CGT Consequences when an Asset is Transferred to a Trust
The recent Federal Court case demonstrated that transferring a Capital Gains Tax (CGT) asset to a trust may trigger a CGT event and, consequently, gives rise to CGT liabilities. In this case the taxpayer transferred land to a joint venture trust for the purpose of commercial development. The Court had to determine whether CGT event E1 happened (a trust was created over a CGT asset); CGT event E2 (a CGT asset was transferred to an existing trust) and CGT event A1 (a CGT asset was disposed of) incurred.
The Court found that the trust was created over a CGT asset by settlement and the taxpayer could not rely on the exception. This decision was based on the fact that the taxpayer was not the sole beneficiary of the trust. CGT event E2 happened when the taxpayer transferred land to a joint venture trust because it was an existing trust. Furthermore, CGT event A1 incurred when the land was transferred as the taxpayer ceased to be the owner of the land and became a tenant in common. As CGT event E1 was more specific to the taxpayer’s situation it superseded CGT event A1. In summary, the taxpayer was found liable for capital gains tax and administrative penalties.
It should be noted that neither CGT event E1 nor CGT event E2 happens if the terms of an existing trust are changed pursuant to a valid exercise of a power contained within the trust’s deed. For example in the event of:
1. Adding of new entities to, and excluding of existing entities from, class of objects; or
2. Expansion of power to invest; or
3. Adding of definition of income, power to stream, and extending of vesting date.
The lawyers and tax accounts at the Quinn Group can provide you with advice in this area. You can contact us at The Quinn Group on 02 9223 9166 or fill out an online enquiry.