Issue
Can CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when a taxpayer creates a trust over their contractual rights by declaration?
Decision
Yes. CGT event E1 in section 104-55 of the ITAA 1997 can happen when a taxpayer creates a trust over their contractual rights by declaration.
Facts
The taxpayer entered into a contract with an overseas securities firm with the aim of acquiring shares in US companies. Under the contract, the taxpayer provided money to the overseas securities firm to enable it to acquire nominated shares on the taxpayer's behalf.
The taxpayer has not received share certificates and there is no other evidence that the shares were acquired by the securities firm on the taxpayer's behalf.
The taxpayer has learned that the overseas securities firm has been under investigation by the overseas government in relation to its investment activities. The taxpayer has since been unable to communicate with the securities firm.
Subsequently, the taxpayer declared a trust over the contractual rights against the overseas firm in favour of an existing family trust associated with the taxpayer. The taxpayer is a trustee of the family trust and is also one of its beneficiaries.
Reasons for Decision
CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).
Under section 108-5 of the ITAA 1997 a CGT asset is any kind of property or a legal or equitable right that is not property.
When it entered into the contract with the overseas securities firm, the taxpayer acquired contractual rights. The right to enforce a contractual obligation is a CGT asset (see Note 1 to section 108-5 of ITAA 1997).
Accordingly, where a taxpayer makes a declaration of trust over contractual rights that is effective at law or in equity, CGT event E1 will happen.