Capital Gains Tax: CGT event E2 - transfer of asset to trust - terms and beneficiaries of trusts not the same

Does the exception to CGT event E2 in paragraph 104-60(5)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply if assets of a trust are transferred to another trust and the trust deed of the transferee trust includes a term that is not also in the transferor trust deed?

No. The exception in paragraph 104-60(5)(b) of the ITAA 1997 does not apply because the terms of the two trusts are not the same.

After 19 September 1985, the assets of a superannuation fund (the transferor fund) with more than one member will be transferred to another superannuation fund (the transferee fund).

The transferee fund is a larger fund with several sub-funds. The assets of the transferor fund and its members will comprise another sub-fund within the transferee fund.

The trust deeds of the transferor and transferee funds, to the extent they are relevant to the transferred assets, are similar in most respects. However, the transferee fund contains a clause that does not appear in the trust deed of the transferor fund.

Essentially that clause gives the trustee of the transferee fund certain powers and duties that are needed because the transferee fund is comprised of several sub-funds. For example, the trustee can make adjustments between sub-funds if tax attributes attributable to the assets of one sub-fund have reduced the liabilities of another sub-fund.

CGT event E2 happens when a CGT asset is transferred to an existing trust (subsection 104-60(1) and 104-60(2) of the ITAA 1997). However, the event does not happen if the asset is transferred from another trust and the beneficiaries and terms of both trusts are the same (paragraph 104-60(5)(b) of the ITAA 1997).

Determining whether the exception in paragraph 104-60(5)(b) of the ITAA 1997 applies requires careful examination of the beneficiaries and terms of the trusts in respect of each transferred asset. The beneficiaries and terms of the trusts in respect of each transferred asset must be exactly the same. It is considered that the exception must be construed strictly.

This means, for example, that the exception is not satisfied if one trust deed contains relevant terms that are not present in the other trust deed. A relevant term is one that is relevant to the transferred asset and the trust upon which that asset is held. It does not mean that the two relevant trust deeds need to be worded identically. However, their meaning and effect in respect of the transferred asset must be the same.

In the context of this case, the beneficiaries and terms of the transferor fund must be compared to the beneficiaries and terms of its corresponding sub-fund within the transferee fund. Because the deed of the transferee fund contained a clause (relevant to the transferred assets) that did not appear in the deed of the transferor fund, it is considered that the terms are not the same.

Therefore the exception in paragraph 104-60(5)(b) of the ITAA 1997 is not satisfied. Accordingly, CGT event E2 will happen when the assets of the transferor fund are transferred to the transferee fund. The transferor fund will make a capital gain in respect of the transfer of an asset if the capital proceeds from the transfer are more than the asset's cost base. They will make a capital loss if those capital proceeds are less than the asset's reduced cost base (see subsection 104-60(3) of the ITAA 1997).