- Jan, 12, 2012
Trustee: two capacities
An issue that the ATO has commented on recently, is what happens when a trustee ceases to hold a trust asset on trust, and commences to hold it in its own capacity.
A trust is a legal relationship which consists of one or more trustee entities holding trust property on trust for one or more beneficiary entities. In such a situation, the trustee(s) holds the legal interest in the trust property, whereas the beneficiary(s) holds the beneficial interest. Thus the trust property manifests two forms of interest.
The duality extends to the trustee as well. The trustee of a trust always has two capacities: its capacity as trustee and its own capacity. In its capacity as trustee it will hold the legal interest only of trust property only. In its own capacity, it will hold both the legal and beneficial interest of non trust property only.
Are they two entities? CGT consequences
The ATO’s question was: when a trustee ceases to hold the trust asset on trust, and commences to hold the asset in its own capacity, does this constitute disposal of the asset from one entity to another for the purposes of CGT?
The issue is that, technically, the legal interest in the asset remains at all times in the hands of the same entity. It is apparently only the beneficial interest that is changing hands.
However, the ATO dismissed this view. In the ATO’s view, the “trustee as trustee” and the “trustee in its own capacity” are entirely different entities for CGT purposes. This is supported by the Tax Act’s definition of “entity” for CGT purposes.
Therefore, when the trustee starts to hold trust assets in its own capacity, CGT will apply to any capital gain that arises, in respect of the whole asset, as a disposal of the asset from one entity to another entity under CGT event A1.
Example: Trustee in two capacities
X, Y and Z are members of a single family who decide to set up a family trust, F Trust, in 2006. It is a discretionary trust in which X holds trust property as an individual trustee, with Y and Z as the only beneficiaries.
X therefore holds the legal interest in the trust property. Y and Z get the beneficial interest in the trust property when discretion is exercised in their favour.
In 2006, X as trustee for F Trust acquires a property located in Macarthur NSW, which the family intends to lease out. The rental income is to be distributed to Y and Z. The cost base of the land is $600,000.
In 2012, X wishes to acquire finance to improve the land. A financier is willing to finance the improvements, as long as X is holding the land in his own capacity. By this time the land is worth $900,000.
X ceases to hold the land on trust and starts to hold it in his own capacity.
In this case, there has been a disposal of land from one entity to another – ie from X as trustee to X in his own capacity. Therefore X as trustee is liable to CGT on the $300,000 capital gain (counting the market value of the land as the capital proceeds).
If you have concerns about trustee capacity and CGT, call LAC Lawyers and we can provide advice and assistance.