1 Is the Trust a fixed trust from the time of vesting pursuant to section 272-65 of Schedule 2 of the ITAA 1936 and section 995-1(1) of the ITAA 1997?
Yes. Question 2 Is the Foreign Beneficiary presently entitled to capital gains made by the trustee of the Trust as a result of the trust vesting? Answer Yes. Question 3 Does the Foreign Beneficiary's assessable income include capital gains relating to assets of the Trust after it vests? Answer Yes. As the Foreign Beneficiary is absolutely entitled to the assets of the Trust from vesting, capital gains arising from those assets after this time will be made by them directly and will not form part of the Trust's net income. Question 4 Is the Foreign Beneficiary presently entitled to net income of the Trust after vesting? Answer Yes. Question 5 Does the Foreign Beneficiary disregard capital gains made after vesting from the assets of the Trust that are not taxable Australian real property? Answer Yes. This ruling applies for the following period : Year ended 30 June 20XX
The Trust's deed (the Deed) relevantly provides that: (a) while the Life Tenant (an individual) is alive they may distribute the income of the Trust in their absolute discretion. (b) Vesting Day is the date of death of the Life Tenant. (c) on vesting the trustee of the Trust will stand possessed of, and hold on separate account, any unappointed trust income and capital absolutely for the Foreign Beneficiary and another beneficiary in equal shares. The Foreign Beneficiary is a non-resident for Australian tax purposes. The assets of the trust are a significant number of shares in ASX listed companies and units in unlisted managed funds which are fungible and easily divisible between the Foreign Beneficiary and the other beneficiary.
Income Tax Assessment Act 1936 section 272-5 Income Tax Assessment Act 1936 section 272-65 of Schedule 2 Income Tax Assessment Act 1997 104-75 Income Tax Assessment Act 1997 106-50 Income Tax Assessment Act 1997 855-10 Income Tax Assessment Act 1997 855-40 Income Tax Assessment Act 1997 section 995-1
Question 1 Summary The Trust is a fixed trust from vesting pursuant to section 272-65 of Schedule 2 of the ITAA 1936 and section 995-1(1) of the ITAA 1997. Detailed reasoning Section 995-5(1) of the ITAA 1997 states that "a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust." Section 272-65 of Schedule 2 of the ITAA 1936 similarly states "a trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust." Section 272-5 of Schedule 2 of the ITAA 1936 provides that a beneficiary has a fixed entitlement to the capital or income of the trust where they have a vested and indefeasible interest to that share of the capital or income of the trust. According to the Deed, the trustee of the Trust holds the Trust Fund (which includes assets and any income from these assets) in equal proportions for the Foreign Beneficiary and another beneficiary absolutely from vesting. There are no clauses that can defeat these entitlements. As these entitlements are vested and indefeasible, they are fixed entitlements for the purposes of section 272-5 of Schedule 2 of the ITAA 1936.
The Foreign Beneficiary and the other beneficiary have fixed entitlements to all of the income and capital of the Trust from vesting. Thus, the Trust is a fixed trust from vesting pursuant to sections 995-1(1) of the ITAA 1997 and 272-65 of Schedule 2 of the ITAA 1936. Question 2 Summary Upon vesting, the assets of the Trust become absolute entitlements of the beneficiary as against the trustee, which causes CGT Event E5 in section 104-75 of the ITAA to happen in relation to the Trust's assets. The capital gains on those assets are included in the net income of the Trust. According to the Deed, as of Vesting Day any unallocated assets and income are held absolutely for the Foreign Beneficiary and the other beneficiary in equal shares. Thus, the Foreign Beneficiary is presently entitled to capital gains of the trustee of the Trust as a result of the Trust vesting. The capital gain or loss otherwise made by the Foreign Beneficiary as a beneficiary under paragraph 104-75(5) is disregarded under paragraph 104-75(6). Detailed Reasoning The relevant Commissioner's views on absolute entitlements in relation to CGT assets held within a trust are contained in 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). Paragraph 9 and 10 of TR 2004/D25 state: 9. The provisions apply separately to each beneficiary and asset of the trust. They require absolute entitlement to the whole of a CGT asset of the trust. While a beneficiary's interest in the trust, or in the trust property, may also be a CGT asset as that term is defined in section 108-5, neither is the CGT asset to which the relevant provisions refer. Core principle 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. This derives from the rule in Saunders v. Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).
The Foreign Beneficiary has an absolute interest in the Trust's property and not any specific asset. However, the assets held by the Trust, being ASX listed shares and shares/units in unlisted managed funds, are fungible. TR 2004/D25 relevantly states, in part: 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. See Explanation paragraphs 80-126 ... 107. So where there is, on trust, a group of fungible assets (an asset class) and the assets are conveniently divisible between the beneficiaries, and there is no prejudice to other interest holders, a beneficiary may be able to demand a certain number of those assets in satisfaction of their partial interest in each and every asset within that class. ... Evidentiary requirements ... 124. Because the relevant situation is one where there are both shared interests and the holding of a specific number of assets for each beneficiary, a written record of allocation by the trustee ( or a clear unambiguous trust instrument
) is required. The record serves as confirmation that the trust is administered on the basis that a specific number of assets are held for each beneficiary, rather than on the basis of the shared interests. In the absence of such evidence it is considered that absolute entitlement is not established, regardless of the terms of the trust instrument. ... Example 3: multiple beneficiaries 154. Assume the same facts as for Example 2, except that Paul's wife Christine has predeceased him and as a result he leaves the rest and residue of his estate to his two daughters, Marie and Clare. Assume also that the will makes it clear that Marie and Clare are each entitled to half the total number of shares each, half the cash and a half share in the holiday unit. 155. The shares are fungible. The will is clear that Marie and Clare are each absolutely entitled to 250 shares. 156. Therefore, if Marie directs the trustee to sell her shares and pay her the cash, Marie (and not the trustee) will be the relevant taxpayer in respect of the resulting capital gain. If Clare directs that her shares be transferred to her, she will be the relevant taxpayer if she later disposes of them. ...
(emphasis added) For contrast, see examples 8 and 9 of TR 2004/D25. The Deed makes it clear the Foreign Beneficiary and the other beneficiary are each entitled to half of the number of shares and units in managed funds that comprise the Trust Fund. From the time of vesting the Trust holds half of the assets on separate account absolutely for the Foreign Beneficiary. Given the way the Trust Fund is divided according to this clause, it is apparent there is a clear understanding that the Foreign Beneficiary is entitled to that part of the Trust Fund, 'the Foreign Beneficiary's Fund', to the exclusion of the other beneficiary. Thus, it is considered that the Foreign Beneficiary has an absolute entitlement to assets of the Trust.
On Vesting Day, beneficiaries became absolutely entitled to all the assets of the Trust, causing CGT event E5 in section 104-75 to happen. At this time the trustee makes capital gains on those assets that are included in the net income of the Trust. According to the Deed, as of vesting any unallocated assets and income are held equally for the beneficiaries. Thus, the Foreign Beneficiary is presently entitled to capital gains of the trustee of the Trust as a result of the trust vesting. Paragraph 104-75(5) provides that the beneficiary may also make a capital gain as a result of this CGT event. However, subparagraph 6(a) relevantly provides that such a capital gain is disregarded where the asset is acquired for no expenditure. As the Foreign Beneficiary acquired these assets for no expenditure, the capital gain or loss otherwise made under paragraph 104-75(5) is disregarded. Question 3 Summary
As the Foreign Beneficiary is absolutely entitled to half the Trust Fund, half the assets (which are fungible) of the Trust Fund ('the Foreign Beneficiary's Fund') are treated for CGT purposes as if they owned them directly. Thus, after vesting, the Foreign Beneficiary will make any capital gains or losses arising from the assets directly. These capital gains or losses do not form part of the Trust's net income. Paragraph 2 of TR 2004/D25 relevantly states: Broadly, an absolutely entitled beneficiary (rather than the trustee) is treated as the relevant taxpayer in respect of the asset for the purposes of the capital gains tax (CGT) provisions. Section 106-50 of the ITAA 1997 states: (1) For the purposes of this Part and Part 3-3 (about capital gains and losses) and Subdivision 328-C (What is a small business entity), from just after the time you become absolutely entitled to a • CGT asset as against the trustee of a trust (disregarding any legal disability), the asset is treated as being your asset (instead of being an asset of the trust).
(2) This Part, Part 3-3 and Subdivision 328-C apply, from just after the time you become absolutely entitled to a * CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by you (instead of by the trustee). Example: An individual becomes absolutely entitled to a CGT asset of a trust. The trustee later sells the asset. Any capital gain or loss from the sale is made by the individual, not the trustee. Accordingly, after vesting, any capital gains or losses made on the disposal of the assets in the Foreign Beneficiary's Fund will be made directly by the Foreign Beneficiary and will not form part of the Trust's net income. Question 4 Summary The Foreign Beneficiary is presently entitled to any net income earned on his share of the Trust Fund, Foreign Beneficiary's Fund, after vesting. Detailed Reasoning According to the Deed, from vesting the Foreign Beneficiary is absolutely entitled to any income earned from their share of the Trust Fund, Beneficiary's Fund.
A present entitlement to income will exist where a person has a vested and indefeasible interest in the income. That is, where they have a claim or interest to the income that cannot be defeated by another person, they will be presently entitlement to that income. There are no clauses in the Deed that can defeat the Foreign Beneficiary's entitlement to income on the Foreign Beneficiary's Fund. Thus, the Foreign Beneficiary will be presently entitled to any net income earned on their share of the Trust Fund. Question 5 Summary The Foreign Beneficiary disregards capital gains arising from the assets held in the Foreign Beneficiary's Fund where they are not attributable to taxable Australian property, under sections 855-10 and 855-40 of the ITAA 1997. Detailed reasoning Section 855-10 of the ITAA 1997 provides that a foreign resident disregards the capital gain or loss from a CGT event in respect of CGT assets that are not taxable Australian property. Section 855-40 of the ITAA 1997 provides a comparable CGT exemption for foreign residents making such a capital gain in respect of their interest in a fixed trust (including a managed fund).
In this case the assets held in the Foreign Beneficiary's Fund may give rise to capital gains in relation to assets that are not taxable Australian property as defined by section 855-15 of the ITAA 1997. Where these gains arise directly from the sale of assets held by the Trust, it is considered that the Foreign Beneficiary will derive capital gains directly. In this case, the Foreign Beneficiary, being a foreign resident who will then have a capital gain attributable to assets that are not taxable Australian property, disregards this capital gain under section 855-10 of the ITAA 1997. Where these capital gains arise from distributions on units in managed funds held in the Foreign Beneficiary's Fund, the Foreign Beneficiary can disregard the capital gains under section 855-40 of the ITAA 1997.