Issue
Does a CGT event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the trustee of a discretionary trust disposes of an estate for life in land owned by the trust, to a potential income beneficiary of the trust?
Decision
Yes. CGT event A1 in section 104-10 of the ITAA 1997 happens when the trustee of a discretionary trust disposes of an estate for life in land to a potential income beneficiary.
CGT event E6 in section 104-80 of the ITAA 1997 does not happen because the asset was not disposed of to the beneficiary in satisfaction of the beneficiary's right to receive income from the trust. The beneficiary, being a mere object of the trust, did not have a right to receive income from the trust.
Facts
Before 20 September 1985 a discretionary trust was established inter vivos.
The trust deed requires the trustee to hold the trust property for the benefit of such persons, within the class of income and capital beneficiaries, as the trustee determines.
The trust property includes real estate which was acquired by the trustee for the beneficial occupation of one of the beneficiaries, in accordance with a power in the trust deed. The real estate was acquired before 20 September 1985.
The taxpayer is named in the trust deed as an income beneficiary and has had the beneficial occupation, use or enjoyment of the real estate for many years.
In the 2003 income year, the trustee resolved that the taxpayer would continue to have the beneficial occupation of the real estate during their lifetime. In consequence of their entitlement to beneficial occupation, the trustee determined to transfer to the taxpayer an estate for life.
Reasons for Decision
CGT event E6 in section 104-80 of the ITAA 1997 happens if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's right, or part of it, to receive income from the trust. If the event happens, the trustee may make a capital gain or capital loss from the asset, and the beneficiary may make a capital gain or capital loss from their interest in the trust (that is, their right to income).
It is considered that an object of a trust (who is within the class of income beneficiaries) does not have a right to receive income of the trust as required by section 104-80 of the ITAA 1997. The right contemplated by section 104-80 is a fixed interest in the income of a trust, that is capable of assignment. A mere object merely has a right to be considered by the trustee in exercising its discretion to distribute trust income.
Accordingly, CGT event E6 in section 104-80 of the ITAA 1997 does not happen in this case.
Although CGT event E6 does not happen, CGT event A1 in section 104-10 of the ITAA 1997 will happen when the trustee disposes of the life interest to the taxpayer. ATO Interpretative Decisions 2003/1116 and 2003/1117 take the view that a trustee disposes of part of the freehold interest in land when a life or remainder interest is transferred to a beneficiary of the trust.
The trustee will make a capital gain if the capital proceeds from the disposal are more than the cost base of the life interest. The trustee will make a capital loss if those capital proceeds are less than the reduced cost base of the life interest (subsection 104-10(4) of the ITAA 1997).
However, a capital gain or capital loss made from CGT event A1 happening is disregarded if the asset was acquired before 20 September 1985 (paragraph 104-10(5)(a)). In this case, as the land was acquired before 20 September 1985, any capital gain or capital loss the trustee makes on disposal of the life interest in the property, will be disregarded.
The beneficiary is taken to have acquired their life interest in the land at the time CGT event A1 happened to the trustee.