Edited version of private advice

Authorisation Number: 1052109188187

Date of advice: 1 May 2023

Ruling

Subject: CGT events on trust amendment

Question 1

Will capital gains tax (CGT) event A1 happen when NewCo becomes an additional trustee of the Trust and the Shares are transferred to NewCo?

Answer

No.

Question 2

Will CGT event E1 happen when NewCo becomes an additional trustee of the Trust and the Shares are transferred to NewCo?

Answer

No.

Question 3

Will CGT event E2 happen when the Shares are transferred to NewCo?

Answer

No.

This ruling applies for the following periods:

year ended 30 June 20XX

year ended 30 June 20XX

Relevant facts and circumstances

The Trust

1.         The Trust is a discretionary trust that operates a business.

Relevant clauses of the Trust Deed of the Trust:

2.         The Trust Deed broadly provides that before vesting date the Trustee will hold the Trust Fund and any income of the Trust Fund in trust for one or more of the Discretionary Beneficiaries in such proportions as the Trustee deems fit.

3.         On any change of Trustee:

(i)            the separate trust fund will vest in the new Trustee or new and continuing Trustee on the same terms;

(ii)       any amount treated as a loan to the Trustee will be treated as a loan to the new Trustee or new and continuing Trustee on like terms to those on which it was treated as a loan to the old Trustee; and

(iii)      any person ceasing to be a Trustee will cease to be liable in respect of the separate trust fund amount, except to the extent (if at all) that the old Trustee retains possession or control of any Property of the Trust Fund.

4.         The expenses in connection with the administration of the Trust (including the remuneration and charges of the Trustee provided for in this clause XX and of the investment and reinvestment of any part of the Trust Fund and the collection of income and other sums from the Trust Fund) must be charged against:

(a) the income of the Trust Fund; or

(b)  If the income is insufficient for that purpose then, to the extent of the insufficiency, the Trust Fund.

5.         The Trust Deed provides that the Trustee when acting in accordance with this Deed will be indemnified out of the Trust Fund.

6.         Where there are more than two trustees, clause X provides that:

a)    Where there are two Trustees, they may act only by unanimous vote.

b)    Where there are more than two Trustees, the votes of the majority will prevail unless they agree between them to act on any other basis.

Assets of the Trust:

7.         The trustee of the Trust holds assets such as property, plant and equipment which it uses in its business activities.

8.         On XX XX XXXX, the trustee of the Trust purchased shares in Company B (the Shares).

9.         The Trust also holds other passive investments.

Proposed arrangement:

10.      It is proposed that the following arrangement be implemented:

a.         NewCo, a company with Individual A being the sole director and shareholder of the company,

b.         The Appointer will appoint NewCo as an additional trustee.

c.         NewCo as trustee will hold the Shares as legal owner under the terms of the Trust Deed.

d.         Company A will continue to hold the remaining assets as trustee.

e.         a consolidated set of trust accounts will be held by both trustees. (Proposed Arrangement).

11.      In accordance with the Trust Deed, the trustees will jointly distribute the income and capital of the Trust for the benefit of the beneficiaries.

12.      Other than those steps outlined in the Proposed Arrangement, no further steps are contemplated. As such, no separate Appointor will be appointed solely over the Shares.

13.      The Trustee has the power to amend the clauses of the Trust Deed under the Trust Deed; The Amending Deeds are within the amendment powers of the Trust Deed and do not enliven any restrictions or limitations on the power of amendment under the Trust Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 subsection 104-55(1)

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 subsection 104-60(2)

Reasons for decision

Issue 1

Question 1, 2 and 3

Summary

On the basis of the assumption that the amendments are valid, i.e. that the proposed variations to the Trust Deed will amend the terms of the Trust Deed pursuant to a valid exercise of a power contained within the Trust Deed, the amendments will not cause the Trust to terminate and a new trust to arise for trust law purposes (it will not lead to any asset of the Trust 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).

In that case, CGT event A1 in section 104-10, CGT event E1 in section 104-55, and CGT event E2 in section 104-60 of the Income Tax Assessment Act 1997 will not happen in the circumstances as a result of making the proposed variations to the Trust Deed - noting that where a proposed change is beyond the power conferred by the terms of a trust, it will be of no effect and, therefore, cannot give rise to a resettlement of the trust, and would not result in CGT event E1 or E2 happening.

Detailed reasoning

CGT event A1

CGT event A1 is the disposal of a CGT asset pursuant to subsection 104-10(1).

Subsection 104-10(2) states that a taxpayer will dispose of a CGT asset if a change of ownership occurs from the taxpayer to another entity. However, subsection 104-10(2) also provides that a change in ownership will not occur if the taxpayer ceases to be the legal owner of the asset but continues to be its beneficial owner. Additionally, the note to subsection 104-10(2) explains that CGT event A1 will not occur merely because of a change in trustee of a trust.

CGT events E1 and E2

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.

Subsection 104-60(2) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark), it was established that a trust will not be terminated provided that any amendment to the trust is made in accordance with a power conferred by the trust instrument and there is some continuity of property and membership of the trust.

Following Clark, the Commissioner issued 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 the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent documents, or varied with the approval of a relevant court? (TD 2012/21).

In TD 2012/21 the Commissioner expresses the view that in the circumstances where 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, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the ITAA 1997 happens 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.

Trust Split

CGT event E1 will occur where there is a specified 'trust split'. The Commissioner's view on the potential capital gains tax implications of a 'trust split' is contained in 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).

For this determination, a trust split is defined as an arrangement which generally involves the transfer of some of the assets of the original trust to a new trust fund that has been separated, or carved out of, the original trust fund. The purpose of such arrangements is directed to separating the functional operation of the trust. It is put into place with the intention of:

a)    separating those who control and can benefit from part of the trust corpus transferred to the new trustee from those who control and benefit from the remaining assets held by the original trustee

b)    removing the fiduciary obligations of the original trustee in relation to the assets transferred to the new trustee

c)    removing the entitlement of the original trustee to be indemnified out of the transferred assets for expenses incurred after the introduction of the new trustee, and

d)    ensuring that the new trustee will have no fiduciary obligations in respect of the assets retained by the original trustee and will have no right to be indemnified from those assets.

Application in these circumstances

In this case, the Trust was established by the Trust Deed which constitutes the Trust's constituent document.

The facts of this ruling contain an assumption that the Trustee has the power to amend the Trust Deed in accordance with the proposed amendments.

In accordance with the assumption:

•         The proposed amendments will not result in the termination of the Trust, provided that the amendments are validly made within the scope of the amendment power.

•         The proposed amendments will not, if valid, result in any assets of the Trust being held on new and different trusts.

The proposed variations to the Trust Deed will amend the terms of the Trust Deed pursuant to a valid exercise of a power contained within the Trust Deed and therefore the amendments will not cause the Trust to terminate and a new trust to arise for trust law purposes (it will not lead to any asset of the Trust 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).

Further, the proposed arrangement is distinguishable from the trust splitting arrangements of the kind described in TD 2019/14.

Under the proposed arrangement an additional Trustee will be appointed to legally hold trust assets resulting in the two trustees holding separate items of the trust fund. Both parts of the trust fund continue to be governed by the terms of the original Trust Deed as amended and the range of beneficiaries does not change. The Trust Deed requires both trustees may act only by unanimous vote, gives each trustee recourse to all of the trust assets and requires reporting and accounting be on a consolidated basis.

The proposed variations do not affect the composition of the trust property, or the obligations under which the assets comprising the trust property are held. There is continuity of property and membership of the Trust with the assets of the Trust to continue to be held for the benefit of the Trust beneficiaries.

Given the degree of continuity of the property and membership of the Trust, we accept that the proposed amendment would not cause the existing trust to terminate and a new trust to arise. It is also considered that the proposed amendments do not result in a particular asset being settled on terms of a different trust. As such it is concluded that the Trust will continue as one trust albeit with two separate trustees.

Consequently, neither CGT event E1 nor CGT event E2 will happen as a result of making the proposed variations to the Trust Deed. That is, on the basis of the assumption that the amendments are valid, and in accordance with the views expressed in TD 2012/21 and TD 2019/14 neither CGT event E1 or E2.

Similarly, neither will CGT event A1 happen by reason of the variation of the trust instrument as pursuant to subsection 104-10(2) there is no change in ownership as whilst the ownership of the CGT asset is transferred from one trustee to another (ie: legal owner of the asset is transferred) the Trust nevertheless continues to be its beneficial owner. As stated in the note to subsection 104-10(2) CGT event A1 does not occur because it is merely a change in trustee of a trust asset.

It should be noted that where a proposed change is beyond the power conferred by the terms of a trust, it will be of no effect. Therefore, it cannot give rise to a resettlement of the trust and would not result in CGT event E1 or E2 or A1 happening.

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