Edited version of private advice

Authorisation Number: 1051534790674

Date of advice: 27 June 2019

Ruling

Subject: The resettlement of a trust and capital losses

Question 1

Does the change in ownership of the Fund (the Trust) caused by the acquisition of units by a related party or the subsequent acquisition of units by new investors in the Trust, result in the denial of the prior year net capital losses under the trust loss provisions in Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Did the events leading to the relaunch of the Trust cause a resettlement of the Trust such that the net capital losses incurred in prior income years cannot be utilised by the Trust in the income year in which the relaunch occurred or subsequent income years in working out the net capital gain of the Trust in accordance with section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 3

Will the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply to deny the availability of the Trusts' prior year net capital losses?

Answer

No

This ruling applies for the following period:

A specified period

The scheme commences on:

A specified date

Relevant facts and circumstances

The Trust:

·  The Fund (the Trust) is an Australian resident unit trust.

·  The Trust has a Responsible Entity (RE).

·  The RE manages a number of collective investment vehicles in the form of unit trusts.

·  The Trust made an election under Division 275 of the ITAA 1997 to apply deemed capital account treatment to the disposal of covered assets.

·  The Trust has elected into the AMIT regime.

Pre-Relaunch: Establishment of the Trust and accumulation of capital losses:

·  A copy of the original Trust Deed was provided with the private ruling application.

·  The Trust was seeded by the issue of units to an unrelated investor and invested in a portfolio of equities.

·  The Trust Deed was replaced with a new Constitution (the '20XX Constitution') via Constitutional Amendment, as permitted under a clause of the original Trust Deed. Copies of the Constitutional Amendment and 20XX Constitution were provided with the private ruling application.

·  New investors came into the Trust and other investors redeemed from the Trust.

·  The final external unitholder redeemed its units from the Trust. As per usual procedure, a related entity applied for a nominal number of units in the Trust and became the sole unitholder.

·  A new investor applied for units in the Trust and subsequent to that, additional investors applied for units in the Trust and some of these investors subsequently redeemed their units in the Trust.

·  As a consequence of the global financial crisis, many investors began redeeming their units in the Trust.

·  The final external unitholder redeemed its units from the Trust and a related entity applied for a nominal number of units in the Trust and became the sole unitholder.

·  In the income year prior to its relaunch, the Trust had net capital losses carried forward from prior income years.

·  The related entity remained the sole unitholder for the period that there were no external unitholders in the Trust.

·  There was no time during the period from initial settlement of the Trust to the present when the net assets of the Trust were zero or below.

·  In the income year prior to its relaunch, the Trust had net capital losses carried forward from prior income years.

Relaunch of the Trust

·  During the 20XX income year, the Trust was relaunched.

·  The decision to relaunch the Fund was made independently and was based on commercial factors including time and cost benefits and was not dependent on the outcome of this ruling request nor consequently the availability of the capital losses. At the time the decision was made there were no external unitholders in the Trust.

·  The investment mandate continued to be focused on equities.

·  The 20XX Constitution was replaced under an Amending Deed with the 20YY Constitution.

·  New external investors applied for units in the Trust following the relaunch. These investors were unrelated to the RE and the Trust.

·  The existence of the net capital losses in the Trust was not disclosed to potential investors, including in any marketing material for the new Fund. The tax status of the Trust was not used as a selling point to new or potential investors.

·  No information provided to potential investors indicated directly or indirectly the existence of the capital losses. Capital losses were not included in any statements regarding the anticipated performance of the Fund or investor returns.

·  The RE is in the business of funds management and derives income based on funds under management. It is part of its business to establish/maintain trusts and attract investors. Generally, when the final external unitholder of a trust redeems, it remains the intention of the RE to seek new investors and relaunch that trust as soon as possible. It is generally not the intention of the RE to close or wind-up a trust when the last investor redeems.

·  The original Trust Deed, 20XX Constitution and 20YY Constitution were compared and reviewed as part of the private ruling process.

·  Original and current fund material (including Information Memorandums and Product Disclosure Statements) were compared and reviewed as part of the private ruling process.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1997 section 102-5

Reasons for decision

Question 1

Summary

No, the change in ownership of the Trust caused by the acquisition of units by a related party or the subsequent acquisition of units by new investors in the Trust does not result in the denial of the prior year net capital losses under the trust loss provisions in Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936). This is because net capital losses are not included in the calculation of tax losses under section 36-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and as such the net capital losses incurred by the Trust are not included in the trust loss provisions in Schedule 2F to the ITAA 1936. Accordingly, the prior year carried forward net capital losses are not denied under Schedule 2F to the ITAA 1936.

Detailed reasoning

A tax loss of a trust can be carried forward and used to reduce the trust's net income in a later year, subject to certain tests. These tests, in the trust loss provisions in Schedule 2F to the ITAA 1936, restrict the use of tax losses and debt deductions.

The trust loss provisions in Schedule 2F to the ITAA 1936 only applies to tax losses as defined in subsection 272-140(1) of Schedule 2F to the ITAA 1936. In that section a tax loss is defined as:

(a)  a loss within the meaning of former section 79E, 80 or 80AA; or

(b)  a film loss within the meaning of former section 79F or 80AAA; or

(c)  a tax loss worked out under section 36-10 of the Income Tax Assessment Act 1997 (including such a tax loss as increased under section 415-15 of that Act).

Neither of paragraphs (a) or (b) of the definition of tax loss in subsection 272-140(1) of Schedule 2 of the ITAA 1936 are applicable in this case.

Subsection 36-10(1) of the ITAA 1997 states that in order to work out a tax loss, the first step is to add up the amounts you can deduct for an income year (except tax losses for earlier income years). Subsection 102-10(2) of the ITAA 1997 states that you cannot deduct from your assessable income a net capital loss for any income year.

As a net capital loss is not deductible, it is not included in the amount worked out in subsection 36-10(1) of the ITAA 1997. On that basis, net capital losses are not included in tax losses worked out under section 36-10 of the ITAA 1997.

As such, the Trust's net capital losses are not a tax loss within the meaning of that term as defined in subsection 272-140(1) of Schedule 2F to the ITAA 1936, and hence, the trust loss provisions in Schedule 2F to the ITAA 1936 do not apply to deny the prior year net capital losses incurred by the Trust.

Question 2

Summary

No, the events leading to the relaunch of the Trust did not cause a resettlement of the Trust and accordingly, continuity of the trust estate was maintained. As such, the net capital losses carried forward from prior income years are not lost and may be utilised in the income year in which the relaunch occurred and subsequent income years (if all the other conditions in the law are satisfied) in working out the net capital gain of the Trust in accordance with section 102-5 of the ITAA 1997.

Detailed reasoning

It is clear that following Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark's Case) that, at least in the context of recoupment of losses, continuity of the trust estate will be maintained so long as the trust is not terminated for trust law purposes.

The test of continuity set out by the High Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220 (Commercial Nominees) has two limbs, namely, whether changes in one or more of the trust constitution, property and membership are such to:

(a)  terminate the existence of the trust, or

(b)  produce the result that it does not derive the income in question.

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) states that neither CGT event E1 nor CGT event E2 will occur where 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 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.

Continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purposes. When the High Court in Commercial Nominees spoke of trust property and membership as providing two of the indicia for the continued existence of the eligible entity or trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question.

Such an approach is consistent with the position at general law in relation to the four essential indicia of the existence of a trust: the trustee, trust property, the beneficiary and an equitable obligation annexed to the trust property.

In accordance with the principles in Clark's case, the applicant has shown that there has always been at least one unit holder of the Trust at all times, even though their identities have changed over time. Although all of the external unit holders exited from the Trust in an earlier income year, prior to the exit of the last unit holder, a related entity became a unit holder. As such, there has been a continuum of membership of the Trust without severance.

There has also been a continuum of property as at all times there has been at least a nominal amount of subscribed capital in the Trust, as prior to the last external unit holder exiting, a related party subscribed for a nominal number of units in the Trust. Further, there has been no time during the Trust's existence where there has been negative net assets. As such, it is considered that continuum of trust property has been established.

Therefore, continuity of the trust estate has been established between the earliest time that the capital losses were incurred until the entry of the new investors following the Trust's relaunch because there has been a continuum of trust property and membership throughout that time period.

The investment strategy and particulars have changed between the earlier investment mandates of the Trust, and the investment mandate of the relaunched Trust. Although the terms of the investment mandate have changed because of the relaunch, these changes are all within the scope of both the 20XX and 20YY versions of the Constitution. Furthermore, the broad investment objective of the Trust remains consistent i.e. returns exceeding the benchmark over full cycles.

Specifically, in accordance with a clause of 20XX Constitution, subject to the Corporations Act 2001 (Cth), the RE may by deed replace or amend the Trust's Constitution. The Constitution was replaced on in 20YY. Under the 20YY Constitution there were certain amendments made to the distribution clause and other minor changes. Together, none of these changes are considered to cause a resettlement of the Trust. Therefore, it is considered that there has been no resettlement of the Trust caused by the events prior to the relaunch of the Trust. As such, the net capital losses brought forward from the prior income years are not lost because of these events and may be utilised in the income year in which the relaunch occurred and subsequent income years (subject to satisfying all the other conditions in the law, as applicable), in working out the net capital gain of the Trust in accordance with section 102-5 of the ITAA 1997.

Question 3

Summary

No, the general anti-avoidance provisions in Part IVA of the ITAA 1936 will not apply to deny the availability of the Trusts' prior year net capital losses. Based on the information provided and having regard to the relevant circumstances of the scheme, it cannot be concluded that the scheme has been entered into for the sole or dominant purpose of enabling a taxpayer to obtain a tax benefit. Accordingly, Part IVA will not apply to deny the availability of the Trust's prior year net capital losses.

Detailed reasoning

For Part IVA of the ITAA 1936 to apply there must be:

·  a scheme as defined in section 177A of the ITAA 1936;

·  a taxpayer who obtains a tax benefit in connection with the scheme;

·  an objective conclusion, having regard to the eight matters in subsection 177D(2) of the ITAA 1936, that there was a sole or dominant purpose of enabling the taxpayer to obtain a tax benefit (as defined in section 177C of the ITAA 1936); and

·  a determination made by the Commissioner that, in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income, the whole or a part of that amount shall be included in the taxpayer's assessable income of that year of income: paragraph 177F(1)(a) of the ITAA 1936.

Scheme

Subsection 177A(1) of the ITAA 1936 defines the term scheme for the purposes of Part IVA of the ITAA 1936 as meaning:

(a)   any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings; and

(b)   any scheme, plan, proposal, action, course of action or course of conduct.

Although scheme is defined in wide terms, a narrower scheme can exist within a set of arrangements if that narrower scheme can stand on its own as a separate scheme: FCT v Consolidated Press Holdings Ltd (2001) 207 CLR 235; [2001] HCA 32. A scheme may not be identified so narrowly where the circumstances are incapable of standing on their own without being robbed of all practical meaning: FCT v Peabody (1994) 181 CLR 359.

Tax Benefit

For Part IVA of the ITAA 1936 to apply the taxpayer must have obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme. A tax benefit will be obtained in accordance with paragraph 177C(1)(a) of the ITAA 1936, if an amount is not included in the taxpayers assessable income which would have been, or might reasonably be expected to have been, included if the scheme had not been entered into or carried out.

Section 177CB of the ITAA 1936 then applies to decide, under section 177C of the ITAA 1936, whether a tax effect (such as an amount being included in the assessable income of the taxpayer) would have occurred, or might reasonably be expected to have occurred, if a scheme had not been entered into or carried out. Subsection 177CB(2) of the ITAA 1936 states that a decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

Alternatively, subsections 177CB(3) and 177CB(4) of the ITAA 1936 apply to identify a tax benefit in relation to a scheme that also achieves substantive non-tax results or consequences. Subsection 177CB(3) of the ITAA 1936 states that a decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

Under subsection 177CB(4) of the ITAA 1936, whether a postulate is a reasonable alternative to a scheme must be determined having particular regard to the substance of the scheme and any result or consequence for the taxpayer that is or would be achieved by the scheme, but disregarding any potential tax results that would be achieved by the postulate for any person.

Dominant Purpose

It is necessary to determine whether the dominant purpose of one of the parties entering into or carrying out the relevant scheme, did so for the purpose of obtaining a tax benefit.

Subsection 177D(2) of the ITAA 1936 lists the factors to which regard is to be had in coming to a conclusion whether the relevant person had the degree of taxation purpose that must exist if section 177D of the ITAA 1936 is to make Part IVA of the ITAA 1936. These factors were each considered having regard to the relevant circumstances of the scheme.

Conclusion

Based on the information provided and having regard to the relevant circumstances of the scheme, it cannot be concluded that the scheme has been entered into for the sole or dominant purpose of enabling a taxpayer to obtain a tax benefit. Accordingly, Part IVA of the ITAA 1936 will not apply to deny the availability of the Trust's prior year net capital losses.

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