Capital gains tax: CGT event E6 - transfer of legal life interest in property

Does CGT event E6 in section 104-80 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the trustee of a trust transfers to an income beneficiary of the trust, an estate for life in an asset of the trust?

Yes. CGT event E6 happens because the trustee disposed of the life interest to the income beneficiary in satisfaction of the beneficiary's right to receive income from the trust.

After 19 September 1985 a trust was established inter vivos . The trust is not a unit trust.

The trust property consists of a piece of real estate.

The trust deed requires the trustee to hold the land on trust to pay the income from it to an individual for life and to hold the remainder for another individual.

After a number of years the beneficiaries, both of whom are the original beneficiaries named in the trust deed (that is, they did not purchase their interests or acquire them by way of an assignment), wish to bring the trust to an end. They approached the trustee and asked that life and remainder interests in the property be transferred to them.

In the 2003 income year, the trustee transferred the respective life and remainder interests and the transfers were registered on the title.

CGT event E6 in section 104-80 of the ITAA 1997 happens if the trustee of a trust disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's right, or part of it, to receive income from the trust.

The issue that needs to be determined in this case is whether the trustee has disposed of the life interest to the income beneficiary or whether the interest was created in the beneficiary.

Taxation Ruling IT 2561 provides that certain interests in real property are to be treated as created interests. Paragraph 16 of the ruling provides: An easement, profit a prendre or licence (or other comparable right) is an asset created at the time it is granted. The asset is taken by paragraph 160M(5)(c) of the Act to have been acquired by the grantor. Subsection 160C(2) then treats the grantor as owning the asset. The time of acquisition is determined by section 160U. [references to the Act in the above paragraph are to the Income Tax Assessment Act 1936 ]

It is considered that a legal life or remainder interest in land is not 'comparable' to an easement, profit a prendre or licence. The life and remainder interests together represent the entire freehold interest in the land. By transferring the life interest, the trustee is actually disposing of part of the freehold interest in the land in a similar way to the disposal of a percentage interest in the fee simple interest in the property.

Accordingly, CGT event E6 in section 104-80 of the ITAA 1997 happened in this case, because the trustee disposed of a CGT asset (the legal life interest) to a beneficiary of the trust (the income beneficiary) in satisfaction of the beneficiary's right to receive income from the trust. CGT event E6 happened at the time of the disposal (subsection 104-80(2) of the ITAA 1997). As CGT event E6 has happened, there may be consequences for both the trustee and the income beneficiary.

The trustee makes a capital gain under CGT event E6 if the market value of the asset disposed of by the trustee is more than its cost base. It makes a capital loss if the market value is less than the asset's reduced cost base (subsection 104-80(3) of the ITAA 1997).

In determining the capital gain or loss from CGT event E6 happening to the life interest in the land, the trustee must apportion their cost base or reduced cost base of the property in accordance with section 112-30 of the ITAA 1997.

The income beneficiary makes a capital gain under CGT event E6 if the market value of the life interest in the land it acquires is more than the cost base of their right to income (that is, their trust interest). They make a capital loss if the market value of the life interest in the land is less than the reduced cost base of the trust interest (subsection 104-80(5) of the ITAA 1997).

Although the beneficiary did not incur any expenditure to acquire their trust interest, paragraph 112-20(1)(a) of the ITAA 1997 ensures that the market value substitution rule will not apply to determine the first element of its cost base or reduced cost base.

However, the first element of the cost base and reduced cost base of the transferred asset (that is, the life interest in the land) will be based on its market value (at the time CGT event E6 happens): paragraph 112-20(1)(a) of the ITAA 1997. This will depend on a number of factors including the market value of the land and the taxpayer's life expectancy.