1052226151719 | Legal database

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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 private advice

Authorisation Number: 1052226151719

Date of advice: 15 March 2024

Ruling

Subject: Conversion of discretionary trust to unit trust

Question 1

Will CGT event E1 or CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of making the variations to the Trust Deed for the Trust?

Answer

Question 2

Will CGT event E3 in section 104-65 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Answer

Question 3

Will the amendments to the trust deed result in CGT event E4 in section 104-70 of the ITAA 1997?

Answer

Question 4

Will CGT event E5 in section 104-75 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Answer

Question 5

Will CGT event E6 or CGT event E7 in sections 104-80 or 104-85 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Answer

Question 6

Will CGT event E8 in section 104-90 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Answer

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Trust was established on a specified date. The Trust is a discretionary trust.

The trustee of the Trust is Company A. The trustee was the first trustee of the Trust.

The Settlor of the Trust is Individual 3.

The Trust, the trustee, the Appointer and all Beneficiaries are Australian residents for income tax purposes.

There are no beneficiaries that hold a specific percentage of the income or capital of the Trust.

The trustee proposes to amend the terms of the Trust Deed in accordance with Clause 15 of the Trust Deed, in effect to convert the Trust from a discretionary trust to a unit trust.

Clause 15 of the Trust Deed requires the prior written consent of the Appointer and a deed or resolution to amend the Trust Deed on the proviso that no amendment is in favour of an ineligible beneficiary and does not infringe on the rule against perpetuities.

The ultimate owners of the proposed unitholder are the current Appointer and their related entities. That is, the same ultimate beneficiaries that are current eligible beneficiaries under the Trust Deed.

The Unit Trust will identify an Income Beneficiary and Capital Beneficiary.

The Capital Beneficiary will be recorded as the Family Trust.

The Capital Beneficiary is a family trust with the same ultimate beneficiaries as the Trust.

The Income Beneficiary will be recorded as Company B.

The ultimate beneficiary of Company B is the Family Trust.

The only asset of the Trust will remain to be held for the benefit of the Appointer and their family.

The proposed variations to the Trust Deed do not contemplate a transfer of any asset.

There are no unpaid beneficiary entitlements of income of the trust to any beneficiary in respect of prior year income.

Following the variation, no beneficiary becomes absolutely entitled to any particular asset of the Trust as against the trustee. The amendments do not involve an agreement to create a trust of future property.

The Trust is not a Managed Investment Trust (MIT).

Current trust deed

The following are defined under Clause 1.1;

• Appointor means Individual 2 or any other person appointed under clause 11 of the Deed

• Beneficiary means:

o Individual 1 and/or Individual 2;

o the spouse from time to time of Individual 1 and/or Individual 2;

o any child, grandchild or great-grandchild, or their spouse, of Individual 1 and/or Individual 2;

o any relative of Individual 1 and/or Individual 2, including but not limited to a parent, grandparent, brother, sister, uncle, aunt, nephew or niece of Individual 1 and/or Individual 2 or Individual 1 and/or Individual 2's spouse;

o the trustee of any trust or settlement of which any Beneficiary is a beneficiary;

o any other legal entity in which any Beneficiary has an interest, whether as a shareholder or director;

o but does not include an Ineligible Beneficiary.

• Ineligible Beneficiary means the Settlor, the Settlor's legal personal representative and any children of the Settlor aged under 18 years of age

Clause 12 absolutely prohibits an Ineligible Beneficiary from being or becoming a Beneficiary of the Trust. Clause 12 and the definition of Ineligible Beneficiary in Clause 1.1 are irrevocable.

In respect of Income, under Clause 2 the Trustee in its absolute discretion during each Financial Year prior to the Vesting date:

• determine the Income of the Trust Fund for each Financial Year and in determining the oncome of the Trust Fund for a particular Financial Year, identify and separately account for the classes of income;

• accumulate the whole or any part of the Income in any Financial Year in accordance with applicable law, which accumulated income shall form part of the Trust Fund;

• distribute, pay, apply or et aside the whole or any part of the Income (including as to classes of Income) to one or more of the Beneficiaries exclusive of the other Beneficiaries in such shares and proportions and in such manner as the Trustee may determine;

In respect of Capital, under Clause 3 the Trustee:

• holds the capital of the Trust Fund on trust for all of the Beneficiaries or one or more of the Beneficiaries exclusive of the other Beneficiaries in such shares or proportions and in such manner as the Trustee in its absolute discretion determines;

• the Trustee, prior to the Vesting Date, determine to distribute, pay, apply any part of the capital of the Trust Fund to all the Beneficiaries exclusive of the other Beneficiaries or to one or more of the Beneficiaries in such shares and proportions and in such manner as the Trustee in its absolute discretion determines.

Under Clause 4 notwithstanding any other provisions of the Trust Deed, the Trustee has the power in its absolute distraction to:

• determine in respect of any distribution, payment, application or accumulation of Income or capital or any notional amount, the nature, character or source of that Income or capital, including whether they are to be recorded by the Trustee on Income account or capital account;

• make a Beneficiary, who is entitled to a distribution or payment pursuant to the Deed, specifically entitled to capital gains and/or franked distributions made by or paid to the Trust in any Financial Year;

• determine in respect of any expenses, taxes, losses or outgoings, whether they are to be recorded by the Trustee on Income or capital account.

Under clause 10.1 the Appointor may at any time remove the trustee, by notice in writing, and/or appoint any person to be a new or additional trustee provided that the Settlor cannot be appointed as a trustee of the trust.

Under Clause 15 the Trustee may by deed or resolution in writing amend, vary, alter or add to the terms of this Deed provided that:

• prior written consent is provided by the Appointor;

• no amendment, variation, alteration or addition can be made to clause 12 or the definition of "Ineligible Beneficiary" in Clause 1.1 or be for the benefit of or in favour of an Ineligible Beneficiary;

• this Deed must not infringe the rule against perpetuities;

• the amendment, variation, alteration or addition must not affect the beneficial entitlement to any amount set aside for any Beneficiary prior to the amendment, variation, alteration or addition;

• the Trustee may change the class of persons who fall within the definition of Beneficiary pursuant to this Deed.

Proposed trust deed terms

Under clause 88 of the proposed terms clauses 14, 15, 16, 17, 29, 41, 82, 88, 89, 91, 92 and 93 cannot be varied except to the extent necessary to ensure that the trust is a fixed trust for the purposes of the Land Tax Management Act 1956 (NSW).

Under clause 89 the trustee may vary the deed by resolving to approve the variation. The resolution must be signed by the trustee or by an authorised officer of the trustee. A variation concerning any of the following is not effective unless the unit holders consented to it by passing a special resolution at the time of variation or before it:

• the issue, transfer or redemption of units;

• the appointment or removal of a trustee;

• the variation of this deed;

• voting rights at meetings of the unit holders; and

• limitation of the liability of unit holders.

Clause 91 deals with the time a variation takes effect.

Clause 92 deals with the termination date of the trust, being 80 years after the date of the deed, or an earlier date as decided by the trustee of unit holders holding at least 90% of the units on issue.

Clause 93 deals with the realisation of assets, payments of liabilities and distributions to unit holders upon termination of the trust.

Clause 14 states the trustee holds the assets of the trust as a separate fund on trust for the unit holders and the beneficial interest in the trust at any time is vested in the holders of units in the trust at that time.

Under clause 15 each unit holder is presently entitled to their proportionate share in:

• the income of the trust, subject only to the proper payment of expenses by and of the trustee relating to the administration of the trust; and

• the trust's assets.

Under clause 16 a unit holder (subject to any right conferred by this deed on the unit holders to the contrary) must not do any of the following:

• interfere with the trustee's exercise of any right or power;

• exercise a right in respect of an asset or lodge a caveat or other notice in relation to an asset or claim any interest in an asset in any other way;

• require any asset to be transferred to the unit holder.

Under clause 17 the issue price of a unit is set by the trustee, subject to clause 5

Under clause 5 the trustee may create and issue additional units at any time. Unless all the unit holders provide their written consent otherwise, the price paid for each issued unit must be equal to the redemption price calculated in accordance with clause 30 at the time immediately prior to the units being issued.

Under clause 30 the redemption price is the net asset value of the trust less transaction costs divided by the number of units on issue.

Under clause 29 if the trustee receives a redemption request under clause 28, the trustee must accept the application and comply with the request as soon as practicable.

Under clause 28 a unit holder may apply to redeem one or more units provided it does so by giving the trustee a completed form approved by the trustee for that purpose. The unit holder may not withdraw an application for redemption.

Under clause 41 the trustee may accumulate income with the prior approval by way of a resolution of the unit holders. The trustee may do so for any of the following purposes:

• to recoup a loss in an earlier financial year;

• as a reserve to meet contingencies, to provide for repairs and maintenance, for depreciation or for any other purpose.

Under clause 82 the unit holders may appoint a new trustee by passing a special resolution.

Under clause 40 the trustee may, instead of relying on the definition of 'income of the trust fund' set out in this deed, decide at any time prior to 30 June in a financial year to adopt, for that financial year, another definition of 'income of the trust fund'.

Under clause 48 in determining the income of the trust for a financial year, the trustee may decide whether, and to what extent, a receipt or outgoing is on account of income or capital.

Assumptions

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.

The proposed 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).

The proposed amendments to the Trust Deed are valid and effective in accordance with the law of the relevant state.

Written consent of the Appointer will be provided prior to any amendments to the Trust Deed and a deed or resolution be made in writing to amend the Trust.

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

Income Tax Assessment Act 1997 section 104-90

Does 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-avoidancerule for income tax'.

Reasons for decision

Question 1

Will CGT event E1 or CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997)happen as a result of making the variations to the Trust Deed for the Trust?

Summary

As the proposed amendments are within the Trustee's powers contained in the Trust Deed, the Commissioner considers there will be continuity of the Trust property, membership of the Trust and operation of the Trust. The proposed amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust. As such neither CGT event E1 or CGT event E2 of the ITAA 1997 will happen.

Detailed reasoning

A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue as a result of CGT event including E1.

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.

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.

For CGT event E1 to occur, it is required that there be both the creation of a trust and that this be done by way of declaration or settlement.

The phrase "you create a trust over a CGT asset" is to be understood by reference to the general law of trusts.

In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 518-519. Hope JA analysed the 'very nature of a trust' in terms of a personal obligation of a trustee annexed to property to hold the property for the benefit of another.

In order to 'create' a trust, there must be a creation of both elements of a trust; that is, a creation of personal obligations and a creation of rights annexed to property.

Notwithstanding that an existing trust estate may not have come to an end and the entirety of the trust fund settled on terms of a new trust, it is possible for assets to be settled on a new trust estate that has been separated from (or carved out of) the original trust fund. This may occur notwithstanding that the transactional documents executed to affect such a separation do not expressly speak of the asset having been settled on a new trust.

The decision of the Supreme Court of South Australia in Dyda P/L & Anor v Commissioner of State Taxation [2013] SASC 156 (Dyda), albeit concerned with a different legislative regime, is instructive in this context.

In Dyda the Supreme Court of South Australia considered whether a series of steps to transfer control of a real property to the Dyda group gave rise to a stamp duty liability. The land in question was held in a unit trust, the Woodville Property Trust. Units in this trust were held by two family trusts, the Meeuwissen Family Trust and the Young Family Trust.

The transfer of the control of the real property was affected through a series of steps. First Dyda Pty Ltd was appointed as trustee of the part of the trust assets of the Woodville Property Trust which comprised the real property. This part of the trust was to be known as the Burleigh Avenue Trust. The trust deed was amended to allow for a new type of units, funding units, which could receive income in priority to all existing units. Dyda Nominees was appointed as trustee to part of the Meeuwissen Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 2. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 2. Similarly, Dyda Nominees was appointed as trustee to part of the Young Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 3. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 3.

The appellants argued that upon appointment of the new trustee, no rights were conferred in relation to the trust property. The rights remained as they were because the same persons remained objects and beneficiaries of the discretionary trusts.

Stanley J rejected the arguments of the appellants. At paragraphs [143] - [144] he concluded as follows:

143. The appointment of Dyda Nominees as trustee of the Burleigh Avenue Trust No. 2 and No. 3, was in each case, effectively the resettlement of the units under a new trust rather than the appointment of a new trustee to existing trusts. The requisite continuity of the trust did not exist.

144 The continuity of trusts was broken because of the transfer of control of these two discretionary trusts to the Dyda group, which occurred on 8 March 2007. This was achieved by the appointment of Dyda Nominees as the trustee, and by the appointment of John Dyda as the appointor and guardian under the trusts. In his capacity as guardian, John Dyda could control the distributions of some income and of all of the capital of the trusts. A member of the class of potential beneficiaries of the trusts who was not a member of the Dyda group could not realistically expect ever again to receive any distributions under the trusts. This conclusion is reinforced by the granting of the indemnities. Accordingly, Dyda Nominees acquired an absolute interest in the ordinary units.

Dyda demonstrates that in particular circumstances the appointment of different trustees and appointors over specific trust assets can cause those assets to be settled on terms of a new trust.

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. TD 2019/14 at paragraph 47 sets out that 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.

By declaration or settlement

The second element necessary for CGT event E1 to happen is that the creation of the trust is by declaration or settlement.

A trust is created by declaration within the meaning of subsection 104-55(1) when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property (Kafataris v. DC of T (2015) 243 FCR 291 at [26]) (Kafataris). Transactional documentation that evidences an express intention to hold the transferred assets subject to the terms of the trust deed, may suffice to create a trust over those assets by declaration.

A trust is created by settlement when property is vested in a trustee for the benefit of others (Taras Nominees Pty Ltd v. FC of T (2015) 228 FCR 418 at [5]; Kalantaris at [31]). A transfer of existing trust property to, and the vesting of this property in, a new trustee for the benefit of others can satisfy the description of the creation of a trust by settlement.

In TD 2012/21, the Commissioner accepts that "continuity of a trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated". The determination states that CGT event E1 and CGT event E2 will not generally happen if the terms of a trust are changed pursuant to a valid exercise of a power contained in the trust's constituent document or are varied with a court's approval. However, a CGT event will occur if the change:

• causes the existing trust to terminate and a new trust to arise for trust law purposes; or

• results in a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that asset has been settled on terms of a different trust.

Application to your circumstances

This ruling is based on the assumption that the Trustee has the power to amend the Trust Deed in accordance with the proposed amendments.

The current Trust Deed provides the Trustee with broad powers to revoke, alter to or vary all of any of the provisions of the Trust Deed at any time.

The proposed changes to the Trust Deed are also considered to fall within the scope of the Trustee's power of amendment provided for in the Trust Deed. In this regard, it is noted that the proposed amendments are not considered to fall within the specific restrictions.

The Commissioner is satisfied that the factors regarding possible trust splitting will not occur in your case. Therefore, the proposed amendments to the Trust Deed will not result in the creation of a new trust by declaration or settlement as the Trustee does not have new personal obligations and new rights have not been annexed to the assets held by the Trust. Therefore, CGT Events E1 and E2 will not happen.

As the proposed amendments are within the Trustee's powers contained in the Trust Deed, the Commissioner considers that, following the execution of the Proposed Deed of Amendment to amend the terms of the Trust Deed, there will be continuity:

• of the Trust property;

• in the membership of the Trust; and

• in the operation of the Trust.

The underlying principles encapsulated in paragraphs 21 and 24 of TD 2012/21 provide that, assuming there is some continuity of property and membership of a trust, an amendment to the trust that is made in a proper exercise of a power of amendment contained under the trust deed will not result in a termination of the trust - regardless of the extent of the amendments, so long as the amendments are properly supported by the power.

On this basis, as continuity in the membership, operation and property of the Trust would be maintained following the execution of the proposed amendments to the Trust Deed pursuant to a valid exercise of the amendment power in the Trust Deed, such amendments would not result in a termination of the Trust. This is consistent with the decisions in both the Commercial Nominees and Clark cases.

Having regard to paragraph 27 of TD 2012/21, the Commissioner is satisfied that the proposed amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust.

Therefore, in accordance with paragraph 1 of TD 2012/21, executing the Proposed Deed of Amendment to amend the current Trust Deed pursuant to a valid exercise of the amendment power contained in clause 15 of the current Trust Deed, would not cause either CGT event E1 or CGT event E2 of the ITAA 1997 to happen.

Question 2

Will CGT event E3 in section 104-65 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Summary

No beneficiary was absolutely entitled to any CGT asset of the Trust just before the conversion of the Trust to a Unit Trust and as such CGT event E3 will not happen with respect to the amendments.

Detailed reasoning

Subsection 104-65(1) of the ITAA 1997 provides that CGT event E3 happens if a trust over a CGT asset is converted to a unit trust and just before the conversion, a beneficiary was absolutely entitled to the asset as against the trustee.

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)sets out the Commissioner's view on when a beneficiary may become absolutely entitled to an asset.

Paragraphs 10 and 11 of TR 2004/D25 provide:

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40).

11. Under the rule in Saunders v Vautier, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it.

Beneficiaries of a discretionary trust do not have any interest, either individually or collectively, in the property or income of a trust estate. Where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital: it is for the trustee to determine, firstly, whether such beneficiaries will benefit at all under the terms of the trust and, secondly, to what extent the beneficiaries will benefit. Such beneficiaries have no more than a right to have the trust duly administered. (See Gartside and Another v. Inland Revenue Commissioners [1968] 1 All ER 121 and Re Weir's Settlement MacPherson and Another v. Inland Revenue Commissioners [1970] 1 All ER 297).

Prior to the amendments, the Trustee has the discretion to pay the whole or any part of the income or capital of the Trust to any one or more of the eligible beneficiaries to the exclusion of the others in such proportions as the Trustee may determine. Consequently, no beneficiary was absolutely entitled to any CGT assets of the Trust.

Therefore, CGT event E3 will not happen with respect to the amendments.

Question 3

Will the amendments to the trust deed result in CGT event E4 in section 104-70 of the ITAA 1997?

Summary

CGT event E4 has no application with respect to the amendments to the Trust Deed itself: however, the changes will mean a trust in the nature of a unit trust, where the unitholders have acquired their units for consideration, such that section 104-70 of the ITAA 1997 is capable of applying where the Trustee makes a non-assessable distribution to the Unitholders in respect of their unit holdings.

Detailed reasoning

In broad terms, CGT event E4 (section 104-70 of the ITAA 1997) happens where the trustee of a trust makes a payment to a taxpayer in respect of their unit or interest in the trust acquired after 20 September 1985 (except for CGT event A1, C2, E1, E2, E6, or E7 happening in relation to it), and some or all of the payment is not included in the taxpayer 's assessable income, described as a non-assessable part (non-assessable distribution), which may be reduced by exclusions and adjustments under section 104-71.

The Revised Explanatory Memorandum to the New Business Tax System (Miscellaneous) Act (No. 2) 2000 explains the operation of the provision as follows:

10.8 Section 104-70 of ITAA 1997 reduces the cost base of a unit or fixed interest in a trust where the trustee pays a non-assessable amount to the beneficiary. If the payment is more than the beneficiary's cost base, a capital gain is made.

This means that, where the Trustee makes such a payment, the beneficiary will need to make an adjustment to the cost base of their trust asset or unit. This adjustment will affect the calculation of any capital gain or capital loss on the sale of the trust asset or unit. However, if the amount of the payment exceeds the cost base of the trust interest or unit, the excess is treated as a capital gain in the year it is paid to the beneficiary (see Taxation Determination TD 93/170 Income tax: capital gains: how is the adjusted payment calculated pursuant to subsection 160ZM(3A) of the Income Tax Assessment Act 1936 where there is a non assessable distribution from a unit trust and when is the adjusted payment used for the purposes of calculating a capital gain or loss under section 160ZM? and Taxation Determination TD 93/171 Income tax: capital gains: what are the consequences where a taxpayer receives a non assessable distribution in respect of units in a unit trust and the distribution exceeds the indexed cost base of the units?).

In Taxation Determination TD 2003/28 Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to (a) a mere object; or (b) a default beneficiary?, the Commissioner confirm that that CGT event E4 applies in respect of an interest in a trust that acquired for consideration or by way of assignment:

In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a Unitholder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests.

Question 4

Will CGT event E5 in section 104-75 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Summary

No beneficiary has or will become absolutely entitled to a CGT asset of the Trust and as such CGT event E5 will not happen as a result of making the amendments to the Trust Deed.

Detailed reasoning

Section 104-75 of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee.

A beneficiary of a discretionary trust does not have any interest in the trust assets except to the extent that the trustee exercises a discretion in favour of that beneficiary.

.Paragraphs 10 and 11 of TR 2004/D25 provide:

Paragraph 13 of TR 2004/D25 states that an object of a discretionary trust cannot be absolutely entitled prior to any exercise of the trustee's discretion in their favour. This is because they do not have an interest in the trust's assets.

Paragraphs 73 and 74 of TR 2005/D25 describe the type of interest required in the trust asset for a beneficiary to be absolutely entitled:

73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest.

74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

The nature of the beneficiary's interest in the asset, and whether it meets the requirements of absolute entitlement, therefore depends on the particular trust instrument, and whether the trustee has made a resolution in favour of a beneficiary (such that the beneficiary would be absolutely entitled).

In this case, no beneficiary has an entitlement to a CGT asset of the Trust - and the amendments do not cause any beneficiary to have an entitlement to a CGT asset of the Trust.

Therefore, CGT event E5 will not happen as a result of making the amendments to the Trust Deed.

Question 5

Will CGT event E6 or CGT event E7 in sections 104-80 or 104-85 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Summary

The amendments do not cause a disposal of a CGT asset of the Trust to a beneficiary and as such CGT events E6 and E7 will not happen as a result of the amendments to the Trust Deed.

Detailed reasoning

CGT events E6 and E7 happen if a trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the income or capital of the trust: sections 104-80 and 104-85 of the ITAA 1997.

In this case, the amendments do not cause the disposal of a CGT asset of the Trust.

Therefore, CGT events E6 and E7 will not happen as a result of making the amendments to the Trust Deed.

Question 6

Will CGT event E8 in section 104-90 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust?

Summary

No beneficiary has an interest in the trust that constitutes a vested and indefeasible interest in the trust capital and as such CGT event E8 will not happen as a result of the amendments to the Trust Deed

Detailed reasoning

CGT event E8 happens to a beneficiary of a trust (except a unit trust or a trust to which Division 128 applies) who did not give any money or property to acquire the CGT asset that is the beneficiary's interest in the trust capital and they did not acquire it by assignment and the beneficiary disposes of the interest, or part of it (but not to the trustee): section 104-90.

Taxation Determination TD 2009/19 Income tax: does a taker in default of trust capital have an 'interest in the trust capital' for the purposes of CGT event E8 in section 104-90 of the Income Tax Assessment Act 1997? states that 'only those interests which constitute a vested and indefeasible interest in a share of the trust capital fall within the scope of CGT event E8' (paragraph 2 of TD 2009/19).

No beneficiary has an interest in the trust that constitutes a vested and indefeasible interest in the trust capital.

Therefore, the making of the amendments to the Trust Deed will not cause CGT event E8 to happen.

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