Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to: (a) a mere object; or (b) a default beneficiary?
(a) No, CGT event E4 does not happen if a trustee of a discretionary trust makes a non-assessable payment to a mere object in respect of their interest in the trust.
In this context, a mere object refers to a member of the class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee (i.e. a discretionary beneficiary). A default beneficiary refers to a beneficiary whose entitlement to income or corpus arises should the trustee decide not to exercise their discretion in favour of the objects or fail to exercise their discretion.
CGT event E4 does not happen in the circumstances described in paragraph 1 because a mere object or default beneficiary is not considered to have an 'interest in the trust' of the nature or character required in paragraph 104-70(1)(a).
The meaning to be given to the words 'interest in the trust' depends on the context in which they are used, see for example Leedale v. Lewis [1982] 3 All ER 808 and Gartside v. IRC [1968] AC 553. In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests.
The interest that a mere object has in a trust is not one in which another person can invest - such an interest, being a bare right of action, cannot be purchased or assigned. An interest of a default beneficiary has been held to constitute a vested, but defeasible, proprietary interest in a trust (see Queensland Trustees v. Commissioner of Stamp Duties (Queensland) (1952) 88 CLR 54 at page 63). [F1] It can be assigned and be the subject of a testamentary disposition. However, it is not an interest potentially subject to CGT event E4 where it has not been acquired for consideration or by way of assignment.
[Omitted]
This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).