Issue
Does the sole beneficiary of a trust have the right, as against the former holder (the trustee), to possess the trust asset immediately in accordance with item 6 of section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997) by reason of a right to demand transfer of legal title to the asset from the trustee?
Decision
No. The sole beneficiary of the trust estate does not have the right as against the former holder to possess the trust asset immediately in accordance with item 6 of section 40-40 of the ITAA 1997. Prior to the beneficiary asking for ownership of the asset to be transferred to them, they do not have the right as against the former holder to possess the asset immediately.
Facts
A unit trust is established for the purpose of acquiring an asset which is to be leased to an unrelated third party. The trustee acquires the asset and enters into a lease agreement with the third party. The terms of the lease agreement are such that the third party will not have a right to obtain ownership of the asset.
The trust deed provides that the trustee has the same powers in respect of the trust asset as if it was the beneficial owner of the asset acting in its personal capacity. These powers include the power to deal with the asset and the power to mortgage, charge or otherwise give security over any asset on such terms as the trustee thinks fit.
The trust deed also provides that the beneficiary may require the trustee to transfer ownership of the asset to the beneficiary at any time or dispose of the asset at the direction and for the benefit of the beneficiary.
The beneficiary is not in possession of the asset and the trustee has not been required to transfer ownership of the asset to them.
Reasons for Decision
You must hold a depreciating asset before you are entitled to claim a deduction for its decline in value under Division 40 of the ITAA 1997. The table in section 40-40 of the ITAA 1997 sets out who holds a depreciating asset.
Essentially, the legal owner of a depreciating asset is the holder of the asset under item 10 of the table in section 40-40 of the ITAA 1997 unless any other item in the table applies. In this case the legal owner is the trustee and they will be the holder unless another item in the table applies.
The only other item in the table which could potentially apply is item 6. Under item 6 the economic owner, rather than the legal owner, will hold an asset where the specified conditions are satisfied. The third party lessee will not hold the asset as economic owner under item 6 because the condition in item 6(b) is not satisfied (it does not have a right to obtain ownership of the asset). However, the beneficiary will satisfy this condition.
Item 6(a) requires that the economic owner must possess the asset, or have a right against the former holder to possess the asset immediately.
The beneficiary of the trust does not possess the asset as the asset is possessed by the lessee. To comply with item 6(a) it is therefore necessary that the beneficiary has a right as against the trustee to possess the asset immediately.
The beneficiary is not the legal owner and there is no deed, agreement or legal rule that gives the beneficiary the right to immediate possession of the asset. The trust deed provides that the trustee has the power to deal with the asset and the power to mortgage, charge or otherwise give security over any asset on such terms as the trustee thinks fit. These powers are not consistent with the beneficiary having a right to possess the asset immediately.
The trust deed merely allows the beneficiary to demand the transfer of ownership of the asset. The ability to demand transfer of ownership, of itself, does not give the beneficiary a right to immediate possession. In the absence of an agreement or legal rule that gives the beneficiary the express right to immediate possession the only way they can obtain that right is by the actual demand for the transfer of ownership. In this case the demand has not been made. When the demand is made this will be a step in the process of the beneficiary becoming the legal owner and once they become the legal owner they will hold under item 10.
Paragraph 1.33 of the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001 provides the following guidance about the requisite right: Where the economic holder does not have actual possession but only a right against the apparent holder to possession, that right must be immediate, unconditional and non-contingent. That is, there must not be any thing to be done before that economic owner has the right to gain actual possession of the asset. For example, a taxpayer may have a call option over a depreciating asset the taxpayer does not hold but until that option is exercised there is no immediate right to possession and the option-holder will not hold the asset.
Although, under the trust deed, the beneficiary is able to demand transfer of legal ownership they have not done so. The beneficiary is not the legal owner, does not possess the asset and does not have the right to possess the asset immediately. This means that they are not the holder under section 40-40 of the ITAA 1997.