage was registered on the property. The purchase price, stamp duty and any other related purchase costs were paid by Individual A. Individual B did not pay any monies towards the purchase. -    By execution of trust deed Dated xx between Individual A and Individual B the following conditions and terms were agreed, relevantly: ... [The trust deed was provided] -    The settlement of the Property purchase occurred in xx xx xx, with the Trustee being registered on title on xx xx xx. -    After the Property was purchased, by oral agreement Individual A agreed to allow Individual B, in her individual capacity, to rent out the Property. -    Pursuant to the oral agreement: a.Individual B was responsible for the payment of costs and expenses referrable to the Property; and

b.Individual B retained the balance of the rental income herself, which Individual B declared as assessable income. -    Individual B and Individual A were close platonic friends. Individual A did not express his motivation for making the Property available to Individual B. -    The Beneficiary did not meet any expenses/outgoings in respect of the property. -    On xx xx xx the Beneficiary executed a Will that appoints his Individual D and Individual C as executors and otherwise gifts the interest in the Property to Individual C. The Will makes specific reference to the Trust Deed. -    The Beneficiary died on xx xx xx and probate of the Will was granted to Individual D and Individual C on xx xx xx. - The legal personal representatives of the Beneficiary's Estate, Individual D and Individual C, directed the Trustee to transfer the legal title of the Property to Individual C, in accordance with the Trust Deed and the Will. The Trustee transferred the Property to Individual C on xx xx xx. That transfer was for nil consideration as it is otherwise in accordance with the direction to do so.

Income Tax Assessment Act 1997 Parts 3-1 and 3-3 Income Tax Assessment Act 1997 subsection 104-10(1). Income Tax Assessment Act 1997 subsection 104-10(2). Income Tax Assessment Act 1997 section 106-50 Income Tax Assessment Act 1997 subsection 106-50(1) Conveyancing Act 1919 (NSW) subsection 23C(1) Taxation Administration Act 1953 Part IVAAA

Questions 1 and 2 Summary The Beneficiary is 'absolutely entitled' to the Property held by the Trustee on trust for the sole benefit of the Beneficiary for the period from the purchase of the Property for the purposes of section 106-50 of the ITAA 1997. The Beneficiary is "absolutely entitled" to the Property held by the Trustee on trust for the sole benefit of the Beneficiary for the purposes of section 106-50 of the ITAA 1997. As a result, no CGT event will happen for the Trustee when the Trustee transfers the Property is to Individual C in accordance with the Beneficiary's Will. Detailed reasoning Legal verses beneficial ownership Legal interest in a property is determined by the legal title to the property under the property law legislation in the state or territory in which the property is situated. In Australia, the principle of indefeasibility operates which is a process of title of real property by registration, by which a person holds title against the world. 'Indefeasible title' is subject to some exceptions, such as equitable rights against the person who holds such a title.

In certain situations, legal ownership of an asset may differ from beneficial ownership of an asset. The legal term ' beneficial ownership ' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner. Establishment of a trust A trust is created by declaration when it is created by the holder of the undivided legal interest in property using words or actions that sufficiently evidence an intention to create a trust over that property ( Korda v Australian Executor Trustees (SA) Ltd (2015) 317 ALR 225; [2015] HCA 6). This will often be done through the execution of a trust deed but may occur nevertheless without a trust deed being prepared or executed. A trust is created by settlement by vesting property subject to a trust for the benefit of others ( Taras Nominees Pty Ltd as Trustee for the Burnley Street Trust v FC of T 2014 ATC). Again, this will often be done by execution of a trust deed but may occur without a trust deed being executed.

A declaration and a settlement are not mutually exclusive, and there are many situations where both will occur during the settlement of a trust. For example, the holder of an unencumbered parcel of land may first declare that they hold the land on trust for a particular beneficiary and then settle the property on a trustee. An implied trust arises when a person holds legal ownership of an asset but is considered to hold it on behalf of someone else. This situation often occurs when property is registered in another person's name, even though the original owner did not intend for that person to become the sole beneficial owner. The circumstances where an implied trust may exist are often similar to those where a resulting trust arises. An implied trust can emerge without any express statement from a person. Its existence is determined by the specific facts of each case. An implied trust arises where an individual can establish that in spite of being the legal owner of an asset, that they only hold this asset on behalf of someone else. Most trusts created under English law are done so deliberately and are formed involving three parties: a.     the settlor, who creates the trust;

b.     the trustee, who holds the legal interest in the trust property and who administers the trust; and c.     the beneficiary, who holds the equitable interest in the trust property, who enjoys the trust but who also acts as an 'enforcer' of the trust, ensuring that the trustee honours the terms of the trust. Most trusts that are formed deliberately, or expressly, do not have to comply with any requirements as to form. This means they can, for the most part, be created entirely orally. For example, a settlor can simply instruct a trustee to hold property for a beneficiary's benefit. The hallmark of such express trusts is that they are created by the settlor's intention. An exception to this principle exists, however, for trusts which have land as their subject matter. All trusts which are expressly created and have land as all, or part, of their subject matter are caught by a statutory provision which means that they must be evidenced in writing. In the case of an inter vivos trust (a trust created by people still alive), the conveyance of land must be evidenced in writing. Relevantly, in New South Wales, subsection 23C(1) of the Conveyancing Act 1919

(NSW) requires that the creation or disposal of an interest in land must be done in writing. This includes the declaration of a trust over a piece of land. Subsection 23C(2) of the Conveyancing Act 1919 (NSW) states that the writing requirement does not affect the creation or operation of resulting, implied, or constructive trusts. Absolute entitlement - Bare trusts A trust is a bare trust where the trustee has no interest in the trust assets other than that existing by reason of the office of trustee and the holding of the legal title to the assets, and the trustee did not have active duties to perform or has ceased to have those duties so that in either case the property is merely awaiting transfer to the beneficiary or to another party at the direction of the beneficiary ( Herdegen & Anor v Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271). If a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust, the CGT provisions apply to an act done by the trustee, as if it were an act done by the beneficiary. Meaning of "absolutely entitled"

To be "absolutely entitled" to an asset as against the trustee of a trust, a beneficiary must have both a vested and an indefeasible interest in an asset, and to be able to demand transfer of the asset by the trustee. It is not sufficient if the beneficiary merely has a right or entitlement under the deed to be paid a benefit. The beneficiary must have an immediate entitlement to demand transfer of the particular asset in circumstances where that entitlement cannot be defeated. Meaning of 'absolutely entitled" - Commissioner's views Subsection 106-50(1) of the ITAA 1997, for CGT purposes, effectively treats an asset as being an asset of the beneficiary and not of the trustee where that beneficiary is absolutely entitled to that asset: Absolutely entitled beneficiaries (1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a • CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).

(2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a * CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee). Example: An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee. The Commissioner's views on the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in the CGT provisions are set out in Draft Taxation RulingTR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997. While the draft may not be relied on by taxpayers, as it is not a ruling for the purposes of Part IVAAA of the Taxation Administration Act 1953 , the draft ruling represents the considered views of the ATO.

In TR 2004/D25, the Commissioner specifically provides that a sole beneficiary of a trust who can direct the trustee of that trust to transfer the trust property to them or at their direction will be absolutely entitled to the property of the trust. TR 2004/D25 states: 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). ... 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. As noted above, the ruling relies on the principles articulated in the case of Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282 ( Saunders ). In Saunders , the testator left assets to be held on trust to accumulate income from those assets for his beneficiary, the accumulated income and the assets to be transferred to the beneficiary when he attained the age of 25. However, when the beneficiary attained the age of 21 (being the age of majority) he sought to have the whole of the income and assets transferred to him. Despite the directions contained in the will, it was held that the beneficiary had an absolute indefeasible interest in the legacy, there being no gift over in the event of his failing to attain the age of 25. The beneficiary was therefore entitled to the fund. The Master of the Rolls, Lord Langdale, stating at p116:

where a legacy is directed to accumulate for a certain period, or where the payment is postponed the legatee, if he has an absolute indefeasible interest in the legacy, is not bound to wait until the expiration of that period. Further Lord Davey in Wharton v. Masterman [1895] AC 186 at 198; [1895-9] All ER 687 at 691, enunciated this principle as follows: The principle is this: that where there is an absolute vested gift made payable at a future event, with direction to accumulate the income in the meantime, and pay it with the principal, the court will not enforce the trust for accumulation in which no person has any interest but the legatee, or (in other words) the court holds that a legatee may put an end to an accumulation which is exclusively for his benefit....There is no condition precedent to happen or to be performed in order to perfect the title of the legatees, and there is no other person who has any interest in the execution of the trust for the accumulation, or who can complain of its non-execution.

Accordingly, a beneficiary is absolutely entitled to an asset of a trust if they have a 'vested and indefeasible' interest in the entire trust asset - that is, there is no other person with an interest in that property and they can direct the trustee to immediately transfer the asset to themselves or to someone else. Relevantly, the principle is simply concerned with whether a beneficiary has the ability to terminate the trust in respect of the asset, and not whether the beneficiary actually terminates (or seeks to terminate) the trust. The most straightforward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. A single beneficiary who has all the interests in a trust asset 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) direct the trustee to transfer the asset to them or to transfer it at their direction.

Under the Trust Deed, the Beneficiary, is the sole beneficiary of the Trust. Furthermore, Clause x and x of the Trust Deed provide that the Trustee will transfer and deal with the Property only as the Beneficiary directs, for example, the trustee does not have the power to sell and vary investments (see Kafataris v The Deputy Commissioner of Taxation [2008] FCA 1454). The Beneficiary, as the sole beneficiary of the Trust, can direct the Trustee to transfer the Property to the Beneficiary or to any other entity at their direction (including Individual C under the terms of the Beneficiary's Will) and therefore has an indefeasible and vested interest in the Trust property. Consequently, the Beneficiary is 'absolutely entitled' to the Property held by the Trustee for the purposes of section 106-50 of the ITAA 1997. The Beneficiary was therefore absolutely entitled to the Property as against the Trustee for the purposes of the CGT provisions. It follows that the Property should be treated as having been the property of the Beneficiary for CGT purposes, since it was acquired by the Trustee. Capital Gains tax events

Relevantly, CGT event A1 happens if you dispose of a CGT asset, and you dispose of a CGT asset when there's a change of ownership from you to another entity: see subsections 104-10(1) and (2). Ordinarily, the purported transfer of legal title from a trustee to another entity would attract the operation of CGT Event A1. As detailed above, the owner of the CGT asset is the Beneficiary for CGT purposes and acts of the Trustee, as legal owner, are treated as the acts of the Beneficiary, as the absolutely entitled sole beneficiary. In this cases, whilst CGT event A1 would have applied to the Property devolving from the Trustee to the LPR or beneficiary of the Beneficiary's Will as the Beneficiary was absolutely entitled to the Property and pursuant to section 106-50 of the ITAA 1997, no CGT event happened for the Trustee when the Property was transferred to LPR or beneficiary of the Beneficiary's Will in accordance with the terms of the Beneficiary's Will.