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Edited version of private ruling

Authorisation Number: 1011524121465

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Ruling

Subject: CGT -Trust resettlement

1. Will the proposed Deed of Amendment to the Trust terminate the Trust or create a new Trust for income tax purposes and result in a capital gains tax event occurring for the purposes Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

2. Will the Commissioner confirm that Subdivision 149-B of the ITAA 1997 will not apply to the proposed variations to the Trust Deed for each of the Trusts, such that if the variations are made to the Trust Deeds, the "pre-CGT assets" (as defined in section 149-10 of the ITAA 1997] of the Trusts will not stop being "pre-CGT assets" [as so defined]?

Yes.

3. Will the Commissioner confirm that Subdivision 149-B of the ITAA 1997 will not apply to the previous variations to the Trust Deed for each of the Trusts, such that the "pre-CGT assets"(as defined in section 149-10 of the ITAA 1997] of the Trusts did not stop being "pre-CGT assets" [as so defined]?

Decline to rule.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The Trusts are discretionary trusts and were established pursuant to the Trust Deeds. The settlors of the Trusts were A and B. The primary beneficiaries were the lineal descendants of A and B living as at a particular date.

The assets of the Trusts are assets of the Family. Almost all of the assets of the Trusts were acquired before 20 September 1985 therefore pre-CGT.

The Trusts Deeds were varied after 20 September 1985. The variations arose to extend the lineal descendants to the next generation.

The variations ensured that, following the death of one of the primary beneficiaries the then existing children of the deceased would receive a proportionate share of the income and capital of the Trusts in the place of their deceased parent. Prior to those amendments, if that primary beneficiary were to die, no part of the Trust Fund or the income thereof would have passed to their children under the then-terms of the Trusts.

The Trustee lodged an application for a Private ruling in respect of the variations. By way of Notice of Private Ruling the Commissioner confirmed that section 149-30 of the ITAA 1997 would not apply as a result of the Original Variation, on the basis that the Commissioner was satisfied that at all times on and after 20 September 1985 the majority of underlying interests in the assets of the Trusts were had by ultimate owners who had majority underlying interests in the assets immediately before that date. Accordingly, the Commissioner confirmed that the assets of the Trusts that were acquired before 20 September 1985 did not stop being 'pre-CGT assets' as a result of the variations.

Since the original ruling application was lodged with the ATO, one of the primary beneficiaries has re-married and had further children. The re-marriage and further children were not in expectation or even contemplation at the time the previous variations were executed.

As with the previous variations, it is now desired that the new children be introduced as beneficiaries under the trusts and similarly be entitled to receive a proportionate share of the income and capital of the Trusts if the primary beneficiary is not living at the time of any distribution by the Trustee of income or capital,

Accordingly, it is proposed that the Trustee vary the Trust Deeds to effectuate those desires.

You have provided the following documents which are to be read with and form part of these facts:

    · Proposed Deeds of Variation by the Trustee

    · Consolidated Trust Deeds incorporating the proposed amendments

    · Deeds of Variation made on dd/mm/xxxx by the Trustee

    · Trust Deeds with amendments incorporated up to dd/mm/xxxx

    · Application for Private Ruling lodged with the ATO for the previous amendments

    · Letter sent to the ATO for the previous private ruling application

    · Notice of Private Ruling previously issued.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Part 3.1

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-30

Taxation Administration Act Section 359-25

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 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 of the ITAA 1936 applies we will first 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 of the ITAA 1936, go to our website www.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

The relevant legislation is the Income Tax Assessment Act 1997 (ITAA 1997). All references to legislation is to ITAA 1997 unless otherwise stated.

Section 104-55

The capital gains tax (CGT) provisions are contained in Part 3.1. Under section 104-55 CGT event E1 occurs when a trust is created over a CGT asset by declaration or settlement. Changes to an existing trust may cause CGT event E1 to occur.

The creation of a new trust - Statement of Principles August 2001 (Statement of Principles) outlines when the Commissioner will treat changes as giving rise to a new trust estate. The Statement of Principles uses the term resettlement to describe when changes to a trust deed are such that, for income tax purposes, one trust estate comes to an end and is replaced by another trust.

The Statement of Principles advises that it is a change in the essential nature and character of the original trust relationship which creates a new trust. The Statement of Principles considers the following changes which may result in the creation of a new trust:

    · any change in beneficial interests in trust property

    · a new class of beneficial interest (whether introduced or altered)

    · redefinition of the beneficiary class

    · changes in the terms of the trust or the rights or obligations of the trustee

    · changes in the nature or features of trust property

    · additions of property which could amount to a new and separate settlement

    · depletion of the trust property

    · a change in the termination date of the trust

    · a change in the trust that is not contemplated by the terms in the original trust

    · a change in the essential nature and purpose of the trust,and/or

    · a merger of two or more trusts or a splitting of a trust into two or more trusts.

Depending on their nature and extent, and their combination with other indicia, these changes may amount to a mere variation of a continuing trust, or alternatively, to a fundamental change in the essential nature and character of the trust relationship. A fundamental change in the essential nature and character of the trust relationship means that the original trust is brought to an end and/or a new trust created.

The Statement of Principles provides:

    Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the power of the trustee. The original intentions of the settler must be considered in determining whether a new trust has been created.

Application to your circumstances

Based on your facts and submissions, overall the proposed changes do not represent a change in the essential nature and character of the trust relationship therefore there is not a new trust created for the purposes of the CGT provisions under Part 3.1

Division 149

A CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985, and no income tax provision has operated to treat it as having been acquired after that date. The provisions in Division 149 may cause a pre-CGT asset to be treated as a post-CGT asset.

Division 149 contains provisions which govern when an asset held by an entity stops being a pre-CGT asset and is treated as having been acquired after that date. Entities affected by Division 149 are principally companies and trusts (a non-public entity) and public entities.

In accordance with subsection 149-30(1), an asset of a non-public entity stops being a pre-CGT asset when majority underlying interests in the asset are not held by the same ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-30(2) states that if after 20 September 1985 majority underlying interests in the asset were the same as prior to 20 September 1985, the asset continues to be a pre-CGT asset. If the majority underlying interests in the asset have not changed, then the pre-CGT character of the asset will not be altered.

Section 149-10 provides that a CGT asset an entity owns is a pre-CGT asset if it was: 

    · last acquired before 20 September 1985,and

    · the entity was not, immediately before the start of the 1998-99 income year, taken to have acquired the asset after 20 September 1985 under former subsection 160ZZS(1) of the ITAA 1936,and

    · the asset has not stopped being a pre-CGT asset because of Division 149 of the ITAA 1997.

In Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985, the Commissioner considered the application of section 160ZZS of the ITAA 1936 (now Subdivision 149-B of the ITAA 1997) where an asset acquired by the trustee of a discretionary trust on or before 19 September 1985 is disposed of after that date.

The ruling states that in considering the question of 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 exercised.

Paragraphs 6 and 7 of the ruling make it clear that if a trustee continues to administer a trust for the benefit of members of a particular family, section 160ZZS of the ITAA 1936 (Subdivision 149-B of ITAA 1997) will not apply. The ruling explains that if there is an amendment to the trust deed which results in a practical effect of a change of more than 50% of the underlying interests of the trust assets, then subsection 160ZZS(1) (Subdivision 149-B of ITAA 1997) would apply.

Application to your circumstances

As the majority underlying interests in the assets of the trust have remained the same and former subsection 160ZZS (1) of the ITAA 1936 as well as Division 149 of the ITAA 1997 would not operate to remove the pre-CGT status of any assets in the trust.  

Section 359-25 of the Taxation Administration Act

TR 2006/11 outlines the private ruling system and the period for which a private ruling has effect is discussed under paragraph 54 as follows:

    54. A private ruling will usually specify the time it begins to apply and the time it ceases to apply. The specified start or end time of a private ruling may be before, when or after the private ruling is made. This time may be specified by reference to the occurrence of a particular event (for example, commencement of the relevant scheme). Where no date or event is specified, the private ruling applies from when it is made. If no end time is specified, it ceases to apply at the end of the income year or accounting period in which it started to apply.

In theory, there is no limit to the number of forward years that we can rule on. There are risks, however, in giving advice that applies for extended periods. These risks include:

    · the possibility of a change of the law

    · the likelihood of changes to the facts of the case, and

    · the risk that a subsequent public ruling might override the private ruling.

Should any of these events happen, the private ruling will no longer apply, and the taxpayer will no longer be protected. In addition, a court may refuse to entertain a case based on a ruling if it considers that the facts or tax law are so likely to change that it would make the case of no legal consequence to either of the parties.

We would not normally rule for beyond three to four years, because the likelihood of change to the law or to the factual situation is too great.

Conclusion

Question 1

Will the proposed Deed of Amendment to the Trust terminate the Trust or create a new Trust for income tax purposes and result in a CGT event occurring for the purposes Part 3-1 of the ITAA 1997?

No. Overall the proposed changes do not represent a change in the essential nature and character of the trust relationship therefore there is not a new trust created for the purposes of the CGT provisions under Part 3.1

Question 2

Will the Commissioner confirm that Subdivision 149-B of the ITAA 1997 will not apply to the proposed variations to the Trust Deed for each of the Trusts, such that if the variations are made to the Trust Deeds, the "pre-CGT assets" (as defined in section 149-10 of the ITAA 1997] of the Trusts will not stop being "pre-CGT assets" [as so defined]?

Yes. As the majority underlying interests in the assets of the trust have remained the same and former subsection 160ZZS (1) of the ITAA 1936 as well as Division 149 of the ITAA 1997 would not operate to remove the pre-CGT status of any assets in the trust.  

Question 3

Will the Commissioner confirm that Subdivision 149-B of the ITAA 1997 will not apply to the previous variations to the Trust Deed for each of the Trusts, such that the "pre-CGT assets"(as defined in section 149-10 of the ITAA 1997] of the Trusts did not stop being "pre-CGT assets" [as so defined]?

A Private Binding Ruling was issued in respect of the previous variations to the Trust Deeds. As this Private Binding Ruling is still current we have declined to rule on this question.