Edited version of private advice

Authorisation Number: 1052039672267

Date of advice: 29 September 2022

Ruling

Subject: Proposed trust deed variations

Question 1

Will CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of executing the Deed of Variation and/or the Deed of Direction and Appointment of Distributors?

Answer

No.

Question 2

Will CGT event E2 in section 104-60 of the ITAA 1997 happen as a result of executing the Deed of Variation and/or the Deed of Direction and Appointment of Distributors?

Answer

No.

Question 3

Will CGT event E3 in section 104-65 of the ITAA 1997 happen as a result of executing the Deed of Variation and/or the Deed of Direction and Appointment of Distributors?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust

The Trust was established by Trust Deed in Australia. The Trust is an Australian resident discretionary trust.

"Eligible Beneficiaries" of the Trust include the Individual, their spouse and children.

The Appointer of the Trust is the Individual and their spouse (jointly).

The Trustee of the Trust is a corporate entity. The Individual and their spouse are the directors of the Trustee company and hold 50% each of the beneficial ownership of the shares on issue in the Trustee company.

The Trust is an investment entity holding passive investments for the benefit of the family.

The Trust has a family trust election in place.

The Trust Deed gives the Trustee the general power to amend the Trust Deed.

Current powers

The Trustee has the power to:

• Determine the net income of the Trust
• Allocate the net income of the Trust in the Trustee's absolute discretion to Eligible Beneficiaries in such proportions as the Trustee determines
• To accumulate the net income of the Trust
• To allocate the capital of the Trust in the Trustee's absolute discretion to Eligible Beneficiaries in such proportions as the Trustee determines prior to the Vesting Day
• Exercise its powers by a resolution of Directors of a sole corporate Trustee and where there is more than one Trustee, decisions are referred to a voting majority

The Appointer has the power to:

• Appoint a new or additional Trustee or remove any Trustee
• Change the Appointer of the Trust.

Proposed trust deed variations

The Trustee proposes to exercise its powers to vary the Trust Deed.

A "Deed of Variation" and a "Deed of Direction and Appointment of Distributors" (Deed of Direction) has been drafted and a copy has been provided to us.

The Deed of Variation has the following effects:

• Upon their death, replacing the Individual and their spouse as the current Appointer of the Trust, with their children.
• Providing that the children, as the Appointer of the Trust, must act jointly and unanimously in exercising their powers, or otherwise require arbitration.
• The Appointer will have the additional power to direct the Trustee to divide any income or capital of the Trust, which the Trustee determines to distribute under the Trust Deed, into shares (that need not be equal).
• The Appointer will also have the additional power to appoint (and remove) a person to be the "Distributor" in respect of a share of that income or capital.
• Where there is no Appointer in office, the Distributors may exercise the powers that would otherwise have vested in the Appointer.

• The Distributor will have the power to give directions to the Trustee about their share of that income or capital. The Distributor has the power to direct the Trustee to distribute its relevant share to such Eligible Beneficiaries in such proportions as the Distributor directs.
• Where no such direction is provided, the Trustee continues to have the power to deal with that share as usual.

The Deed of Direction has the following effects:

• The Individual and their spouse as the current Appointer of the Trust will direct that, on their passing, the income and capital of the Trust that the Trustee determines to be distributable in that year, will each be divided into equal shares.
• On their passing, the Individual and their spouse appoint the children as the Distributors in respect of each equal share of that income and capital.

There will be no changes, whether or not expressly provided for in the Deed of Variation or Deed of Direction, such that a subset of Eligible Beneficiaries will benefit from certain Trust assets over other Eligible Beneficiaries.

Assumptions

Our ruling is provided on the assumption that the Trustee has the power to amend the clauses of the Trust Deed as proposed and enter into the Deed of Direction pursuant to the powers contained in the Trust Deed and that these valid changes will be made in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-65

Further issues for you to consider

This ruling does not advise that the transactions which are the subject of this ruling are legally effective (for example, under relevant trust law). This Private Ruling is only the written expression of the ATO's opinion about the way in which the relevant tax provisions in the questions apply to the Rulees.

Reasons for decision

Question 1

Summary

The execution of the Deed of Variation and/or the Deed of Direction will not result in CGT event E1 happening.

Detailed reasoning

Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

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) explains the Commissioner's view at Paragraph 1, that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen unless:

1. The change causes the existing trust to terminate and a new trust to arise for trust law purposes, or
2. 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.

For the purposes of this ruling, we have assumed that the execution of the Deed of Variation and the Deed of Direction will constitute a proper exercise of the powers of amendment contained in the Trust Deed.

1)    Trust termination

In the explanation and Appendix to TD 2012/21, Paragraph 21 states:

Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark, is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power.

A number of amendments are proposed to be made under the Deed of Variation and the Deed of Direction. There are a number of minor amendments that do not disturb the fundamental operations of the Trust. Operationally, the substantive changes as a result of the proposed amendments are:

• The Individual and their spouse will direct the Trustee to divide the income or capital available for distribution (as determined by the Trustee in each successive income year) into equal shares.
• The individual and their spouse will nominate their children to be a Distributor of each share of that income or capital, as determined by the Trustee.
• Each child will have control over their share and can direct the Trustee to distribute that share to such Eligible Beneficiaries and in such proportions as that child directs.

These operational changes will have the effect of removing the Trustee's current discretion, to allocate the income and capital of the Trust to Eligible Beneficiaries, and dividing this power of allocation between each of the children equally. Nonetheless, all Eligible Beneficiaries will continue to be capable of consideration for allocation of the income or capital of the Trust by the children, in their absolute discretion. In addition, none of the proposed amendments have the effect of changing the continuity of the property of the Trust, including how that property is shared amongst Eligible Beneficiaries of that Trust property.

Despite the operational changes, there remains continuity of the membership of the Trust and continuity of the property of the Trust. It is also an assumption of this ruling that the execution of the Deed of Variation and the Deed of Direction will constitute a proper exercise of the powers of amendment contained in the Trust Deed. Accordingly, it is our view that the Trust will not terminate upon execution of the Deed of Variation and/or the Deed of Direction.

2)    Property settled on new trust

In the explanation and Appendix to TD 2012/21 Paragraph 27 states:

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.

TD 2012/21 further provides at Paragraph 29:

...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

The proposed amendments as contained in the Deed of Variation and the Deed of Direction do not disturb the continuity of the property of the Trust. None of the amendments have the effect of disturbing the rights or obligations with respect to the assets of the Trust such that they could be said to be now held separately. Accordingly it is our view that assets have not been settled upon a new Trust, subject to the consideration of whether or not the amendments could be considered to be in the nature of a "Trust split", which is discussed below.

Trust split

Taxation Determination TD 2019/14 Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? (TD 2019/14) further explains the Commissioner's view of the application of CGT event E1 in the case of a 'trust split'.

While there are many forms of arrangement that can be described as a trust split, TD 2019/14's reference to a trust split refers to an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled by and held for the benefit of a subset of beneficiaries, and other trust assets are controlled and held for the benefit of others. A common reason given for 'splitting' the trust is to allow different parts of the family group to have autonomous control of their own part of the assets held on trust.

A trust split in this sense will exhibit all or most of the following features, as outlined by Paragraph 2 of TD 2019/14:

a)    The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets.

b)    Control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries.

c)    A different appointor is appointed in respect of the part of the fund held by the new trustee, the control of the new appointor aligned with the control of the new trustee.

d)    The rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee.

e)    The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit one subset of beneficiaries to the exclusion of others. The original trustee is also expected to exercise its powers in respect of the assets held by it independently of the new trustee to benefit instead a different subset again to the exclusion of others. This is so whether the range of beneficiaries that can benefit from particular assets is expressly limited.

f)     The rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed.

g)    The original trustee and new trustee keep separate books of account.

h)    The new trustee may also seek to apply for a new tax file number and/or Australian business number, and commence to lodge a separate return in respect of the income derived from the assets it holds.

The proposed Trust Deed amendments are distinguishable from the trust splitting arrangements of the kind described above in Paragraph 2. Specifically, this arrangement is distinguished because:

• There are no express changes to the assets of the Trust such that a subset of beneficiaries can benefit from certain assets to the exclusion of others.
• There are also no expected changes, whether or not express, such that a subset of beneficiaries will benefit from certain assets over others. Trust assets are not intended to be separated. The Trust property remains available to be deployed for the Trust's original purposes and continues to be governed by the terms of the original Trust Deed, as amended.
• The range of potential beneficiaries entitled to benefit from the Trust (Eligible Beneficiaries) as a whole does not change.
• The Distributor amendments shift the responsibility to allocate income and capital of the Trust from the Trustee to each child separately and equally.

Accordingly, in our view, the Deed of Variation and/or Deed of Direction do not result in a "trust split".

Conclusion

Our advice is based on the assumption that the execution of the Deed of Variation and Deed of Direction will be a valid exercise of the Trustee's power. Consequently, the elements of subsection 104-55(1) of the ITAA 1997 will not be satisfied and CGT event E1 will not happen upon execution of the Deed of Variation and/or the Deed of Direction.

Question 2

Summary

The execution of the Deed of Variation and/or the Deed of Direction will not result in CGT event E2 happening.

Detailed reasoning

Subsection 104-60(1) of the ITAA 97 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

The Commissioner's approach to whether CGT event E2 happens in relation to the variation of a trust deed is contained in TD 2012/21 which is outlined in the detailed reasoning in Question 1 above. In short, the amendments do not have the effect of transferring the assets of the Trust to a new or existing Trust.

Accordingly, based on the assumption that the execution of the Deed of Variation and Deed of Direction will be a valid exercise of the Trustee's power, the elements of subsection 104-60(1) of the ITAA 1997 will not be satisfied and CGT event E2 will not happen on execution of the deeds.

Question 3

Summary

The execution of the Deed of Variation and/or the Deed of Direction will not result in CGT event E3 happening.

Detailed reasoning

Subsection 104-65(1) of the ITAA 1997 says that CGT event E3 happens if:

(a)  a trust (that is not a unit trust) over a CGT asset is converted to a unit trust; and

(b)  just before the conversion, a beneficiaryunder the trust was absolutely entitled to the assetas against the trustee (disregarding any legal disability the beneficiary is under).

The Trust is a discretionary trust. Any potential benefits to be received by the Eligible Beneficiaries is at the discretion of the Trustee and the Trust is not divided into units as discrete parcels of shares. None of the proposed amendments contained in the Deed of Variation or Deed of Direction disturb the discretionary nature of the Trust or result in the Trust being divided into units. Therefore, the Trust is not a 'unit trust' and the proposed amendments will not cause the Trust to become a 'unit trust'.

The proposed amendments and instructions contained in the Deed of Variation and/or Deed of Direction will not cause the Trust to become a 'unit trust'. Accordingly, CGT event E3 under subsection 104-65(1) of the ITAA 1997 will not happen upon execution of the Deed of Variation and/or Deed of Direction.

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