Are you absolutely entitled to the Property as against the Trustee of the Trust for the purposes of section 106-50 of the Income Tax Assessment Act 1997 ?
No. This ruling applies for the following period : Year ending 30 June 20YY The scheme commenced on: 1 July 20YY
A Property was purchased over 10 years ago in the name of a Company as Trustee for a Family Trust (the Trust). The Trust was established over 10 years ago for the purpose of holding the Property. The Trust is a discretionary trust. Your parent (deceased) and you were directors of the trustee Company. Your parent was removed as a director and shareholder of the trustee Company, and as the Appointor to the Trust, about 5 years ago. You have remained as the sole director of the Company. Your parent lived in the Property as their main residence until their death about 5 years ago. You and your spouse moved into the Property as your main residence. There were, and still are, no other assets held by the Trust other than the Property. You and your spouse do not have any children. Your parent has a living nephew and two nieces. You are looking into transferring the property into the names of you and your spouse and winding up the Trust. A copy of the Trust Deed has been provided and forms part of the facts and circumstances of this private ruling. Relevantly, the Trust Deed includes the clauses reproduced below. The primary purposes of establishing the Trust are:
• to directly or indirectly provide financial assistance to varying degrees for the maintenance, education and benefit in life of any one or more of the beneficiaries; • to invest or utilise all or any part of the trust fund to achieve the purpose in paragraph (a) without the necessity to have regard to generating income or accretion of capital; • to assist or benefit a beneficiary without regard to the taking of security or the possibility of incurring a loss of capital; and • to give to the Trustee the widest possible discretion in the exercise of its powers whether investment or otherwise. The beneficiaries of the Trust include the following: a) your parent; b) any child or grandchild of your parent born before the termination date; c) the spouse of any child or grandchild of your parent d) any brother or sister, nephew or niece of your parent. No capital distribution to beneficiary who is sole director of the Trustee - if the Trustee is a company having a sole director who is also one of the beneficiaries, no determination of the Trustee may be made distributing any capital to such beneficiary during the period the beneficiary is the sole director of the Trustee.
Discretionary powers of the Trustee - the Trustee holds the income of a financial year which is available for distribution upon trust to pay, apply or set aside the income, or any part of the income, to or for the benefit of the beneficiaries, other than a default beneficiary who is not otherwise a beneficiary, or any one or more of them exclusive of the other or others who are living or which are in existence at the time payment, application or setting aside of such income is made in such shares or proportions and from such category of income as the Trustee may in its discretion determine. Limitation of liability - the Trustee is not liable or answerable or accountable under this deed or in respect of the Trust for any loss other than a loss attributable to dishonesty of the Trustee; or the wilful commission of an act known by the Trustee to be a breach of trust. Indemnity - provided the Trustee acts in good faith:
• it is entitled to be indemnified out of the trust fund for all debts, damages, obligations or other liabilities incurred, arising or awarded by or against the Trustee in the execution of any power, duty, discretion or authority under this deed and in respect of all actions, claims, demands and costs relating to or concerning the trust fund; • is entitled to reimbursement from the trust fund for all moneys expended and debts incurred in or about the administration of the Trust; and • it may apply the trust fund or any moneys or property comprised in the trust fund as it may decide to satisfy the rights of reimbursement or indemnity to which it is under this deed, or otherwise by law, entitled. Powers of the Trustee include: Real property: to acquire, dispose of, exchange, mortgage, sub-mortgage, lease, sub-lease, let, grant, release or vary any right or easement or otherwise deal with real property or any estate or interest in real property. On the winding up of the Trust, the Trustee may distribute property comprised in the trust fund in specie in satisfaction of a part of the trust fund to which a beneficiary is entitled.
Income Tax Assessment Act 1997 section 106-50
Where a beneficiary of a trust is absolutely entitled to the asset of a trust as against the trustee, section 106-50 of the ITAA 1997 treats an act done by the trustee as if the beneficiary had done it. Draft Taxation Ruling 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) provides the Commissioner's view on what is meant by absolute entitlement. 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 (1841) 4 BEAV 115; 49 ER 282; CR. & Ph. 24( Saunders v. Vautier )applied in the context of the CGT provisions. The relevant test of absolute entitlement is not whether the trust is a bare trust. Under the rule in Saunders v. Vautier
, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it. The most straight forward application of the core principle is one where a single beneficiary has all the interests in the trust asset. Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. One beneficiary with all the interests in a trust asset Paragraphs 21 and 22 of TR 2004/D25 explain that a beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries). Such a beneficiary will be absolutely entitled to that asset as against the trustee for the purposes of the CGT provisions if the beneficiary can (ignoring any legal disability) terminate the trust in respect of that asset by directing the trustee to transfer the asset to them or to transfer it at their direction.
More than one beneficiary with interests in a trust deed Paragraphs 23 to 25 of TR 2004/D25 explain that a beneficiary will generally not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. 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. 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 (i.e. replaceable by another identical item or mutually interchangeable); • 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. Paragraph 54 of TR 2004/D25 clarifies that the requirement for absolute entitlement cannot be satisfied if there are multiple beneficiaries in relation to a single asset such as land. While each beneficiary may have an interest in, and therefore be entitled to, a share of the land, no beneficiary is entitled to the whole of it. The same goes for a single asset that is property. Beneficiary's interests must be vested and indefeasible TR 2004/D25 explains that: 73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest. 74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it
75. Also, the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event. For example, if the class of potential beneficiaries has not yet closed then a beneficiary's interest is capable of being defeated, at least in part, by the admission of new beneficiaries to the class. Discretionary trust TR 2004/D25 explains that because an object of a discretionary trust does not have an interest in the trust assets, they cannot be considered absolutely entitled to any of the trust assets prior to the exercise of the trustee's discretion in their favour (paragraph 71). The objects of a discretionary trust are the potential beneficiaries as specified in the trust deed. Other impediments to absolute entitlement A case that considered absolute entitlement, and post-dates TR 2004/D25, is Oswal v. Commissioner of Taxation [2013] FCA 745 where Edmond J found that the phrase 'absolutely entitled to a CGT asset of a trust... as against the trustee' requires a beneficiary to have a vested, indefeasible, and absolute entitlement to a trust asset and to be entitled to require the trustee to deal with the asset as the beneficiary directs.
In particular, Edmond J stated that: • the exercise by a trustee of a power of sale, either expressed in the instrument creating the trust or conferred by statute, of an asset vested in the trustee for the absolute benefit of a beneficiary would defeat that beneficiary's interest in the asset, and • a trustee's right of indemnity in respect of liabilities and expenses properly incurred as trustee of a trust fund as provided for in the Trust Deed was an impediment to absolute entitlement as against the trustee. Application to your circumstances In your case, the nature of the Trust and the provisions of the Trust Deed prevent you from being absolutely entitled to the Property as against the trustee of the Trust. The Trust Deed specifies various classes of potential beneficiaries that the Trustee may make a distribution to, including. • your parent (while they were living); • any child or grandchild of your parent born before the termination date; • the spouse of any child or grandchild of your parent • any brother or sister, nephew or niece of your parent.
Consequently, the current objects or potential beneficiaries of the Trust include you, your spouse, and your late parent's nephew and two nieces. We also note that there is nothing in the Trust Deed that states that you have an interest in a specific asset of the Trust to the exclusion of any of the other potential beneficiaries. Therefore, you are unable to call for the Property to be transferred to you, or to be transferred at your direction, and are not absolutely entitled to the Property as against the Trustee. We also note that a clause of the Trust Deed provides that no capital distribution may be made by the Trustee to a beneficiary who is the sole director of a company that is the Trustee of the Trust. Consequently, as you are the sole director of the trustee company, this clause also appears to prevent you from being absolutely entitled to the Property as against the Trustee. Conclusion You are not absolutely entitled to the Property as against the trustee of the Trust for the purposes of section 106-50 of the ITAA 1997.