1 Were you absolutely entitled as against the Trustee when CGT event A1 happened in relation to the sale of the Property by the trustee for the purposes of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 No. Question 2 Were you entitled to the main residence exemption in section 118-110 of the ITAA 1997 on the sale of the Property? Answer 2 No. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
The Property was purchased some years ago. You paid for the Property with your own funds and some years later you renovated the Property with your own funds. All expenses relating to upkeep and holding of the Property have been paid by you. The Property was exclusively used as your private residence since the purchase and you did not ever conduct a business from the Property. The purchase contract for the Property was initially in your name only. However, because at the time a relative was undergoing certain legal issues, you were advised to use a nominee company to be the purchaser of the Property and hold it on trust for you. You are the sole director, secretary and shareholder of the trustee company. A Declaration of Trust over the Property was entered into between the trustee and you as beneficiary (the Trust Deed). The Property was recently sold and the net proceeds were paid to you. You used the proceeds to purchase another property as your home. A copy of the Trust Deed has been supplied with this application and forms part of the facts of this private ruling. The Trust Deed notes the following:
• The Trustee at the request of the Beneficiary entered into the agreement the Agreement for the purchase of the Property described in the Schedule (the Trust Estate). • The deposit and all other monies required to be paid for the purchase of, or to retain and maintain, the trust estate have been provided by the Beneficiary. • The Trustee has at all relevant times agreed to act as trustee of the trust estate on the terms set out in this Deed. The clauses of the Trust Deed include the following: • The Trustee declares that the Trustee has entered into the agreement for the purchase of the trust estate and holds and will continue to hold the trust estate in trust for the beneficiary and where there is more than one beneficiary as joint tenants.The trustee agrees that at the request and cost of the beneficiary the Trustee will convey the trust estate to the beneficiary. • The parties hereby agree that in the absence of instructions from the beneficiary the Trustee may act as the Trustee sees fit and the beneficiary shall be bound by the acts of the Trustee in this regard.
• The beneficiary shall provide the Trustee with all monies necessary to hold and continue to hold and maintain the trust estate for the beneficiary as and when such monies are due to be, or in the opinion of the Trustee should be paid. The beneficiary shall further provide the Trustee with all monies which may be required by the trustee to enable the Trustee to perform and comply with the covenants terms and conditions contained in any mortgage or charge which the Trustee may execute over or in respect to the trust estate at the request of the beneficiary either alone or together with the beneficiary. • The Trustee shall notify the beneficiary of all notices, assessments, claims of demands which the Trustee receives in respect of the trust estate and shall promptly pay all outgoings including rates, taxes and charges of all kinds from funds provided by the beneficiary.
• The beneficiary covenants with the Trustee to keep the Trustee indemnified against all loss and liability of any kind whatsoever in respect of or arising out of the trustee acting as trustee of the trust estate. The beneficiary agrees that all funds or property which may become subject to these trusts shall stand charged with and be security for the Trustee's shall have the benefit of the charge constituted by way of security in respect of all rights of reimbursement and indemnity to which the trustee may be or become entitled to in respect of the covenants on the part of the trustee contained in this deed. • In the event that the trust estate or any part shall at any time be disposed of, the Trustee shall receive the proceeds of sale and after payment of all outgoings and expenses in respect of the trust estate hold such monies upon trust for the beneficiary.
• The Trustee may accept any instruction of direction from the beneficiary verbally or in writing and either from the beneficiary personally or from any person firm or company which the trustee may have reason to believe is giving such direction or instruction on behalf or with the authority of the beneficiary. The Trustee shall not incur liability or be responsible by reason of the trustee acting on or carrying out any such instruction or direction and in the event that there shall be more than one beneficiary the Trustee may accept any instruction or direction of any one or more of the beneficiaries. • The Trustee may, without prior reference to or authority of the beneficiary, make such decisions and take such action or refrain from taking such action, as it may in its absolute discretion decide, over or in respect of the trust estate. The beneficiary shall accept and be bound by all such actions or decisions of the Trustee without having any recourse against the Trustee.
• The Trustee shall not be entitled to capital or income of the trust fund beneficially other than by way of reasonable remuneration for services rendered or performed so that subject to the foregoing no provisions of this deed shall operate so as to confer or be capable of conferring any benefit to or on the Trustee directly or indirectly out of the trust estate. • Nothing in this deed shall entitle the Trustee to beneficial ownership of the trust estate or to deprive the beneficiary of the rights of beneficial ownership including the right of possession of the trust estate, except where the rights of the Trustee or of any third party may be paramount by reason of the failure of the beneficiary to carry out and perform all matters requested to be carried out by the beneficiary.
Income Tax Assessment Act 1997 section 106-50 Income Tax Assessment Act 1997 section 118-110
Question 1 Absolutely entitled to a CGT asset as against the trustee of a trust 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. Specifically: • 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) (subsection 106-50(1)). • 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) (subsection 106-50(2)). 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.
Terms of the Trust Deed In Kafataris v Deputy Commissioner of Taxation [2008] FCA 1454 ( Kafataris ), the Court restated that whether a taxpayer was absolutely entitled to a trust asset as against the trustee depended on the terms of the relevant deed and on general law principles [at 73]. This is consistent with the observation by the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) 2005 ATC 4925 where the High Court emphasised in the context of resolving the application of the particular statutory provision then in issue to the trust under examination that: All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust (at paragraph 15 of the joint judgement). 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. 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. Bare trust is not the test The Commissioner considers that the test of absolute entitlement is based on whether the beneficiary can direct the trustee to transfer the trust property to them or at their direction. While the existence of a bare trust may be a good indicator that a beneficiary of the trust is absolutely entitled, it is not necessary to establish that the trust is a bare trust in order to establish absolute entitlement. Likewise, the existence of a bare trust does not lead automatically to the conclusion that a beneficiary of the trust is absolutely entitled (paragraph 33 of TR 2004/D25). The concept of a bare trust was discussed by Gummow J in Herdegen & Anor v FC of T
88 ATC 4995; (1988) 84 ALR 271. The usually accepted meaning of 'bare' trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them. 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. Impediments to absolute entitlement The Kafataris
case was considered after the publication of TR 2004/D25 and confirmed the meaning to be given to the notion of 'absolutely entitled to the asset as against the trustee'. His Honour stated that the test 'is intended to describe a situation in which the beneficiary of a trust has a vested, indefeasible and absolute interest in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs' [at 61]. In this particular case, the Court found that certain clauses of the trust deed prevented absolute entitlement as follows: • even if the taxpayers had an interest in an asset of their respective fund (which they did not), that interest would have been defeasible by reason of the trustee having the power under a clause of the trust deed to sell and vary investments, • the trust deed permitted but did not mandate in specie distributions of assets by the trustee, and • the trust deed contained a general rule that no member had, or acquired, a beneficial or other interest in any specific asset of the relevant fund or the assets of the fund as a whole. In
Oswal v. Commissioner of Taxation [2013] FCA 745 ( Oswal ) , the Court reconfirmed the accepted view of what is meant by 'absolutely entitled to the asset as against the trustee' and noted that the following aspects were impediments to absolute entitlement: • 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. Application to your circumstances In your case, you: • entered into a Declaration of Trust with the Trustee over the Property with you as beneficiary • were the sole beneficiary under the Trust Deed during the ownership period • provided all the funds required to purchase the Property • lived in the Property as your main residence during the ownership period until the Property was sold.
While it is evident that you were beneficially entitled to the Property under the Trust Deed, this is insufficient in itself to demonstrate absolute entitlement. For you to be absolutely entitled to the Property as against the Trustee requires a consideration of whether you had a vested, indefeasible and absolute interest in the trust property and were entitled to require the Trustee to deal with the trust property as you directed. This will depend on the terms of the Trust Deed and general law principles. In this respect, the relevant legal principles need to be applied to the Trustee and the beneficiary as separate arms-length entities, ignoring any personal relationships. We note that a clause of the Trust Deed states that the Trustee agrees that at the request and cost of the beneficiary the Trustee will convey the trust estate to the beneficiary. As you had all the interests in the trust asset as the sole beneficiary, the wording in the clause is consistent with you being able to terminate the trust in respect of that asset by directing the trustee to transfer the asset to you or to transfer it at your direction. Discretionary powers of the Trustee
We note that a clause of the Trust Deed provided the Trustee with broad discretionary powers in relation to the trust estate: The Trustee may, without prior reference to or authority of the beneficiary, make such decisions and take such action or refrain from taking such action, as it may in its absolute discretion decide, over or in respect of the trust estate. The beneficiary shall accept and be bound by all such actions or decisions of the Trustee without having any recourse against the Trustee. As such, the breadth of this clause is inconsistent with you having absolute entitlement to the Property. This is because your entitlement to the asset was defeasible if the Trustee had decided to undertake other actions in relation to the Property, such as disposing of the Property for any reason, prior to you calling on the Trustee to deal with the Property as you directed. Therefore, you did not have a vested, indefeasible and absolute interest in trust property and were not entitled to require the trustee to deal with the Property as you directed. Trustee's right of indemnity
The relevant state legislationprovides that a trustee of a trust created in that state has a right of indemnity against trust property: • A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects or defaults, and not for those of any other trustee, nor for any banker, broker or other person with whom any trust money or securities may be deposited, nor for the insufficiency or deficiency of any securities, nor for any other loss unless the same happens through his own wilful default. • A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers. We also note that the following clauses of the Trust Deed are indicative of the Trustee having a right of indemnity out of the trust estate:
• The beneficiary agrees that all funds or property which may become subject to these trusts shall stand charged with and be security for the Trustee's shall have the benefit of the charge constituted by way of security in respect of all rights of reimbursement and indemnity to which the trustee may be or become entitled to in respect of the covenants on the part of the trustee contained in this deed. • Nothing in this deed shall entitle the Trustee to beneficial ownership of the trust estate or to deprive the beneficiary of the rights of beneficial ownership including the right of possession of the trust estate, except where the rights of the Trustee or of any third party may be paramount by reason of the failure of the beneficiary to carry out and perform all matters requested to be carried out by the beneficiary. [emphasis added] From the above, we consider that the Trustee had a right to indemnity against trust property in respect to any debts or liabilities that may have arisen in respect to the trust estate. This right was an impediment to you being able to direct the Trustee to deal with the trust property as you directed.
Therefore, similarly to Oswal , you as beneficiary had an impediment to absolute entitlement as against the trustee. You did not have a vested, indefeasible and absolute interest in trust property and were not entitled to require the trustee to deal with the Property as you directed. Conclusion Your interest in the trust property as beneficiary was defeasible by the Trustee thus preventing absolute entitlement for the purposes of section 106-50 of the ITAA 1997. Question 2 Main residence exemption If you are an individual, you can disregard a capital gain or capital loss you make from a CGT event that happens to a dwelling that qualifies as your main residence as long as the dwelling was your main residence for the whole period you owned it (section 118-110 of the ITAA 1997). You have an ownership interest in a dwelling that is not a flat or home unit if you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it (section 118-130 of the ITAA 1997). In your case, the Trustee of the Trust was the legal owner of the Property and you were not absolutely entitled to the Property as against the Trustee.
Therefore, you are not entitled to the main residence exemption on the sale of the property.