CGT: majority underlying ownership and deceased estate - discretionary trust - beneficiary a 'new owner'

Can the beneficiary of the (discretionary) testamentary trust be said to have a beneficial interest in the assets of the trust and be a 'new owner' for purposes of the deemed continuity of underlying interests provisions in subsections 149-30(3) and 149-30(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. On the basis of the terms of the particular trust deed, the beneficiary of the (discretionary) testamentary trust can be said to have a beneficial interest in the assets of the trust and be a 'new owner' for the purposes of section 149-30 of the ITAA 1997.

A deceased estate holds almost all of the equity in a non-public entity as a result of the death of the majority equity owner. The equity was a pre-CGT asset of the deceased.

A discretionary testamentary trust has been established in accordance with the will. The beneficiaries can only receive amounts from the estate if the trustee exercises a discretion in their favour.

The non-public entity owns assets that it acquired before 20 September 1985.

The provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset (unless the entity is a public entity listed in section 149-50 of the ITAA 1997). This happens at the earliest time when the 'majority underlying interests' in the asset were not held by 'ultimate owners' who held majority underlying interests in the asset immediately before 20 September 1985.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them.

Can the beneficiaries of a testamentary trust, given that they can only receive amounts from the estate if the trustee exercises a discretion in their favour, be a 'new owner' for purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997?

Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital. Because the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) of the ITAA 1997.

Taxation Ruling IT 2340 reflects on an approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded Division 149 of the ITAA 1997, is reflected in Taxation Ruling IT 2340. Among other issues, IT 2340 deals with questions regarding the application of section 160ZZS of the ITAA 1936 'to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.'

Taxation Ruling IT 2340 states at paragraph 5 that it will be relevant to take into account the way in which the discretionary powers of the trustee are exercised when considering the question whether majority underlying interests have been maintained in the assets of the trust. IT 2340 continues: 6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion. 7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed....

Taxation Ruling IT 2340 correctly reflects the position that section 160ZZS of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets. Likewise, a shareholder is treated for the purposes of section 160ZZS as having a beneficial interest in the company's assets.

The discretionary powers of the trustee of a discretionary (family) trust and those of the trustee of a discretionary testamentary trust are not materially different and it is reasonable to adopt the same approach to both when considering the question of majority underlying interests for purposes of Division 149 of the ITAA 1997.

Applying the 'look through' approach to the present case and considering the terms of the testamentary trust, as well as the way in which the trustee has exercised his powers, the beneficiary of the trust can be said to have a beneficial interest in the assets of the trust. The beneficiary is therefore a 'new owner' for purposes of subsections 149-30(3) and 149-30(4) of the ITAA 1997 and the pre-CGT assets of the non-public entity retain their status.

Date of amendment Part Comment 24 April 2014 Legislative References Section 160ZZS of the ITAA 1936 rewritten as section 149-30 and 149-35 of the ITAA 1997

Date of amendment | Part | Comment

24 April 2014 | Legislative References | Section 160ZZS of the ITAA 1936 rewritten as section 149-30 and 149-35 of the ITAA 1997