The ATO has formed the view that in certain circumstances:
The ATO 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 ATO released a Draft Taxation Determination on the topic on 1 February 2012. You can read the full draft determination here.
The ATO's draft determination provides a number of examples of the relevant circumstances in which the beneficiary of a trust estate can be "reasonably expected" to receive a share of the net financial benefit. The examples include the following.
In November 2011, the Trustee of the Bottomley Trust entered into a binding contract for the sale of shares with settlement to take place in November 2016. The contract contained a number of conditions which must be fulfilled before either party to the contract is obliged to complete. Therefore, although there is an immediately binding contract which creates rights and obligations capable of enforcement, the contract is subject to the fulfilment of conditions subsequent to its formation. Accordingly:
Because the completion of the contract is contingent on 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 to cause CGT event A1. If the contract is completed, then 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. The deed provides that trustee resolutions made in accordance with the deed are irrevocable.
Subdivision 115-C of the ITAA 1997 applies if there is a net capital gain of a trust estate included in the net income of that trust.
If the contract for the sale of shares settles and results in a capital gain to the Bottomley Trust, then 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 fact that the happening of CGT event A1 (and the making of a capital gain) is contingent on 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 if the contract completes.
Therefore, the trustee's 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 if the contract completes.
The trust deed for the Morse Trust provides that Hercules is entitled to receive all of the income and any gains or proceeds in respect of shares held in Dairy Pty Ltd. The trustee has no power to vary the terms of the trust. Accordingly, the deed establishes a reasonable expectation of Hercules receiving the financial benefit referable to any capital gain that is made by the trust estate in respect of those shares.
When finalised, the Determination is proposed to apply both before and after its date of issue.
Comments are due by 2 March 2012, to ATO contact: Amanda Connolly, Tel: (07) 3213 5456, Fax: (07) 3213 5971, Email: firstname.lastname@example.org
Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please
Andrew is a Partner in the Maddocks Tax & Revenue team.
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Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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