What is CGT Event E1?

CGT Event E1 deals with a situation where a taxpayer creates a trust over a CGT asset by way of declaration or settlement.

The rules dealing with CGT Event E1 are contained in section 104-55 of the Income Tax Assessment Act 1997 (Cth).

At what time does CGT Event E1 occur?

CGT Event E1 occurs at the time when the trust over the asset is created.

This is also typically the time the asset will be viewed as having been acquired by the trustee for CGT purposes.

How to calculate a CGT Event E1 capital gain or capital loss?

The taxpayer makes a capital gain if the capital proceeds from the creation of the trust exceed the assets cost base.

The taxpayer makes a capital loss if the capital proceeds are less than the assets reduced cost base.

Cost base rule

If the taxpayer is the trustee of the trust and no beneficiary is absolutely entitled to the asset as against the taxpayer (disregarding any legal disability), the first element of the assets cost base (or reduced cost base) is the market value of the asset when the trust is created.

Remember that a beneficiary generally has absolute entitlement where they have a vested and indefeasible interest in the entire trust asset, with the authority to direct the asset be immediately transferred to them or someone else.

Meaning of settlement and declaration

The term settlement is undefined in the legislation. The common law provides that settlement occurs when property is vested in the trustee for the benefit of others. This might include, for instance, where land is transferred from the taxpayer to a trustee to hold on trust for the purposes of a joint venture development.

The term declaration is also undefined in the legislation and takes its ordinary meaning. The declaration requires words or actions used by the holder of the undivided legal interest in the asset which provide sufficient evidence of an intention to establish a trust over the asset. In TD 2004/13, the ATO notes (albeit in the context of a shareholder declaring a trust over shares for the benefit of a purchaser) that words used need to identify the elements that must exist for a trust to come into existence. These include certainty of intention to create a trust, its terms, subject matter (the shares) and the objects (the persons to benefit).

Instances where CGT Event E1 can occur

CGT Event E1 does not occur over a trust asset simply where the trustee of the trust changes.

In ID 2009/129, the ATO view is that CGT Event E1 does not happen where a court order is made for the sale of property (including the appointment of statutory trustees). This is broadly because it is not the taxpayer creating the trust over the CGT asset by way of declaration or settlement. Rather, the trust is established as a result of court exerting its independent powers.

In TD 2019/14, the ATO view is that CGT Event E1 can apply to trust splits as these are viewed as creating new trusts. Here, the ATO describes a trust split as an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled by and held for the benefit of a subset of beneficiaries, and other trust assets are controlled and held for the benefit of others. These arrangements are commonly entered into for the purposes of allowing different members of a family group to have control over their own part of the assets held on trust.

As contemplated in TD 2012/21, CGT Event E1 might occur in the context of trust resettlements marked by features such as changes to the continuity of property and membership of a trust, or where a court approved variation leads to trust property being subject to a separate charter of rights and obligations.

In TD 2004/13, the ATO view is that CGT Event E1 can happen to a shareholder of a company in voluntary administration who declares a trust over their shares in favour of the purchaser. That said, CGT Event E1 will not happen if the shareholder enters into a contract to transfer the shares, as that arrangement does not involve the establishment of a trust.

As set out in TR 2018/6, the vesting of a trust may give rise to CGT Event E1 if the vesting of the trust causes the trust to come to an end and the trust property to settle on the terms of a new trust. Whether this occurs generally depends on the terms of the relevant trust deed.

Further, CGT Event E1 does not happen where a trust vesting date is amended through a valid exercise of power under the deed or by court order.

Exceptions

CGT Event E1 does not occur if the taxpayer is the sole beneficiary of the trust and:

• The taxpayer is absolutely entitled to the asset as against the trustee; and
• The trust is not a unit trust.

This is commonly the case in respect of bare trusts.

A capital gain or capital loss will also be disregarded if the relevant CGT asset was acquired before 20 September 1985 (i.e. pre-CGT).

In addition, any capital gain or loss will generally be disregarded where the asset in question is held on revenue account as a revenue asset or as an item of trading stock, as other rules generally take priority in managing the taxation in such instances.

CGT discounts and concessions

Any capital gain which results from CGT Event E1 may be discounted under the general CGT discount (Division 115 ITAA) if the conditions of eligibility are satisfied. The small business CGT concessions (Division 152 ITAA) may also be available to reduce or eliminate capital gains where the taxpayer meets the relevant conditions eligibility.

The main residence exemption (Subdivision 118-B ITAA) may also be available to disregard a capital gain which occurs under CGT Event E1.

This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.