1 Will the vesting of the Trust, either in two or three beneficiaries, result in these beneficiaries becoming absolutely entitled as against the Trustee to the CGT assets of the Trust so as to trigger Capital Gains Tax (CGT) event E5?
No. This ruling applies for the following period : Year ending 30 June 20XX The scheme commenced on: 1 July 20XX
The Trust was established by deed of settlement (Trust Deed). At all times, the Trust has been a discretionary trust. The original principal under the Trust Deed was Person A. On XX XXX XXXX, Person A was replaced as principal of the Trust by, Person B, Person C, Person D and Person E (collectively the Principals). The beneficiaries Under the Schedule to the Trust Deed, the beneficiaries under the Trust Deed include • Person A, spouse, widow, children and grandchildren, • any company or trust in existence either at the date of settlement of the Trust or prior to the vesting date of which these persons owned shares or are beneficially entitled, • any trust where the beneficiaries are also beneficiaries under the other trust in existence on the vesting date. Person E is a non-resident for tax purposes. The trust fund Under clause X of the Trust Deed, the trust fund (Trust Fund) is defined as including the settlement amount of $X, accumulation of income directed to be made, investments and property held by the Trustee as the Trust Fund, and investments and property representing such money investments, property, accumulation or any part of it.
The Trust currently has the following property: • X units in the ABC Unit Trust (Unit Trust), which represents X% of the total units issued by the Unit Trust. The Unit Trust owns approximately $X worth of property, and X% of the units in another unit trust, the DEF Unit Trust • X shares of the same class in Company A • approximately $X in cash. The vesting day Under clause X of the Trust Deed, the vesting day (Vesting Date) is defined as the period of X years after the execution of the Trust Deed, being XX XXX XXXX (Vesting Date). Also under clause X, the Trustee may give notice to the Principals of its intention to appoint an earlier date to be the vesting day. X weeks after this notice has been received by the Principals, the Trustee may execute a deed to appoint an earlier vesting day. Clause X of the Trust Deed provides that the Trustee:
...shall stand possessed of the Trust Fund on the Vesting Day in trust as to income and capital for such of the Beneficiaries as are then living, or any one or more of them exclusive of the other or others in such shares and proportions as the Trustee in his absolute discretion may determine on or within a period of fourteen days before the Vesting Day... Proposal In accordance with clause X of the Trust Deed, on the Vesting Date the Trustee intends to vest the Trust Fund (Vesting Resolution) in two or three beneficiaries in equal proportions. Clause 5 of the Vesting Resolution will state It is resolved that, in accordance with clause 4 of the Trust Deed, the Company will stand possessed of the income and capital of the Trust Fund of the Trust for the following beneficiaries in equal proportions: The beneficiaries will be either two of the siblings or three of the siblings, as determined at the time of the Vesting Resolution
The reason for the trustee currently being uncertain as to whether the trust property will be held for two or three siblings is that there is uncertainty within the family as to who wants to own the assets after the Vesting Date. It may be that one of the siblings instead benefits from other family assets that are not held by the Trustee.
Income Tax Assessment Act 1997 Section 104-75 Income Tax Assessment Act 1997 Subsection 104-75(1) Income Tax Assessment Act 1997 Subsection 104-75(3) Income Tax Assessment Act 1997 Subsection 104-75(4)
All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (subsection 104-75(1)). The trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base or a capital loss if that market value is less than the asset's reduced cost base (subsection 104-75(3). A capital gain or capital loss is disregarded if the assets were acquired before 20 September 1985 (subsection 104-75(4)). Determining whether or not a CGT event happens on vesting requires a close consideration of the deed. This will include consideration of the effect of vesting on the beneficial interests in the trust, and the nature of the property held on trust. TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997
(TR 2004/D25) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee: 10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction... 23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. 24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where: • the assets are fungible; • the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and
• there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. 25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets are fungible if they are of the same type (for example, shares in the same company and with the same characteristics). Fungible assets form a separate class for the purpose of determining the number and type of assets to which each beneficiary is regarded as being absolutely entitled. Application to your circumstances: Clause 4 of the Trust Deed provides that the Trustee:
...shall stand possessed of the Trust Fund on the Vesting Day in trust as to income and capital for such of the Beneficiaries as are then living, or any one or more of them exclusive of the other or others in such shares and proportions as the Trustee in his absolute discretion may determine on or within a period of fourteen days before the vesting day and in default of any such determination as aforesaid shall stand possessed of the Trust Fund for such of the children of the Principal as shall then be living, and if more than one as tenants in common in equal shares... In accordance with clause 4 of the Trust Deed, on the Vesting Date the Trustee intends to vest the Trust Fund in two or three individual beneficiaries. The Trust Fund consists of three different types of assets: • units in a unit trust • company shares of the same class • cash. Each of the three types of assets are fungible assets within their own asset type, as they match the same description within their asset class such that one asset can be replaced with another.
Each asset type is conveniently divisible by two if they were left in two equal shares. The Units in the Unit Trust and the cash are divisible by three if left in equal shares to three beneficiaries, However the Company shares are not conveniently divisible by three. The trustee does not intend to allocate particular assets to particular beneficiaries on vesting and will continue to hold the Trust Fund for the beneficiaries on vesting. As there is more than one type of asset and more than one beneficiary, it is not clear how the assets will be allocated. The determination that the beneficiaries on vesting are to 'share equally' does not make it clear whether or not specific assets or asset types are to be held for each of the siblings. Because the trustee has not recorded a specific number of assets as being held for each beneficiary, the beneficiaries will not be absolutely entitled to any of the Trust's assets on the Vesting Date. Accordingly, CGT Event E5 will not happen when the Trust vests.