Issue
When is a beneficiary of a trust taken to have acquired a CGT asset of the trust if the beneficiary has always been absolutely entitled to the asset as against the trustee?
Decision
The beneficiary is taken to have acquired the asset when the trustee acquires it, rather than when the beneficiary obtains legal title to it. This is the effect of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
The taxpayer is not an Australian resident.
The taxpayer asked an Australian friend to purchase a residential unit for the taxpayer in an Australian capital city.
The taxpayer provided money for this purpose. The money was not sufficient to purchase a suitable property so the friend approached a bank for a loan of the additional amount required. The bank would only provide the loan if the property was registered in the friend's name.
The taxpayer and the friend exchanged documents agreeing to this and to the fact that the friend was to hold the property on trust for the taxpayer.
On this basis, the friend acquired a property pursuant to a contract entered into before 1985. The property was rented out for several years and the mortgage payments were made from the rental income.
In 1993 legal title in the property was transferred to the taxpayer. The taxpayer intends selling the property.
Reasons for Decision
Generally, a CGT asset is acquired when the taxpayer becomes its owner: subsection 109-5(1) of the ITAA 1997. Alternatively, if the CGT asset was acquired as a result of a CGT event happening, the asset is acquired at the time set out in the table in subsection 109-5(2).
The trustee in this case acquired the asset as a result of CGT event A1 happening. Therefore, the trustee would otherwise have acquired the asset when they entered into the contract to acquire the asset: table in subsection 109-5(2) of the ITAA 1997.
It is considered that a beneficiary is absolutely entitled to a CGT asset of a trust as against the trustee 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 how that asset shall be dealt with.
Absolute entitlement is not precluded because of the existence of a trustee's lien to enforce a right of indemnity, or where a loan must be discharged before transferring legal title.
Under the trust arrangement in this case, the taxpayer had a vested, indefeasible and absolute interest in the asset from the day it was purchased and was able to direct how it should be dealt with. Therefore, the taxpayer was absolutely entitled to the property as against the trustee.
Because the beneficiary was always absolutely entitled to the property as against the trustee, everything done by the trustee in relation to the property, including its acquisition is taken to have been done by the beneficiary: section 106-50 of the ITAA 1997. Therefore, for the purposes of the capital gains tax provisions in Parts 3-1 and 3-3 of the ITAA 1997, the beneficiary acquires the asset before 1985, rather than when legal title was obtained in 1993. This means that the property is a pre-CGT asset in the taxpayer's hands and any capital gain or capital loss made by them when they sell the property is disregarded.
Note: The fact that the taxpayer was absolutely entitled to the asset as against the trustee also means that no CGT event happened when legal title in the asset was transferred to the taxpayer. A CGT event would only have happened if the transfer constituted a change of ownership. But section 106-50 of the ITAA 1997 also treats that transfer as an act done by the beneficiary (that is, the taxpayer). As the taxpayer was also the transferee, there was no change of ownership from one entity to another.