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Absolute entitlement

If a beneficiary is absolutely entitled to a trust asset, they, rather than the trustee, are required to return any capital gain, or claim any capital loss from a CGT event that happens to the asset. A common example that illustrates the significance of this concept is that of a nominee who holds shares on behalf of a principal. If the principal directs the nominee to sell the shares, the principal returns the capital gain, not the nominee. "Absolute entitlement" is therefore an important concept in the CGT rules. But recent Court decisions have created considerable uncertainty about when a beneficiary will be absolutely entitled to an asset, indeed, whether a beneficiary can ever be absolutely entitled to an asset. In Oswal v FCT [2013] FCA 745 the Federal Court held that if the trustee has a power of sale over a trust asset, a beneficiary cannot be absolutely entitled to the asset. If this decision is correct, it would mean that beneficiaries are almost never absolutely entitled to trust assets, because Trustee legislation in all Australian jurisdictions now gives trustees a power of sale, unless such power is expressly excluded. The Court also held that a beneficiary is not absolutely entitled to an asset if the trustee has properly incurred liabilities in connection with the administration of the trust.


A further unresolved issue is whether beneficiaries who are jointly entitled to an asset can be absolutely entitled to an asset. The Commissioner of Taxation issued a draft ruling TR 2004/D25 regarding the meaning of "absolutely entitled to a CGT asset as against the trustee of a trust" many years ago. The preface to the ruling still states that the Tax Office is consulting with Treasury in relation to absolute entitlement and in particular the problem areas of joint and multiple beneficiaries and the trustee's indemnity. The draft ruling takes the view that multiple beneficiaries cannot be absolutely entitled to an asset, unless the asset is "fungible", that is, an asset that is one of many that are identical and exchangeable, such as shares of the same class in the same company. The Federal Court has held that beneficiaries cannot be absolutely entitled jointly to land (see Kafataris v DCT (2008) 172 FCR 242), but the position in relation to fungible assets is uncertain.


The law should be amended to make it clear that a beneficiary can be absolutely entitled to an asset notwithstanding that the trustee has a power of sale or that the trustee has incurred liabilities in administering the trust. The position of multiple beneficiaries should also be clarified, preferably by allowing beneficiaries who have joint ownership of an asset to be jointly absolutely entitled to the asset as against the trustee.



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Idea No. 61