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29 Sep 08 Super fund beneficiary not sole beneficiary absolutely entitled - Kafataris

The Federal Court (Lindgren J) has held that the exception to CGT Event E1 in s 104-60(5) did not apply to two joint tenants in land (the taxpayers, Peter and Helen) who executed two declarations of trust, by each of which they declared that they held one of the joint interests on the trusts of a superannuation fund established for the benefit, amongst others, of the owner of the joint interest. The land was sold to a third party (Marriott) 6 days later for $4m, having been purchased in 1987 for $612,000.

The taxpayers argued that each declaration of trust fell within the exception to CGT Event E1 in s104-60(5) which provides that "CGT Event E1 does not happen if (a) you are the sole beneficiary of the trust, and (i) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability)..."

Lindgren J examined the terms of Helen's superannuation fund and concluded that there were at least 22 beneficiaries of the fund (Helen, her spouse, 5 children and 15 grandchildren). Accordingly, his Honour held that Helen was not the sole beneficiary of the trust. A beneficiary for these purposes was not necessarily someone who had a beneficial interest in the trust property. The same analysis applied to Peter.

Lindgren J also held that neither Helen nor Peter was absolutely entitled to the asset in their respective superannuation funds. His Honour accepted the Commissioner's submission regarding absolute entitlement, saying that it is "intended to describe a situation in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs". In this regard, his Honour examined the terms of the superannuation fund, including the trustees' power of sale. His Honour said, at para 65: "The Trustees had power to sell the Property, as they did only six days after the Trusts were established. Even if Helen had an interest in the half interest the subject of Helen’s Trust as at 28 June 2002 [which his Honour had previously rejected], the Trustees’ power of sale would have made it a defeasible interest: see Kent v SS "Maria Luisa" (No 2) (2003) 130 FCR 12 at [71]."

His Honour also pointed out the inconsistencies in the taxpayers' arguments. His Honour said, at para 21:

"In sum, if, as the applicant’s contend, the exception allowed by subs (5) of s 104-55 or of s 104-60 applies, s 106-50 [acts of the trustee taken to be acts of the absolutely entitled beneficiary] also operates, and the applicants are taken to have sold their respective half interests in the Property to Marriott in the 2002-2003 year. If that subsection, and therefore s 106-50, does not apply, the applicants are caught by the primary provision of s 104-55 [CGT Event E1] or s 104-60 [CGT Event E2] in the 2001-2002 year."

Kafataris v The Deputy Commissioner of Taxation [2008] FCA 1454 (Federal Court, Lindgren J,19 September 2008).

For a copy of the decision, go here.

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