Capital gains tax: absolute entitlement to trust asset - multiple beneficiaries

Is the taxpayer, who is one of two beneficiaries of a trust, absolutely entitled to the trust asset as against the trustee in accordance with section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) so that CGT event A1 happens to the taxpayer (rather than the trustees) when the asset is sold?

No. Because there is another beneficiary with an interest in the trust asset, it is considered that the taxpayer is not absolutely entitled to the asset as against the trustee in accordance with section 106-50 of the ITAA 1997. Accordingly, CGT event A1 will happen to the trustee (and not to the taxpayer or the other beneficiary) when the asset is sold.

The taxpayer and their spouse wished to purchase an investment property. They located a suitable property and agreed to purchase it in the 2000 income year. The property was registered in the names of the taxpayer, their spouse and their children as tenants in common in equal shares.

Although there was no written agreement, all family members understood that each child held their interest in the property on trust for the taxpayer and their spouse. That is, each child was the trustee of a trust in respect of their interest of which the taxpayer and their spouse were the only beneficiaries.

The taxpayer and their spouse paid all costs associated with the property. The children did not contribute financially to the acquisition or maintenance of the property.

The property was sold in the 2004 income year.

If the taxpayer is absolutely entitled to each of the children's interests then CGT event A1 will happen to the taxpayer in respect of those interests when the property is sold.

This is because where a beneficiary is absolutely entitled to the asset of a trust as against the trustee, section 106-50 of the ITAA 1997 treats an act done by the trustee as if the beneficiary had done it. Therefore, if section 106-50 applies, the disposal by the children of their interests will be regarded as a disposal by the taxpayer.

It is considered that a beneficiary is absolutely entitled to a CGT asset of a trust as against the trustee if the beneficiary is able to terminate the trust in respect of the asset by demanding that the asset be transferred to them or at their direction. A beneficiary can terminate the trust in respect of the asset if there is no other beneficiary or person with an interest in the asset. That is, if the beneficiary has an interest in the asset that is vested in possession and is indefeasible. This is known as the rule in Saunders v. Vautier (1841) Cr & Ph 240; 49 ER 282.

However, a taxpayer will have difficulty in establishing the requirements for absolute entitlement under section 106-50 of the ITAA 1997 if one or more other beneficiaries have an interest in the trust asset. This is because section 106-50 requires identification of a specific trust asset that is held on behalf of a specific beneficiary. It is not sufficient for a beneficiary to show they have an undivided interest in the trust asset. Instead it must be possible to identify a particular asset being held for a particular beneficiary.

The asset in respect of each of the trusts is the interest in the property held by the relevant child and in each case that asset is held not just for the taxpayer but for the taxpayer and their spouse. While under the rule in Saunders v. Vautier the taxpayer and their spouse could together terminate the trust in respect of that asset, section 106-50 of the ITAA 1997requires an identification of a specific asset to which the taxpayer is entitled in their own right, to the exclusion of others. Given that the taxpayer's spouse also has an interest in each trust asset, the taxpayer merely has an undivided interest in each trust asset and is unable to establish that they alone are entitled absolutely to each asset as is required by section 106-50.

Therefore, the taxpayer is not absolutely entitled to the interests in the property held by the children in accordance with section 106-50 of the ITAA 1997. Accordingly, CGT event A1 will happen to the trustees (that is, the children) in respect of their interests when they are disposed of as a result of the sale of the whole of the property. Each trust will make a capital gain or loss on the disposal of its interest. The trust will then be assessed on that gain or loss in accordance with the rules in Division 6 of Part III of the Income Tax Assessment Act 1936. Note: The question in this case was raised by the taxpayer. The ATO would take the same view if asked the same question by the taxpayer's spouse.