Edited version of private advice

Authorisation Number: 1052134952508

Date of advice: 7 July 2023

Ruling

Subject: CGT - converting a discretionary trust to a fixed unit trust

Question

Will the Proposed Amendments of the Trust Deed, converting the Trust from a discretionary trust to a fixed unit trust cause any of CGT events E1, E2 or E3 in sections 104-55, 104-60 or 104-65 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XY

The scheme commenced on:

20XT

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust is a discretionary trust settled by deed on a date in 20XT (Trust Deed) with Trustee Company as the trustee (Trustee) in a State in Australia.

The Trust Deed was amended by deeds dated 20XU, 20XV and a deed of consolidation dated 20XW (Consolidated Deed).

The Trust has specified assets.

There are relevant clauses in the Consolidated Deed which define the following terms:

•         Beneficiaries

•         Income Distribution

•         Capital distribution

•         Vesting day

•         Perpetuity Period

•         Trustee's power of amendments

The Trustee wishes to amend the Consolidated Deed to convert the Trust from a discretionary trust to a fixed unit trust (Proposed Amendments).

The Proposed Amendments will be done by a Deed of Amendment (Amendment Deed) to the Consolidated Deed. An Annexure to the Amendment Deed further specifies the terms of the Amendment Deed

The purpose of the Proposed Amendments is for succession planning.

The Trustee will not make any determination to make any beneficiary of the Trust absolutely entitled to any asset of the Trust as against the Trustee immediately prior to the Proposed Amendments.

Assumption

The amendments set out in the proposed Amendment Deed constitute a valid exercise of the Trustee's amendment power contained in the Consolidated Deed dated 20XW.

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

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

This is to explain how we reached our decision. This is not part of the private ruling.

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

Summary

On the assumption that the amendments set out in the proposed Amendment Deed constitute a valid exercise of the Trustee's amendment power contained in the Consolidated Trust Deed, the proposed conversion of the Trust into a unit trust will not cause CGT events E1 to E3 to happen in relation to any of the assets of the Trust.

Detailed reasoning

CGT events E1 and E2

Under subsection 104-55(1) CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Under subsection 104-60(1) CGT event E2 happens when you transfer a CGT asset to an existing trust.

In 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) the Commissioner states 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:

(a)  the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

(b)  the effect of the change 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.

Following from the decisions in Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd [2001] HCA 33 (Commercial Nominees) and Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark [2011] FCAFC 5 (Clark), the Commissioner accepts the general proposition that where there is some continuity of property and membership of the trust, changes to the terms of a trust that are made in proper exercise of a power of amendment will not terminate the trust where they are properly supported by that power.

In this case the Trustee of the Trust proposes to use its power under a relevant clause of the Consolidated Trust Deed to vary the Trust from a discretionary trust to a unit trust. For the purposes of the ruling decision, it is assumed that the amendments set out in the Deed of Amendment constitute a valid exercise of the Trustee's amendment power.

Based on the information provided, the Proposed Amendments will not cause the Trust to terminate and a new trust to arise for trust law purposes. The effect of the Proposed Amendments will not give rise to a conclusion that any asset of the Trust has been settled on terms of a different trust.

Therefore, in accordance with the views expressed in TD 2012/21, neither CGT event E1 or E2 will happen by reason of the variation of the trust instrument converting the Trust to a unit trust.

CGT event E3

CGT event E3 under subsection 104-65(1) happens if a trust over a CGT asset is converted into a unit trust and, just before the conversion, a beneficiary was absolutely entitled to the asset as against the trustee.

Paragraph 13 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 ITAA 1997) states that an object of a discretionary trust cannot be absolutely entitled to one or more trust's assets prior to an exercise of the trustee's discretion in their favour.

CGT event E3 will not happen when the Trust is converted into a unit trust, as the Trustee will not make any determination to make any beneficiary absolutely entitled to any asset, or assets of the Trust just prior to the Proposed Amendments.

Cost base of units

As the Initial Unitholder will not give any property for the issue of the units. Because of this, the first element of cost base under subsection 112-25(2) would be nil and the market value substitution rule would not apply because of item 6 in the table in subsection 112-20(3).

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