It is relatively common for the trustee of a trust to transfer an asset to a beneficiary of the trust for no consideration.

A transfer of real property to a beneficiary in this way often qualifies for exemption from duty in Victoria, so it is a common step in restructuring ownership of assets.

If a trust transfers an asset to a beneficiary for no consideration, the trust is treated as disposing of the asset for its market value for capital gains tax purposes.

There is a twist in determining who will pay tax on that capital gain.

A beneficiary who receives the financial benefit referable to a capital gain generally is treated as being “specifically entitled” to the gain and will pay tax on that gain.  

If a trustee of a trust transfers an asset to a beneficiary, it would appear logical that the beneficiary would be treated as specifically entitled to the gain arising on the disposal of that asset by the trust and be subject to tax on that gain.

Not so.  

Section 115-228(3) of the Income Tax Assessment Act 1997 provides that in calculating the amount of the capital gain the trust must “disregard sections 112-20 and 116-30 (Market value substitution rule) to the extent that those sections have the effect of increasing the amount of the capital gain”.  

In other words, the beneficiary is not treated as specifically entitled to the gain arising on the disposal of the asset transferred.

This means that although one beneficiary may receive an asset from a trust, another beneficiary or the trustee may be required to pay tax on the gain arising on the disposal of that asset.

If a trust transfers an asset to a beneficiary for less than its market value, the trust should be very careful about how it frames:

  1. the resolution to transfer the asset; and
  2. the distribution minute resolving to distribute the income of the trust.

Contact Patrick Cussen or Rob Warnock if you have any questions about this issue.