Capital gains tax: trusts: absolutely entitled beneficiary

Does the taxpayer hold property as trustee for a beneficiary who is absolutely entitled to that property for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the taxpayer holds the property as bare trustee for an absolutely entitled beneficiary. As a result, section 106-50 of the ITAA 1997 applies so that any act done by the trustee is treated as an act carried out by the beneficiary. On disposal of the property, the beneficiary (not the trustee) will make a capital gain or capital loss.

The trustee entered into a contract to purchase a residential property after 20 September 1985 on behalf of the beneficiary. Settlement of the contract occurred three months after the trustee entered into the contract.

Prior to settlement of the contract, a 'Declaration of Trust' was made which provided that: • the beneficiary was to provide the purchase money for the property to the trustee; • the beneficiary was the beneficial owner of the property in all respects and was entirely responsible for payment of all purchase monies, repayment of all principal and interest relating to the acquisition of the property and all costs in regard to outgoings and maintenance; and • the beneficiary was to make all decisions in regard to disposal of the property and was to be entitled to all proceeds of the sale of the property.

The trustee has not spent any money on the property, nor received any monies (e.g., rent) from the property.

The beneficiary instructed the trustee to dispose of the property to a third party on their behalf.

Section 106-50 of the ITAA 1997 provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee of a trust then the CGT provisions apply to an act done by the trustee as if it were an act done by the beneficiary. While the scope of the phrase 'absolutely entitled to an asset as against the trustee of a trust' in this section is unclear, it is clear that it applies at least to bare trusts.

Subsection 160V(1) of the Income Tax Assessment Act 1936 (ITAA 1936) is the equivalent of section 106-50 of the ITAA 1997. The heading to section 160V of the ITAA 1936 'Disposals by bare trustees and persons enforcing securities' indicates that this provision was intended to apply at least to bare trusts.

Subsection 13(1) of the Acts Interpretation Act 1901 provides that headings to Parts, Divisions and Subdivisions are part of the Act. It is a general principal of statutory interpretation that if the language of a section is doubtful or ambiguous, the meaning which is consistent with the headings must be adopted (see Ragless v. District Council of Prospect [1922] SASR 299 and MacAdam A. I. and Smith, T. M, 1993, Statutes Rules and Examples, Third edition, Butterworths, Sydney, 1993 p. 77). In this case, the meaning of subsection 160V(1) of the ITAA 1936 is unclear. As a result an interpretation consistent with the heading to this section should be adopted. Therefore, subsection 160V(1) of the ITAA 1936 will apply at least to trustees of bare trusts. Although the heading to section 106-50 of the ITAA 1997 is different, it is not considered that the scope of the provision has changed.

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, and who never has had active duties to perform or who has ceased to have those duties with the result that in either case the property awaits transfer to the beneficiaries or at their direction (see Herdegen & Anor v. Federal Commissioner of Taxation 88 ATC 4995; (1988) 84 ALR 271).

In this situation, it is considered that the taxpayer holds the property as bare trustee. The trust was established by the Declaration of Trust and the trustee merely holds the legal title to the property for the benefit of the beneficiary. The beneficiary provided the purchase consideration for the property and is responsible for the payment of all principal and interest relating to the acquisition of the property and all outgoings and other maintenance costs. It is also concluded that based on the facts of this case, the beneficiary is absolutely entitled to the property as against the trustee of the trust.

As the beneficiary is absolutely entitled to the property in this case as against the trustee of a bare trust, section 106-50 of the ITAA 1997 will apply to treat an act done by the trustee as an act done by the beneficiary themselves. In these circumstances, any subsequent sale of the property by the trustee will be treated as though the beneficiary sold the property rather than the trustee. The beneficiary (not the trustee) will therefore make a capital gain or capital loss on the disposal of their property.