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Edited version of your written advice
Authorisation Number: 1012991136582
Date of advice: 1 April 2016
Ruling
Subject: CGT event - change from a discretionary to a fixed unit trust
Question 1:
Will the proposed conversion of the discretionary trust into a fixed unit trust trigger CGT event E1 or E2?
Answer:
No
Question 2:
Will the proposed conversion of the discretionary trust into a fixed unit trust trigger CGT event E5 or any other CGT event?
Answer:
No
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Facts
A trust owns property.
The property was acquired by purchase from a number of beneficiaries and the purchase price remains as an unpaid debt payable on demand.
The trust was created by a deed and has not been amended.
Clause 2 of the Deed provides that the income and capital of the Trust are available to be applied at the discretion of the Trustee to benefit all or any of the objects of the Trust.
Clause 2 of the Deed also details a range of related entities and religious practitioners as objects of the Trust to which the income and capital of the Trust are available to be applied at the discretion of the Trustee.
Clause 12 of the Deed provides the power of the Trustee to amend the Deed where it states:
Notwithstanding anything expressed or implied to the contrary herein, the Trustee may at any time or times and from time to time as the Trustee shall in the absolute discretion of the Trustee think fit by deed vary, alter or add to any of the trusts or provisions of this Deed provided that that no such variation alteration or addition shall provide for any commission to be payable to the Trustee or in any way diminish the liability of the Trustee or otherwise operate for the personal benefit of the Trustee or the Settlor and provided further that no such variation alteration or addition shall be in favour of any person other than one or more of the persons named or described in clause 2 hereof.
The Proposal
Based on Subclause 2.2.1 of the Deed, the Trustee proposes:
1. to resolve to make a capital distribution of the balance in the unrealised capital profits account to the beneficiaries; and
2. by agreement convert the debt to the sellers of the property to equity so as to end up with each of the sellers having a certain percentage of equity in the Trust and the remainder split equally between the remaining beneficiaries.
Based on the powers provided in Clause 12 of the Deed, the Trustee wishes to amend the terms of the Trust Deed in the manner contained in the Draft Deed of Amendment to convert the Trust into a fixed unit trust.
Reasons for decision
Question 1 - CGT event E1 and CGT event E2
CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).
CGT event E2 happens if a CGT asset is transferred to an existing trust (subsection 104-60(1) of the ITAA 1997).
Taxation Determination TD 2012/21 expresses the view that CGT event E1 or CGT event E2 does not happen if the terms of the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document; or varied with the approval of a relevant court unless:
• the change causes the existing trust to terminate and a new trust to arise for trust law purposes; or
• the effect of the change or court approved variation is such as to 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.
TD 2012/21 explains (at paragraph 24) that:
… the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.
Where an asset is instead transferred to an existing trust, CGT event E2 will be the relevant event - subsection 104-60(1).
TD 2012/21 explains (at paragraphs 26 and 27):
26. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective.
27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.
It is noted however, that invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening.
In your case, a clause of the Trust Deed provides the Trustee with powers to vary, alter or add to any of the provisions of the Deed in the absolute discretion of the Trustee although subject to certain restrictions. You confirmed that none of the restrictions apply to your case.
Following review of the proposed amendments to the Trust Deed, it is considered that the amendments are within the powers of the Trustee under the specified clause of the Deed.
This is based on the observation that the ultimate beneficiaries of the Trust after the proposed amendments are the individuals who are the objects of the Trust, although the extent of their interests in the Trust will change. After the amendments the beneficiaries will have fixed entitlement to a share of the income and capital of the Trust in proportion to their unit holding as per the draft deed of amendment.
Therefore, as the amendments are, in effect, within the Trustee's powers contained in the trust instrument, the continuity of the Trust is maintained for trust law purposes. As such the proposed amendments to the terms of the Trust will not trigger the happening of CGT event E1 or CGT event E2 in section 104-55 or section 104-60 of the ITAA 1997.
Question 2 - CGT event E5 or any other CGT event
CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee despite any legal disability of the beneficiary. This CGT event does not happen if the trust is a unit trust (subsection 104-75(1) of the ITAA 1997).
In your case, given that the Trust becomes a unit trust following the amendments, the exception to CGT event E5 will apply.
Therefore CGT event E5 does not happen in your case.
It is considered that there are no other CGT events happening when the Trust is converted into a unit trust. This is because the proposed amendments are, in effect, within the Trustee's powers contained in the trust instrument, so that the continuity of the Trust is maintained for trust law purposes.
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