Edited version of private advice

Authorisation Number: 1052265551628

Date of advice: 8 August 2024

Ruling

Subject: CGT - trust

Question 1

Pursuant to subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), is the Commissioner satisfied, or does the Commissioner think it reasonable to assume that, at all times on or after 20 September 1985 to the date of this ruling application, a majority of the underlying interests in the pre-CGT assets of the Company were held by ultimate owners who had majority underlying interests immediately before that day, such that subsections (1) and (1A) apply as if that were the case?

Answer

Yes.

Question 2

If the interests in the Trust are vested in the eligible corpus beneficiaries as proposed, pursuant to subsection 149-30(2) of the ITAA 1997, will the Commissioner be satisfied, or will the Commissioner think it reasonable to assume that, at all times on or after 20 September 1985 to the date of such vesting, a majority of the underlying interests in the pre-CGT assets of the Company were held by ultimate owners who had majority underlying interests immediately before that day, such that subsections (1) and (1A) apply as if that were the case?

Answer

Yes.

Question 3

If the interests in the Trust are vested in the eligible corpus beneficiaries as proposed, will CGT event E5 occur?

Answer

No.

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

The Company

1.      The Company was incorporated in xxx on DD MM YYYY.

2.      At incorporation, there were 5 directors of the Company until one of them passed away.

Shareholding history of the Company

3.      Immediately before 20 September 1985, the Company had 32,000 ordinary shares on issue held as follows:

Table 1: Immediately before 20 September 1985, the Company had 32,000 ordinary shares on issue held as follows:

4.      No additional shares have been issued in the Company on or after 20 September 1985.

5.      There have been 2 changes to the shareholders in the Company since 20 September 1985.

Changes to the shareholding

6.      Person E passed away on DD MM YYYY. On DD MM YYYY, the remaining 4 individual shareholders were transferred Person E's shares in equal shares as an inheritance under Person E's Will.

7.      Person C passed away on DD MM YYYY. Pursuant to the Will of the late Person C. Their shares were transferred to their spouse on DD MM YYYY.

8.      The spouse of Person C did not own shares in the Company before 20 September 1985.

9.      The current shareholders of the Company are:

Table 2: The current shareholders of the Company are:

10.    On this basis, there have been no share transfers since 19 September 1985, other than due to the death of 2 people as shown below:

Table 3: On this basis, there have been no share transfer since 19 September 1985, other than due to the death of 2 people as shown below:

The Trust

11.    Company A is the corporate trustee of the Trust (trustee), established by deed of settlement (trust deed) dated DD MM YYYY.

12.    At all times, the Trust has been a discretionary trust.

13.    The trustee was incorporated on DD MM YYYY. The directors of the trustee were Person A, Person B, Person C and Person D until Person C's passing. They were also the shareholders of the trustee in equal shares.

14.    The Trust was established by Person X. Person X died on DD MM YYYY.

Beneficiaries and distributions

15.    The trust deed provides that the 'eligible income beneficiaries' of the Trust are the spouse of Person X and their children, grandchildren and great-grandchildren born before the vesting day.

16.    Trust deed provides that the 'eligible corpus beneficiaries' of the Trust are:

•         the spouse of Person X and their children, grandchildren and great-grandchildren born before the vesting day, and

•         any body corporate other than the trustee for the time being controlled by any one or more of the persons mentioned above.

17.    Since the establishment of the Trust, income of the trust has been distributed to the families of Person A, Person B, Person C and Person D.

The trust fund

18.    The underlying assets of the Trust are xxx shares in the Company and 50% of a property (the land).

Trustee's right of indemnity and right to incur expenditure

19.    Under clause xxx of the trust deed, the trustee is entitled as of right to full indemnity out of the trust fund against its costs, charges and expenses properly incurred in the management of the trust:

The expenses in connection with the administration of this trust including the remuneration and charges of the Trustee herein provided for and of the investment or reinvestment of any part of the trust fund and the collection of income and other sums derivable therefrom shall be charged against the income of the trust fund but if such income is insufficient for the purpose then the same shall be charged against the trust fund or so much thereof as may be required in addition to the income for the purpose.

20.    Clause xxx of the trust deed states that the trustee has a right of indemnity against the liability for any loss or damage arising under certain circumstances:

No Trustee of this settlement shall be liable for any breach of trust howsoever occurring except to the extent if at all that such breach results from his own wilful default or neglect. The exercise of any power conferred by this settlement on the Trustee shall be in the discretion of the Trustee and no Trustee shall be liable for any loss or damage occurring as a result of his exercising or failing or refusing to exercise or of his concurring in or failing or refusing to concur in any exercise of such power.

Proposed trust vesting

21.    Under clause xxx of the trust deed, the 'vesting date' is defined as:

"the vesting date" means the date upon which occurs the first of the following events:-

(i)       80 years from the date of the trust deed;

(ii)       the death of the last survivor of all of the lineal descendants male or female of his late Majesty King George the Sixth of England who were living on DD MM YYYY; and

(iii)      the execution by the Trustee of a document declaring the date of the execution of the same to be the vesting day.

22.    The trustee is considering bringing forward the vesting date per clause xxx of the trust deed.

23.    Clause xxx of the trust deed provides that the trustee may determine in writing within one month before the vesting day that the corpus of the trust will be held on trust for one or more of the 'eligible corpus beneficiaries' then living in such proportions and to the exclusion of any that the trustee determines.

24.    To the extent that no determination of distribution is made, clause xxx of the trust deed sets out that 25% of the income is to be paid to or applied for each of the families of Person A, Person B, Person C and Person D.

25.    The trustee is considering vesting the Trust in the following eligible corpus beneficiaries in the proportions specified:

Table 4: The trustee is considering vesting the Trust in the following eligible corpus beneficiaries in the proportions specified:

26.    The trustee does not intend to allocate particular assets to particular beneficiaries on vesting and will continue to hold the trust property for the beneficiaries on vesting (albeit in the proportions specified).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1936 former subsection 160ZZS

Reasons for decision

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

Question 1

Pursuant to subsection 149-30(2), is the Commissioner satisfied, or does the Commissioner think it reasonable to assume that, at all times on or after 20 September 1985 to the date of this ruling application, a majority of the underlying interests in the pre-CGT assets of the Company were held by ultimate owners who had majority underlying interests immediately before that day, such that subsections (1) and (1A) apply as if that were the case?

Summary

More than 50% of the beneficial interests that the ultimate owners have in the Company's assets, and the ordinary income from the assets of the Company, continue to be held by the same persons who held those interests before 20 September 1985 to the date of the ruling application of DD MM YYYY (date of the ruling application). Due to the passing of 2 original shareholders, the beneficiaries of the original shareholders' Estates, being Person A, Person B, the spouse of Person C and Person D, are deemed to have held the shares for the period of time the former owners held them as a result of subsections 149-30(3) and (4), and former subsection 160ZZS(2) of the ITAA 1936.

Accordingly, the Commissioner finds it reasonable to assume that there had been no change in the majority underlying interests in the Company since 19 September 1985 until the date of the ruling application pursuant to subsection 149-30(2).

Detailed reasoning

27.    Division 149 contains provisions, applicable to the 1999 and later income years, which govern when an asset acquired by an entity before 20 September 1985 stops being a pre-CGT asset. Section 149-10 provides:

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a)    the entity last acquired the asset before 20 September 1985; and

(b)    the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i)         former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii)       Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c)    the asset has not stopped being a pre-CGT asset of the entity because of this Division.

28.    Essentially, a CGT asset acquired before 20 September 1985 remains a pre-CGT asset if the majority underlying interests in the asset have not changed since 20 September 1985. Where a change in the majority underlying interests occurs, the CGT asset is deemed to be acquired after 19 September 1985, under either Division 20 of the Income Tax Assessment Act 1936 (ITAA 1936) (in respect of income years before the 1999 income year) or Division 149 (in respect of the 1999 income year and succeeding income years).

29.    The Company is not a public company. Therefore, former subsection 160ZZS(1) of the ITAA 1936 will apply for income years up to and including the income year ended 30 June 1998, and Subdivision 149-B will apply for income years after the income year ended 30 June 1998.

Majority underlying interests in a CGT asset

30.    Under the factual test in subsection 149-30(1), an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

31.    The meaning of 'majority underlying interests' in a CGT asset is defined in subsection 149-15(1) as:

(a)    more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b)    more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

32.    An 'underlying interest' in a CGT asset is defined in subsection 149-15(2) as:

... a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

33.    An 'ultimate owner' is defined in subsection 149-15(3) to include an individual or a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members.

34.    Subsections 149-15(4) and (5) provide that an ultimate owner has an indirect beneficial interest in a CGT asset of another entity if they receive for their own benefit any capital or ordinary income distributed by the entity through interposed entities (for example, companies, partnerships or trusts).

35.    The expression 'beneficial interests' as used in the definition of majority underlying interests is not itself defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company. Thus, it would be difficult to see how an asset of a company can satisfy the majority underlying interests test and remain a pre-CGT asset.

36.    Under subsection 149-30(2), if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the asset have not changed up to a particular time, then subsections

37.    149-30(1) and (1A) apply and the asset continues to be a pre-CGT asset.

38.    Subsections 149-30(3) and 149-30(4) provide that if an ultimate owner (new owner) has acquired an interest in an asset which is transferred to them as a result of the death of a person (former owner), the new owner is deemed to have held the underlying interest of the former owner for the same duration. Effectively it is deemed that there is no change from the former owner to the new owner, following the death of the former owner.

39.    Assistance is provided in Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340) where the terms 'underlying interest' and 'majority underlying interest' as used in former section 160ZZS of the ITAA 1936 are discussed.

40.    Paragraph 2 of IT 2340 states:

... underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

41.    Section 357-85 of Schedule 1 of the Taxation Administration Act 1953 (TAA) provides that if the Commissioner has made a ruling about a relevant provision and that provision is re-enacted or remade, the ruling is taken to be about the re-enacted or remade provision, insofar as the new law expresses the same ideas as the old law. Section 357-85 of the TAA applies to all rulings, including public rulings (paragraphs 49 to 50 of Taxation Ruling TR 2006/10 Public Rulings). As former section 160ZZS of the ITAA 1936 expresses the same ideas as Division 149, IT 2340 equally applies to Division 149.

42.    Applying the 'look through' approach for the purposes of Division 149, a shareholder may be treated as having a beneficial interest in the company's assets. This approach has been supported by the Administrative Appeals Tribunal in AAT Case 7529 (1991) 22 ATR 3532, Case Y59 91 ATC 502.

Events that resulted in changes of shareholding before the start of the 1999 income year

43.    For events that occurred before the start of 1999 income year, in order to address subsection 149-10(b), former subsection 160ZZS(1) of the ITAA 1936 needs to be considered, which stated:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

44.    Former subsection 160ZZS(3) of the ITAA 1936 defined majority underlying interests when applying subsection 160ZZS(1) to having the same meaning as in Subdivision G of Division 3 of Part III of the ITAA 1936.

45.    Majority underlying interests was defined in former subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of:

(a)    The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and

(b)    The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property.

46.    Former subsection 160ZZS(2) of the ITAA 1936 (the transitional provision with effect from

47.    31 December 1993 to 19 January 1997), was the equivalent provision to subsections 149-30(3) and (4), and provided:

For the purposes of this section, where, by reason of the death of a person, a natural person acquires a percentage (in this subsection referred to as the "acquired percentage") of the underlying interests in an asset, the natural person shall be deemed to have held (in addition to any other part of the total underlying interest that the person held or is deemed to have held), at any time when the deceased person held a percentage (in this subsection referred to as the "deceased person's percentage") of the total underlying interests in the property, a percentage of the total underlying interests in the property equal to the acquired percentage, or the deceased person's percentage at that time, whichever is the less.

48.    Former subsection 160ZZRU of the ITAA 1936, which replaced subsection 160ZZS(2) with effect from 20 January 1997, was the equivalent provision to subsections 149-30(3) and (4), provided:

For the purposes of this Division, if, because of a person's death, a natural person acquires a percentage (the acquired percentage) of the underlying interests in an asset, the natural person is taken to have held (in addition to any other part of the total underlying interests that the person held or is taken to have held), at any time when the dead person held a percentage (the dead person's percentage) of the total underlying interests in the asset, a percentage of the total underlying interests in the asset equal to the acquired percentage, or the dead person's percentage at that time, whichever is the less.

Application to your circumstances

49.    A summary of the share changes before 20 September 1985 to the date of the ruling application is as follows:

Table 5: A summary of the share changes before 20 September 1985 to the date of the ruling application is as follows:

Pre-CGT shares

Family inheritances Sep 19XX

Family inheritances Mar 19XX

Family inheritances Jul 19XX

Family inheritances Mar 19XX

Family inheritances Aug 19XX

Family inheritances May 19XX

Family inheritances May 19XX

Transferred by Person X Dec 19XX

Transferred by Person X Sept 19XX

Transferred by Est. Person Y Dec 19XX

Total Pre-CGT shares

% of total shares issued

Transferred shares

Inherited from Person E

(Transferred DD MM YYYY)

Inherited from Person C

(Transferred DD MM YYYY)

Total transferred shares

% of total shares issued

Total Issued Shares

% of total shares issued

Immediately before 20 September 1985

50.    Immediately before 20 September 1985, the shareholding of the Company was xxx ordinary shares held by Person A, Person B, Person C, Person D, Person E and Company A as trustee for the Trust in different proportions.

51.    As individual shareholders, Person A (xxx%), Person B (xxx%), Person C (xxx%), Person D (xxx%) and Person E (xxx%) were ultimate owners who had a direct beneficial interest in the assets of the Company, and in the ordinary income that may be derived from the assets of the Company.

52.    On this basis, immediately before 20 September 1985, the majority underlying interests in the Company were held by Person A, Person B, Person C, Person D and Person E. However, it is necessary to consider the impact of the deaths of Person C and Person E and its effect on these shareholders' majority underlying interests in the Company.

After 19 September 1985

a)     DD MM YYYY - Death of Person E

53.    Person E passed away on DD MM YYYY. Person A, Person B, Person C and Person D received the shares of Person E as an inheritance under the Will of the late Person E, and are deemed to have held the shares for the same period of time they were owned by the deceased by virtue of former subsection 160ZZS(2) of the ITAA 1936. As Person E held their shares in the Company from before

54.    20 September 1985, the new shareholders are similarly deemed to have held this interest from that point of time.

55.    Hence, there had been no change in the majority underlying ownership of the shares in the Company until the date of the ruling application and former subsection 160ZZS(1) of the ITAA 1936 would not have applied to deem a new date of acquisition.

56.    Consequently, Person A, Person B, Person C and Person D are deemed to have jointly held xxx% of shares (or xxx% each) in the Company before 20 September 1985, in addition to their personal original holding of xxx% respectively.

b)     DD MM YYYY - Death of Person C

57.    Person C passed away on 6 November 2022. Before the death of Person C, they continued to hold their original xxx% of shares in the company and acquired an additional xxx shares (or an interest of xxx%) from Person E pursuant to their Will.

58.    The new shareholder, being their spouse, acquired Person C's shares from their Estate pursuant to the Will of the late Person C and is deemed to have held the shares for the same period of time the shares were owned by Person C by virtue of subsection 149-30(4).

59.    Thus, the spouse of Person C is considered to have held xxx% of the shares in the Company since

60.    pre-20 September 1985, plus the additional xxx shares Person C had inherited from Person E.

61.    As such, subsection 149-30(1) has not been triggered as the majority ultimate owners of the Company have been maintained until the date of the ruling application.

Question 2

If the interests in the Trust are vested in the eligible corpus beneficiaries as proposed, pursuant to subsection

149-30(2), will the Commissioner be satisfied, or will the Commissioner think it reasonable to assume that, at all times on or after 20 September 1985 to the date of such vesting, a majority of the underlying interests in the pre-CGT assets of the Company were held by ultimate owners who had majority underlying interests immediately before that day, such that subsections (1) and (1A) apply as if that were the case?

Summary

The trustee's proposed vesting of the Trust in the eligible corpus beneficiaries will allow the trustee to continue to administer the trust for the benefit of members of the family of Person X. The proposed vesting will not affect the majority underlying interests in the assets of the Company which are held by ultimate owners consisting of 4 individuals.

Accordingly, the Commissioner finds it is reasonable to assume that there will be no change in the majority underlying interests in the Company since 19 September 1985 until the date the trustee in its absolute discretion specifies as an earlier vesting date, pursuant to subsection 149-30(2).

Detailed reasoning

62.    Under the factual test in subsection 149-30(1), an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

63.    'Majority underlying interests' is defined in section 149-15 of the ITAA 1997 as:

(a)    more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b)    more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

64.    Subsection 149-15(2) defines an underlying interest in a CGT asset as:

... a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

65.    An ultimate owner is defined in subsection 149-15(3) to include an individual or a company whose constitution prevents it from making any distribution, whether in money, property or otherwise to its members.

66.    Subsections 149-15(4) and (5) provide that an ultimate owner has an indirect beneficial interest in a CGT asset of another entity if they would receive for their own benefit any capital or ordinary income distributed by the entity through interposed entities.

67.    The expression 'beneficial interests' as used in the definition of majority underlying interests is not defined. Under ordinary legal concepts, where there is a discretionary trust, 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. As a beneficiary of a discretionary trust does not hold an interest in any asset of a trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1). Similarly, it would be equally impossible to trace an indirect underlying interest through a discretionary trust given that a discretionary trust is not itself an 'ultimate owner' as set out in subsection 149-15(3).

68.    IT 2340 sets out the Commissioner's view on the application of the 'underlying interest' and 'majority underlying' requirement when assets are held by the trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.

69.    Paragraphs 6 to 8 of IT 2340 states that in considering the question whether majority underlying interests have been maintained in the assets of a discretionary trust, it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised:

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.

8. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application as described.

70.    Therefore, where the trustee of a family trust continues to administer a trust for the benefit of members of a particular family, it would be reasonable for the Commissioner to assume that majority underlying ownership interests in the trust assets have not changed.

Application to your circumstances

71.    The Trust is a discretionary trust established on DD MM YYYY. The trustee acquired a beneficial interest of xxx% in the Company before 20 September 1985. Distributions of income of the Trust have been made to beneficiaries in accordance with the trust deed. Additionally, no variation of the trust deed had the practical effect of changing the beneficiaries of the Trust.

72.    As established in the reasoning for Question 1, the majority underlying ownership of the Company has been maintained during the period 19 September 1985 to the date of the ruling application as the Company's shares have only transferred across members of the family group as a result of either still holding their original shares or from execution of Wills of the respective former owners by virtue of subsection 149-30(4).

73.    The proposed vesting of the Trust will allow the trustee to continue to administer the trust for the benefit of members of Person X's family. The proposed vesting will not change the majority underlying interests in the Company's assets as xxx% of the beneficial interests that the ultimate owners have in the assets of the Company, and the ordinary income from the assets of the Company, continue to be held (or are taken to be held) by the same persons who held those interests before 20 September 1985, for the purposes of Division 149.

Question 3

If the interests in the Trust are vested in the eligible corpus beneficiaries as proposed, will CGT event E5 occur?

Summary

If the trustee determines that the Trust will vest before the nominated vesting date, CGT event E5 under section 104-75 will not occur as the proposed eligible corpus beneficiaries will not be absolutely entitled as against the trustee to the assets of the Trust.

Detailed reasoning

74.    CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee under subsection 104-75(1).

75.    The timing of the event is when the beneficiary becomes absolutely entitled to the asset under subsection 104-75(2).

76.    A CGT asset is any kind of property or a legal or equitable right that is not property. Shares in a company and land are CGT assets according to section 108-5.

77.    Determining whether a CGT event is triggered on the vesting of a trust depends on the terms of the trust deed. This will include consideration of the effect of vesting on the beneficial interests in the trust and the nature of the property held on trust. Taxation Ruling TR 2018/6: Income tax: trust vesting - consequences of a trust vesting (TR 2018/6) outlines the Commissioner's views about the immediate tax consequences of a trust vesting.

78.    Generally, from the time a discretionary trust vests, the trustee no longer has any discretionary power to appoint the income or capital of the trust. Rather, it holds the trust property for the absolute benefit of those beneficiaries specifies as the takers on vesting as per paragraph 12 of TR 2018/6.

79.    'Takers on vesting' is defined under paragraph 4 of TR 2018/6:

Takers on vesting means those beneficiaries that, under the deed, hold a fixed interest in the capital (and income thereon) after the trust vests. 'Takers on vesting' are sometimes called 'capital beneficiaries'...

80.    Paragraphs 13 and 14 of TR 2018/6 set out the consequences of a trust vesting under tax law:

13. The vesting of beneficial interests in a trust, even if described as a 'Termination Date', does not ordinarily cause the trust to come to an end, nor cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, or that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting). [citations omitted]

14. Further, where a trustee continues to hold property for takers on vesting, the property is held on the same trust as existed pre-vesting; albeit the nature of the trust relationship changes.

81.    Central to CGT event E5 is the requirement of a beneficiary's absolute entitlement to the whole of a CGT asset of the trust. 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) discusses the concept of absolute entitlement and states at paragraph 10:

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...

82.    Generally, a beneficiary will not be absolutely entitled to a trust asset if one or more other beneficiaries also have an interest in it. TR 2004/D25 provides at paragraphs 23 to 25:

More than one beneficiary with interests in a trust deed

23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

•      the assets are fungible;

•      the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

•      there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them.

83.    Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets are fungible if they are of the same type (for example, shares in the same company and with the same characteristics) as per paragraph 93 of TR 2004/D25.

84.    Conversely, if the assets are not fungible, but more than one beneficiary has an interest in them, then that is the clearest possible indication that, under the terms of the trust, individual beneficiaries are not entitled to particular assets to the exclusion of others under paragraph 91 of TR 2004/D25. That is, if each asset is unique, but the trust does not clearly set out which beneficiary is to get which asset, this indicates an intention that each beneficiary is in fact to have an interest in each of the assets.

85.    Land is rarely fungible because each parcel of land is unique per paragraph 94 of TR 2004/D25. Real estate is traded based on the actual sale price, not the sale price per unit. Unlike fungible commodities, parcels of real estate do not have equal value.

86.    Trust assets must be conveniently divisible in order for a trustee to satisfy a demand from a beneficiary that their share be satisfied by the transfer of an asset of the trust according to paragraph 100 of

87.    TR 2004/D25.

88.    Paragraph 108 of TR 2004/D25 states that the courts will not permit one beneficiary to terminate the trust in respect of an asset if to do so would defeat the interests of other beneficiaries or in any way prejudice those interests. The trust assets that present the greatest difficulties in being divided amongst multiple beneficiaries include land, private company shares and mortgage debts as per paragraph 110 of TR 2004/D25.

89.    Recent developments in case law have established that a proportionate share of the trust assets as a whole is not sufficient to enable any beneficiary to be absolutely entitled to any particular asset of the trust fund.

90.    Oswal v. Commissioner of Taxation [2013] FCA 745 (Oswal) considered the concept of absolute entitlement. Although it was not necessary for the Federal Court to consider whether CGT event E5 occurred, Edmond J found that the phrase 'absolutely entitled to a CGT asset of a trust... as against the trustee' requires a beneficiary to have a vested, indefeasible and absolute entitlement to a trust asset and to be entitled to require the trustee to deal with the asset as the beneficiary directs.

91.    In Oswal, the trustee's right of sale of trust property meant that the beneficiaries' interests, while absolute, were defeasible. Edmond J held that the trustee's right of indemnity was an impediment to absolute entitlement as against the trustee and, therefore, CGT event E5 did not happen.

Application to your circumstances

92.    The trustee will determine an earlier vesting day for the trust to be the date of execution of a resolution in accordance with the trust deed.

93.    In accordance with paragraph 12 of TR 2018/6, to establish whether a CGT event happens on vesting requires consideration of the trust deed, including consideration of the effect of vesting on the beneficial interests in the trust, and the nature of the property held on trust.

94.    Under the trust deed, the trustee may determine the proportions of the trust deed for each of the eligible corpus beneficiaries one month before the vesting date of the Trust. On vesting date, the trust assets held under the settlement will vest both in interest and in possession in the eligible corpus beneficiaries in the proposed proportions.

95.    The Trust will not come to an end upon vesting. Rather, the relationship between trustee and beneficiary will change, together with a rearrangement of the parties' rights and obligations as follows as per paragraphs 13 and 14 of TR 2018/6:

•         the trustee ceases to hold the trust assets pursuant to a discretionary trust, and will hold it on the terms of a fixed trust, and

•         the trustee is obliged to continue to hold the trust assets on the same trust as existed before vesting for the absolute benefit of the corpus beneficiaries.

96.    As there are multiple eligible corpus beneficiaries, a beneficiary will generally not be absolutely entitled to a trust asset if one or more beneficiaries also have an interest in it as per paragraph 23 of TR 2004/D25. Hence, it is relevant to determine at first instance whether the trust assets are fungible pursuant to paragraph 24 of TR 2004/D25.

97.    The shares in the Company are fungible assets as they are homogenous in terms of the attached legal and/or beneficial rights such that one asset can be replaced with another. However, the xxx shares cannot be conveniently divided between the eligible corpus beneficiaries with an interest in those shares. The beneficiaries are not able to call for their interest to be satisfied by distributing or allocating a specific number of shares in the company without prejudicing the other interest holders.

98.    Land is a non-fungible asset. It is unique and not capable of being replaced with another asset. There is no clear understanding that one of the corpus beneficiaries can call for their interest in the land to the exclusion of the other beneficiaries, nor are they able to call for their share of the land as to divide the land would prejudice the interests of the other beneficiaries' share of the land.

99.    The trust deed does not provide the trustee with any powers past the vesting date and, as such, the trustee will only be able to exercise its administrative powers, or those conveyed by statute, in addition to its obligation to hold the trust property on trust for the corpus beneficiaries. However, consistent with the principles around absolute entitlement in recent case law, there is nothing in the trust deed for the Trust to indicate that the trustee will not continue to operate the trust and incur expenses in the exercise of that role. Consequently, the trustee's right of indemnity will remain in place and the trustee will still be authorised to incur expenses. This means that, similar to Oswal, the beneficiaries will have an impediment to absolute entitlement as against the trustee upon vesting as the trustee will continue to have a common law right of indemnity out of trust assets in accordance with the trust deed. Therefore, even if the beneficiaries want to call for assets and exit the Trust, they could not have any such right until such time as a reckoning was prepared such that the trustee could transfer assets without the potential right of indemnity being still attached.

100. Upon vesting, none of the corpus beneficiaries will be absolutely entitled to a CGT asset of a trust as against the trustee. In accordance with the obiter comments of Edmond J in Oswal, the beneficiaries will not have a vested, indefeasible and absolute entitlement to the trust assets, or be entitled to require the trustee to deal with those assets as they direct.

101. For these reasons, the trustee's decision to vest the Trust before the nominated vesting date will not result in any of the eligible corpus beneficiaries becoming absolutely entitled to either of the assets of the trust as against the trustee and, therefore, CGT event E5 will not happen.

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