Edited version of your written advice

Authorisation Number: 1012651488667

Ruling

Subject: CGT and Trust changes

Questions and Answers

1. If you validly amend the deed at trust law do the proposed amendments to the deeds creating the Trust A and the Trust B either alone or together with the proposed amendments to the constitutions of Company C and Company D trigger any one or more of CGT events E1 or E2 or any other CGT event?

No

2. Will the transferees' cost base of the shares in Company E and Company F given to them be the market value of the shares at the date of transfer?

Yes

This ruling applies for the following period(s)

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

Business G was initially acquired by siblings who are now deceased but descendants of whom now continue the business.

The business is operated partly by Company D and partly by Partnership H.

The assets used in the business are owned in part by each of the following entities:

• Company F

• Company E

• Company C as trustee of the Trust B

• Company C as trustee of the Trust A

Historically one sibling controlled Company F and the Trust A while the other sibling controlled Company E and the Trust B. Both trusts are discretionary as to income and capital. Initially the business was conducted by a partnership between the siblings.

The long-term aim of the family has been to concentrate asset ownership so as to cement the agreed proportionate ownership of the underlying assets.

The only function of Company C is to act as trustee of the Trust A, Trust B and Trust I.

The unit holders in the Trust I are identical to the shareholders in Company D and in the same proportion.

The potential beneficiaries of each of the Trust A and the Trust B followed a pattern. The Trust A was set up for the benefit of one sibling's spouse and children and extended family. The Trust B was set up for the benefit of the other sibling's spouse and extended family.

The same individuals are the directors of each company in the group.

The proposed restructure

It is proposed to restructure the group in the following way:

1. Amend the deeds for the Trust A and the Trust B so as to:

a. extend the life of each trust for the maximum possible period,

b. remove all references to an Appointor,

c. add as a new class of potential beneficiaries "the shareholders and directors of Company D from time to time", and

d. delete any potential beneficiaries who are not shareholders or directors of Company D.

2. Amend the Constitution of Company C to:

a. give Company D as sole shareholder the exclusive power to make decisions about:

i. the distribution of income or capital in the landowning Trusts to beneficiaries of the asset owning trusts other than in proportion to their (or their controlled entity's) shareholdings in Company D,

ii. the sale or lease or mortgage of Trust land other than on a normal commercial basis,

iii. winding up the trust,

iv. amending the trust deeds, and

v. changing the trustees of the asset owning Trusts;

b. make it so that the directors of Company C must be identical to the directors of Company D; and

c. make it so that any change to those rules must be approved by at least 95% of the shareholders.

3. Prepare a resolution for shareholders to amend the Constitution of Company D to:

d. reserve the decision-making power in Company C to the shareholders.

e. make it so that any decision under (a) can only be made if at least 95% of the shareholders agree, and

f. make it so that any change to those rules requires approval by at least 95% of the shareholders.

4. Some shareholders will make gifts of their shares in Company E and Company F so as to make the shareholdings in those companies identical to the shareholdings in Company D

5. The constituent documents of all entities will be varied to staple interests in them so as to require any transfers in one entity to be identical with transfers in all other entities.

The trust deeds and constitutions of the companies form part of the facts of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Subsection 110-25(2)

Income Tax Assessment Act 1997 Section 112-20

Reasons for decision

Summary

If you validly amend the deed at trust law the proposed variations to the existing trust deed would be a valid amendment to the trust and will not result in the happening of CGT event E1 or E2.

The cost base of the shares in Company E and Company F given to you will be the market value of the shares at the date of transfer.

Detailed reasoning

Will the proposed amendments to the deeds creating the Trust A and the Trust B either alone or together with the proposed amendments to the constitutions of Company C and Company D trigger any one or more of CGT events E1 or E2 or any other CGT event?

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement and CGT event E2 happens if you transfer a CGT asset to an existing trust.

Whether changes to a trust create a new trust will depend on particular circumstances. The High Court decision in FCT v Commercial Nominees of Australia Ltd [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220 (Commercial Nominees) there are three main indicia that is of continuity of trust, the trust property and membership. In FCT v Clarke (2011) 79 ATR 550 (Clarke's case) Edmonds and Gordon JJ equally supported the indicia found in Commercial Nominees. The decision in Clarke's case is relevant to the question of the circumstances in which, as a result of changes being made to an existing trust, a new trust comes into existence, triggering CGT event E1.

CGT event E1 is triggered when a trust resettlement occurs, that is, when one trust estate has ended and another has replaced it.

Tax Determination TD 2012/21 sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred.

TD 2012/21 asserts that a valid amendment to a trust will not result in the termination of a trust as long as:

• the amendment is made pursuant to an existing power;

• the amendment does not cause the trust to terminate for trust law purposes; and

• the effect of the amendment does not lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

If you validly amend the deed at trust law the proposed variations to the existing trust deed would be a valid amendment to the trust and will not result in the happening of CGT event E1 or E2.

Will the transferees' cost base of the shares in Company E and Company F given to them be the market value of the shares at the date of transfer?

Subsection 110-25(2) of the Income Tax Assessment Act 1997 provides that the first element of the cost base of a CGT asset is the total of the money you paid, or are required to pay and the market value of any other property you gave, or are required to give in respect of acquiring the CGT asset.

The market value substitution rule can replace the first element of the cost base with the market value of the CGT asset (at the time of acquisition) if:

1. You did not incur any expenditure (including giving property) to acquire it, except where your acquisition of the asset resulted from:

a. CGT event D1 happening; or

b. another entity doing something that did not constitute a CGT event happening; or

2. You did not deal at arm's length with the other entity in connection with the acquisition (section 112-20 of the ITAA 1997).

You will not incur any expenditure to acquire the shares and CGT event A1 will happen to the other shareholders, therefore the first element of the cost base of the shares you receive will be the market value at the time of acquisition.

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