Income tax: can section 36A of the Income Tax Assessment Act 1936 apply if a sole trader who owns trading assets transfers the assets to another person as a trustee of a discretionary trust?

No.

Subsection 36A(1) does not apply because, if such a transfer occurs, the sole trader who owned the trading assets, before the change in ownership of the assets effected by the transfer, has no interest (legal, beneficial or legal and beneficial interest) in the assets after the change.

Section 36A is founded on the existence of undivided fractional interests in trading assets. A discretionary beneficiary of a discretionary trust does not have, in our view, an undivided fractional interest in the assets held by the trustee of a discretionary trust (even if, at general law, the discretionary beneficiary may have a beneficial interest in trust assets in certain circumstances: see Queensland Trustees Ltd v. Commissioner of Stamp Duties (Qld) (1952) 88 CLR 54). Because the sole trader has no undivided fractional interest in the trading assets after the transfer of the assets to the trustee, subsection 36A(1) does not apply.

Because subsection 36A(1) does not apply, subsection 36A(2) cannot apply: see paragraph 36A(2)(a).

Section 36 applies to such a transfer if it is not made in the ordinary course of carrying on the sole trader's business.

This Draft Taxation Determination withdraws and replaces Draft Taxation Determination TD 94/D68.