CGT trust streaming: ‘reasonably expected to receive net financial benefit’
Draft Taxation Determination TD 2012/D2
This draft TD states the ATO view that it is possible (depending on the circumstances) for a beneficiary of a trust estate to be reasonably expected to receive a share of the net financial benefit referable to a capital gain for the purposes of s 115-228(1)(a) of the ITAA 1997 (ie, the ‘CGT trust streaming measures’), despite the making of the capital gain not being established until after the end of the income year. By way of explanation, the draft determination emphasises that the ‘reasonable expectation’ requirement is directed to the future receipt of an amount referable to the gain should it arise, and not to the likelihood of the gain itself occurring.
The draft provides a number of examples, including the following:
Example
In November 2011, the trustee of the Bottomley Trust enters into a binding contract for the sale of shares with settlement to take place in November 2016. The contract contains a number of conditions that must be fulfilled before either party to the contract is obliged to complete. Therefore, although there is an immediately binding contract that creates rights and obligations capable of enforcement, the contract is subject to the fulfilment of conditions subsequent to its formation.
Accordingly, the obligation of the parties to perform is contingent on the fulfilment of the conditions and non-fulfilment confers a right to terminate.
Because the completion of the contract is contingent upon the fulfilment of these conditions, there is a chance the contract will not settle.
Accordingly, when the contact is entered into, there is no certainty that a change of ownership of the shares will occur such that CGT event A1 will happen. If the contract is completed, the sale proceeds will form part of the capital of the Bottomley Trust.
In a valid exercise of a power under the trust deed to distribute capital, the trustee of the Bottomley Trust resolves by 31 August 2012 to distribute to a beneficiary, Potts Pty Ltd, all of the net financial benefit referable to any capital gain arising on the disposal of the shares in the event the contract proceeds to completion. The deed provides that trustee resolutions made in accordance with the deed are irrevocable.
Subdivision 115-C of the ITAA 1997 applies where there is a net capital gain of a trust estate included in the net income of that trust. It then looks to each capital gain made by the trust estate. Should the contract settle and result in a capital gain to the Bottomley Trust, Potts Pty Ltd will satisfy the requirement under s 115-228(1)(a) of the ITAA 1997 that it can be reasonably expected to receive a share of the net financial benefit referable to the capital gain.
The ATO says the fact that the happening of CGT event A1 (and the making of a capital gain) is contingent upon the completion of the contract for sale does not preclude Potts Pty Ltd from demonstrating a reasonable expectation of receiving the financial benefit referable to the capital gain should the contract complete.
The trustee resolution to distribute an amount equal to the net financial benefit referable to the capital gain founds a reasonable expectation of Potts Pty Ltd receiving that amount should the contract complete.
