Edited version of your written advice

Authorisation Number: 1012921290075

NOTICE

The ATO is currently considering the tax consequences of ‘trust splitting' generally. For more information, please search for ‘Consultation' on ato.gov.au.

Date of advice: 3 December 2015

Ruling

Subject: Trusts - trust resettlement

Question and answer

1. Will the appointment of a separate appointor for each of the assets held by Company 1 and Company 2 result in a Capital Gains Tax (CGT) event happening?

No.

2. Will the execution of the deed of variation to the Trust Deed which varies the Deed to limit the trustees' right of indemnity out of the assets of the Trust give rise to a CGT event?

No.

3. Will the narrowing of the class of beneficiaries who can benefit from the assets held by Company 1 and Company 2 in their capacity of trustee result in a CGT event happening?

Yes.

This ruling applies for the following period

Year of income ended 30 June 2015

Year of income ended 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

1. The Trust was established by Deed.

2. The Company is the trustee of the Trust. Individual 1 and Individual 2 are the directors and shareholders of the Company.

3. Individual 1 and 2 are also the shareholders and directors of Company 1 and Company 2.

4. Individual 1 and Individual 2 have three children: Child 1, Child 2 and Child 3

5. Prior to xx xx xx, the Trust held the following assets:

○ Asset 1 acquired in post CGT.

○ Asset 2 originally held by the Trust on a company title (i.e. via pre-CGT shares in a company), however now held by the Trust directly.

○ Asset 3 acquired pre-CGT.

6. These assets are the only substantive capital assets forming part of the property of the Trust, other than some business related assets.

7. The Trust is governed by state laws.

8. The Trust Deed states:

Notwithstanding anything herein contained the Trustee shall have power at any time or times prior to the Perpetuity Date by deed to alter or vary any of the provisions of this Deed (except sub-clause xx, Clause xx, sub-clause xx, and this sub-clause xx to such ends intents and purposes as the Trustee may in its absolute discretion from time to time think fit PROVIDED HOWEVER that the power given by this sub-clause xx shall not be exercised with a view to or in such manner as to result in the Settlor or any trustee or former trustee hereof having a more valuable interest hereunder than he had prior to such exercise and PROVIDED FURTHER that the said power shall not be exercised so as to infringe or result in any infringement of the rule against perpetuities.

9. Sub-clause xx of the Trust Deed specifies “the eligible beneficiaries” of the Trust to be:

○ Individual 1;

○ Individual 2;

○ the children, grandchildren and great grandchildren of Individual 1;

○ all the spouses of all the children of Individual 1 and the future spouse or spouses of Individual 1; and

○ any incorporated companies, trusts, charities or associations appointed by the Trustee to be “eligible beneficiaries”.

10. Clause xx of the Trust Deed deals with the distribution of the Trust funds on the Perpetuity Date.

11. Sub-clause xx provides that Individual 1 has the power to remove trustee(s), and appoint new trustee(s).

12. In accordance with sub-clause xx, the Trust Deed was varied on xx xx xx. As part of the variation, clause xx in relation to distribution of income or capital of the Trust Fund to beneficiaries was deleted and a new clause xx inserted, sub-clauses xx, xx and xx were deleted and sub-clauses xx to xx were inserted.

13. The original sub-clauses xx and xx dealt with trustee resignation and sub-clause xx dealt with trustee decision making in circumstances where there was more than one trustee.

14. Relevant to this ruling request, the new sub-clauses xx, xx and xx state:

xx Without limiting this clause, the Trustee, when making any determination about Distributable Income or Capital of the Trust Fund, may identify that the whole or any part of any one or more of the Income Classes is to be accumulated under clause

xx or held absolutely:

- for the benefit of any one or more of the Eligible Beneficiaries;

- in any proportions as between those Eligible Beneficiaries; and

- otherwise in the manner,

that the Trustee determines.

xx Without limiting the provisions of this clause, the Principal may:

- appoint a separate trustee in respect of separate assets of the Trust Fund, including any Asset Sub-Trust;

- remove a trustee appointed and appoint another trustee in their place; and

- appoint one or more additional trustees to any Asset Sub-Trusts in respect of which a separate trustee has been appointed.

xx In relation to any Asset Sub-Trust, the provisions of this clause apply separately in relation to each such appointment, such that:

- a Principal may appoint and remove trustees of an Asset Sub-Trust without altering the appointment for the remainder of the Trust Fund;

- a Principal may appoint their successor for the purposes of this clause in respect of an Asset Sub-Trust, without impacting any other parts of the Trust Fund: and

- a Principal may appoint different successors for each Asset Sub-Trust.

15. On xx xx xx,

○ The Company, Company 1 and Individual 1 executed a Deed whereby, in accordance with sub-clause xx of the Trust Deed, the Company retired as trustee in respect of Asset 1 and Company 1 was appointed trustee in respect of that asset.

○ The Company, Company 2 and Individual 1 executed a Deed whereby, in accordance with sub-clause xx of the Trust Deed, the Company retired as trustee in respect of Asset 2 and Company 2 was appointed trustee in respect of that asset.

16. The Company remained as trustee in respect of all other assets of the Trust, namely Asset 3 and some business related assets.

17. The following three changes are now proposed; to the extent a resettlement is not triggered.  If a step causes a resettlement, it will not be implemented. While the taxation effect of the changes is dealt with separately, the changes are intended to be implemented at the same time.

18. First, to achieve the asset protection objectives the Trust Deed will be further amended to limit the trustees' right of indemnity against the assets of the Trust as follows:

(a) The Company will only have a right of indemnity against Asset 3 for the liabilities incurred by it as trustee after xx xx xx - which means it will release its right of indemnity against asset 1 and Asset 2;

(b) Company 1 will only have a right of indemnity against the Asset 1 for the liabilities incurred by it as trustee after xx xx xx - which means it will release its right of indemnity against Asset 3 and Asset 2; and

(c) Company 2 will only have a right of indemnity against the Asset 2 for the liabilities incurred by it as trustee after xx xx xx - which means it will release its right of indemnity against asset 3 and Asset 1.

19. Second, Individual 1 will retire as appointor of the assets held by Company 1 and Company 2 and Child 2 and 3 will be designated as the respective appointors in relation to those assets.

20. In addition, Individual 1 will retire as the appointor of the assets held by the Company and Child 1 will be designated as the appointor in relation to Asset 3.

21. Third, the class of beneficiaries of each ‘sub-trust' will be varied as follows:

○ Child 1 and their lineal descendants will be removed from the class of those who can benefit from the assets held by Company 1 and Company 2 on trust; and

○ Child 2, Child 3 and their lineal descendants will correspondingly be removed from the class of those who can benefit from the assets held by the Company on trust.

22. With the setting up of what are described as the ‘sub-trusts' over Asset 1 and Asset 2 for the exclusive benefit of Child 2 and 3 and their respective lineal descendants, Asset 3 and all other assets (excluding the Asset 1 and Asset 2) will continue to be held in the Trust for the benefit of all “the eligible beneficiaries” except Child 2 and 3and their respective lineal descendants.

23. Since the appointment of separate trustees on xx xx xx, separate books of accounts have not been kept for each of Asset 3, Asset 1, and Asset 2, nor does the Trust hold separate trust bank accounts for income and expenses in relation to each trust asset.

24. Separate books of account and separate bank accounts will be established at the same time separate appointers are appointed for each trust asset and the class of those that can benefit from each trust asset is narrowed.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 104-10

Income Tax Assessment Act 1997, Section 104-55

Income Tax Assessment Act 1997, Section 104-60

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision

Summary

25. The appointment of a separate appointor for each of the assets held by Company 1 and Company 2 will not cause a Capital Gains Tax (CGT) event to happen.

26. The agreement by Company 1, Company 2 and the Company to limit their respective rights as trustee to be indemnified so that those rights can only be satisfied out of the assets which they themselves hold as trustee will not cause a CGT event to happen.

27. The agreement by Company 1, Company 2 and the Company to narrow the respective classes of those who can benefit from Asset 1 and Asset 2 will result in the creation of new trusts over those assets. Those new trusts are appropriately described as trusts created by settlement. The result is that CGT event E1 will happen.

Detailed reasoning

CGT event E1

28. CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997)). The time of the event is when the trust over the asset is created (subsection 104-55(2)). However, CGT event E1 will not happen if you are the sole beneficiary of the trust and you are absolutely entitled to the asset as against the trustee, and the trust is not a unit trust (subsection 104-55(5) of the ITAA 1997).

29. The case law has established that short of bringing the trust to an end for trust law purposes, amendment of a trust's deeds through a valid exercise of a power of amendment will not result in the happening of CGT event E1 (see Commissioner of Taxation v Clark [2011] FCAFC 5 discussed in Taxation Determination TD 2012/21).

30. However the authorities also established that even where a pre-existing trust does not terminate, if assets originally held as part of the trust property commence to be held on a separate charter of rights and obligations (eg. by reason of an exercise of a power to appoint capital), the conclusion may follow that a new trust has been created over those specific assets.

31. As to this second proposition, in Commissioner of State Revenue v. Lam and Kym Pty Ltd [2004] VSCA 204; 2004 ATC 5058; (2004) 58 ATR 60 (Lam and Kym) the Supreme Court of Victoria considered a scenario in which by deed of settlement a trustee stood possessed of a fund on discretionary trust for two classes of objects (the Primary Beneficiaries and the Discretionary Beneficiaries). By deed poll the trust was amended giving the trustee the power to transfer the whole or any portion of the fund to or for the advancement of any of the Discretionary Beneficiaries. The trustee subsequently executed an instrument in which it declared that it 'hereafter held separately in trust' particular real estate for certain beneficiaries. Nettle JA (with whom Vincent JA and Hansen AJA agreed) held that the exercise of the power of appointment had the result that the real estate commenced to be held on terms of a new trust.

32. See also the discussion of Lam and Kym in Taxation Determination TD 2012/21, and paragraphs 41 to 43 below.

The Trust proposal

Appointment of new appointers

33. The variations to the deed done on xx xx xx permit separate appointors to be designated in respect of separate assets of the Trust. The second of the proposed changes will involve the designation of separate appointors in respect of Company 1 and Company 2 in their trustee capacities.

34. A mere change in appointor in respect of a trust will not result in the creation of a new trust. The designation of separate appointors in relation to the trust assets, without more, does not lead to the conclusion that Asset 1 and Asset 2 have commenced to be held subject to a new charter of rights and obligations consistent with the assets being held on the terms of a new trust.

Restrictions on the trustees' respective rights to be indemnified

35. In addition to designating separate appointors for the assets held by the two new trustees (Company 1 and Company 2), it is proposed to restrict the trust assets against which the Company, company 1 and Company 2 can respectively look to satisfy any right they have to be indemnified.

36. Basically, the Company being the original trustee of the Trust will release Company 1 and Company 2 from any rights the Company may have to be indemnified out of the assets transferred to Company 1 and Company 2 respectively (Asset 1and Asset 2).

37. The release effectively isolates the assets transferred to Company 1 and Company 2 from claims by the Company. Before the proposed restructure, the Company has a right to be indemnified out of the assets transferred to Company 1 and Company 2 for expenses properly incurred by it in the administration of the Trust - such right amounting to a proprietary interest in those assets in the nature of an equitable lien over them. But following the proposed restructure the Company will have no such rights. This represents a change in the rights and obligations attaching to the assets transferred to Company 1 and Company 2.

38. However this change does not result in the trust estate as originally constituted coming to an end (see Clark).

39. Nor does the change impress on any of the assets of the Trust a new charter of rights and obligations separate to those on which the asset was originally settled on the Company as the sole trustee of the Trust. The restriction of the respective trustee's rights to be indemnified might be seen to be consistent with the appointment of separate trustees over different assets of the Trust. The critical point, however, is that despite these changes the rights of the beneficiaries to be able to benefit from all of the assets of the Trust have, without more, not been impaired.

Changes to the respective classes of those who can benefit from particular assets

40. In addition to designating separate appointors for the assets held by the two new trustees (Company 1 and Company 2) and to restrict the trust assets against which the Company, Company 1and Company 2 can respectively look to satisfy any right they have to be indemnified, it is proposed to narrow the class of beneficiaries who can benefit from Asset 3, Asset 1 and Asset 2.

41. In Lam and Kym the trustee executed a variation to the deed involving the introduction of a new clause 5(a) in the following terms:

5 (a) at any time or times and from time to time before the vesting day raise any sum out of the capital of the Trust Fund (but not out of any monies referred to in paragraph (d) of this clause) and pay or apply the same or transfer the whole or any portion of the Trust Fund in its existing form of investment to or for the advancement or benefit of any of the Discretionary Beneficiaries (whether absolutely or by way of re-settlement upon such trusts as the Trustees think fit) and any such payment or transfer to or in trust for any of the discretionary beneficiaries shall without any receipt constitute a full and final discharge to the Trustees in respect thereof.” (Emphasis added)

42. Subsequently the trustee made the following declaration:

“The Trustee hereby declares that the property described in Certificate of Title Volume 9516, Folio 732 known as 28 Main Street, Box Hill is hereafter held separately in trust for the Primary Beneficiaries named in the Trust Deed and for the Primary Beneficiaries and their parents, children, grandchildren, uncles, aunts, brothers, sister, nieces, nephews and the spouses of any of those person[s] as Discretionary Beneficiaries to the exclusion of all other beneficiaries of the Huynh Family Trust (including any beneficiary that the Trustee may otherwise nominate under Clauses 1(a)(2)(iii), (v) or (vi) of the Trust Deed) but otherwise upon the same trusts and subject to the same powers and condition[s] and for the same period as are set out in the Trust Deed.”

43. The Court held that the effect of the trustee's declaration was that the land became subjected to new trusts different to those upon which the land had been held until that point.

44. In the present case narrowing the class of those that can benefit from the Asset 1 and Asset 2 so that the former is held for the exclusive benefit of Child 2 and their lineal descendants and the latter for the exclusive benefit of Child 3 and their lineal descendants will be to subject Asset 1 and Asset 2 to a separate charter of rights and obligations than those that apply to the remainder of the assets that was originally held by the Company as the sole trustee of the Trust.

45. From this fact the conclusion will follow that Asset 1 and Asset 2 will commence to be held on trusts different to those upon which the two assets had been held up until the time at which changes to respective classes of those who can benefit are made. Those trusts will be properly described as trusts created by settlement (refer Taras Nominees, Kafataris). In short, the conclusion will follow that CGT event E1 happens by reason of these changes.

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