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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051395407556

Date of advice: 6 July 2018

Ruling

Subject: CGT implications on the conversion of a hybrid trust to a unit trust

Question 1

Will the proposed conversion of the Trust from a hybrid unit trust to a unit trust trigger CGT event E1 pursuant to section 104-55 of the Income Tax Assessment Act 1997 (‘ITAA 1997’)?

Answer

No

Question 2

Will the proposed conversion of the Trust from a hybrid unit trust to a unit trust trigger CGT event E2 pursuant to section 104-60 ITAA 1997?

Answer

No

Question 3

Will the proposed conversion of the Trust from a hybrid unit trust to a unit trust trigger CGT event E3 pursuant to section 104-65 ITAA 1997?

Answer

No

Question 4

Will the proposed conversion of the Trust from a hybrid unit trust to a unit trust trigger CGT event E5 pursuant to section 104-75 ITAA 1997?

Answer

No

Question 5

Will the proposed conversion of the Trust from a hybrid unit trust to a unit trust trigger any of CGT event E4 (section 104-70 of the ITAA 1997), CGT event E6 (section 104-80 of the ITAA 1997), CGT event E7 (section 104-85 of the ITAA 1997) or CGT event E8 (section 104-90 of the ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

Relevant Clauses of the Trust Deed

The Proposed Scheme

Proposed Deed of Variation

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-55,

Income Tax Assessment Act 1997 Section 104-60,

Income Tax Assessment Act 1997 Section 104-65,

Income Tax Assessment Act 1997 Section 104-70,

Income Tax Assessment Act 1997 Section 104-75,

Income Tax Assessment Act 1997 Section 104-80,

Income Tax Assessment Act 1997 Section 104-85, and

Income Tax Assessment Act 1997 Section 104-90,

Reasons for decision

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The proposed conversion of the Trust from a hybrid unit trust to a unit trust will not trigger CGT event E1 pursuant to section 104-55.

Detailed reasoning

Subsection 104-55(1) provides that CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. Section 104-60 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a 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? (TD 2012/21) expresses the view that neither CGT event E1 nor CGT event E2 happens 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:

This Taxation Determination (TD 2012/21) was issued following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark) and the High Court's refusal to grant the Commissioner leave to appeal that decision. The explanation to TD 2012/2 explains the Commissioner’s view as follows:

Taxation Determination TD 2012/21 further explains that the scope of the relevant power is determined by the construction of the words of the trust deed, the surrounding context and any relevant admissible evidence. Where a trustee is found not to have power to vary the trust in the manner contended, such invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening.

Application to your circumstances

The proposed amendments to convert the hybrid trust to a unit trust will not terminate the Trust for trust law purposes, as it does not impact on the continuity of the trust, as set out in Clark. Furthermore, the proposed amendment will 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.

Therefore, the proposed amendments will not trigger the happening of CGT event E1 under section 104-55 or CGT event E2 under section 104-60.

Question 2

Summary

The proposed conversion of the Trust from a hybrid unit trust to a unit trust will not trigger CGT event E2 pursuant to section 104-60.

Detailed reasoning

Refer to reasoning in question 1.

Question 3

Summary

The proposed conversion of the Trust from a hybrid unit trust to a unit trust will not trigger CGT event E3 pursuant to section 104-65.

Detailed reasoning

Pursuant to subsection 104-65(1) of the ITAA 1997, CGT event E3 happens if a trust (that is not a unit trust) over a CGT asset is converted into a unit trust, and just before the conversion, a beneficiary under the trust was absolutely entitled to the asset as against the trustee (disregarding any legal disability the beneficiary is under). The time of the event is when the trust is converted.

Paragraphs 90 to 93 of Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) provides the view that joint and multiple beneficiaries cannot be absolutely entitled to the asset of the trust (of which the trustee is the owner) unless it is a fungible asset, for example shares in the same company and with the same characteristics.

Relevantly:

Therefore, in the present case, it cannot be said that a beneficiary of the Trust is absolutely entitled to any CGT asset as against the Trustee, hence CGT event E3 under subsection 104-65(1) of the ITAA 1997 does not happen.

Question 4

Summary

The proposed conversion of the Trust from a hybrid unit trust to a unit trust will not trigger CGT event E5 pursuant to section 104-75.

Detailed reasoning

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies), as against the trustee despite any legal disability of the beneficiary (subsection 104-75(1)).

As explained above, no beneficiary of the Trust can be said to be absolutely entitled to any CGT asset of the Trust (of which the Trustee is the owner). In addition, the exception for a unit trust will apply as the Trust becomes a unit trust at the point of conversion.

Therefore, CGT event E5 does not happen when the Trust is converted to a unit trust.

Question 5

Summary

The proposed conversion of the Trust from a hybrid unit trust to a unit trust will not trigger any of CGT event E4 (section 104-70), CGT event E6 (section 104-80), CGT event E7 (section 104-85) or CGT event E8 (section 104-90)

Detailed reasoning

CGT event E4 happens if the Trustee makes a payment to a beneficiary in respect of their interest in the trust and some or all of the payment is not included in the beneficiary’s assessable income (section 104-70).

In this case, CGT event E4 does not happen because the Trustee does not make a payment to a beneficiary in respect of their interest in the trust.

CGT event E6 (section 104-80 of the ITAA 1997), CGT event E7 (section 104-85) and CGT event E8 (section 104-90) are not relevant and do not happen.


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