Edited version of private ruling

Authorisation Number: 1011641475417

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Ruling

1. Will the proposed amendments (extension to the Vesting Day) to The Trust give rise to capital gains tax (CGT) Event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT Event A1 under section 104-10 of the ITAA 1997?

No.

2. Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the proposed arrangement?

No.

This ruling applies for the following period

1 July 2010 to 30 June 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust was constituted in New South Wales by deed of settlement.

The settler is X.

Under a clause of the Deed income of the trust is held for the benefit of the persons named in Item (d) of the schedule.

The trustee of any other Trust however created the capital or income of which is or may be held in whole or in part (and whether absolutely contingently or otherwise) for any one or more of the aforesaid person provided that no part there of may be held for the settler.

The Deed provides for the Trust Fund to vest in the Beneficiaries when the trust ends.

Later, Y was appointed trustee.

Later, a clause of the trust deed for The Trust was amended.

The Trust appointed A as the appointer of the trust with the power to appoint a new trustee in place of a trustee or in addition to an existing trustee and to remove any trustee.

The year 2017 is the vesting day for The Trust.

During the financial year ended 30 June 2011 you propose to extend the vesting day up to 80 years from the date the trust was established.

The Trustees power to alter the Trust Deed is clause X.

You purpose to amend a clause, the vesting date, in accordance with clause X of The Trust Deed, the Trustee varies the trusts, terms and conditions contained in the Trust Deed.

You propose that a corporate appointor be appointed to ensure continuity of an appointor for the extended life of The Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Subsection 177A(1).

Income Tax Assessment Act 1936 Subsection 177A(3).

Income Tax Assessment Act 1936 Subsection 177A(5).

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Subsection 177C(1).

Income Tax Assessment Act 1936 Section 177D.

Income Tax Assessment Act 1936 Paragraph 177D(b).

Income Tax Assessment Act 1936 Section 177F.

Income Tax Assessment Act 1936 Subsection 177F(1).

Income Tax Assessment Act 1936 PtIVA.

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 section 104-55

Reason for decision

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, CGT event E1 under section 104-55 of the ITAA 1997 will not happen. As there has been no change in ownership of the Trust Property and no disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997, CGT event A1 under section 104-10 of the ITAA 1997 will also not happen.

A capital gain or loss is made only if a CGT event happens (section 102-20 of the ITAA 1997). The CGT events at issue are CGT events E1 and A1.

CGT Event E1

Section 104-55 of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT Event A1

CGT Event A1 under section 104-10 of the ITAA 1997 happens when you dispose of a CGT asset. You are deemed to dispose of a CGT asset if a change of ownership happens from you to another entity, whether because of some act or event or by operation of law.

Subsection 102-25(1) of the ITAA 1997 provides that if more than one CGT event can happen, then you use the one that is the most specific to your situation. In this case CGT event E1 is the most specific event, and is considered firstly.

Overview

CGT event E1 will happen where changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created.

The creation of a new trust - Statement of Principles August 2001 (Statement of Principles) gives guidance as to when the Commissioner will treat changes to a trust as giving rise to a new trust estate.

Part 5.5 of the Statement of Principles states:

It is important to distinguish between changes which are merely procedural and those which fundamentally redefine the relationship between the trustee and beneficiaries in respect of the trust property. It is generally only changes of the latter type which will give rise to a new trust.

The Statement of Principles provides that a change to the essential nature and character of the original trust relationship 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

· redefinition of the beneficiary class

· changes in the terms of the trusts 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 to the trust that is not contemplated by the terms of 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.

Whether a new trust is created will depend, among other things, on the terms of the original trust, the powers of the trustee and the original intentions of the Settlor.

Extending the Vesting Day

Part 5.2 of the Statement of Principles discusses extending the term (duration) of the trust and provides:

… the ATO will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate when:

· the trust deed confers an express power to alter the termination date;

· the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship; and

· other accompanying circumstances do not indicate a fundamental change to the trust.

Express power

Under a clause of the trust deed an express power on the Trustee to appoint an earlier date to be vesting date but does not provide express power to extend the vesting date.

The Trustees power to alter the Trust Deed is found at clause X.

In relation to whether the wide powers provided to the Trustee under clause X are sufficient to determine that the Deed confers an Express Power to extend the Vesting Date we examine the Full Federal Courts comments in FC of T. v Commercial Nominees Australia Ltd 99 ATC 5115; (1999) 43 ATR 42:

So long as any amendment of the trust obligations relating to such property is made in accordance with any power conferred by the instrument creating the obligations, and the continuity of property that is the subject of trust obligations is established, there will be identity of the taxpayer notwithstanding any amendment of the trust obligation and any change in the property itself.

The comments in this case support the conclusion that the implied power conferred in clause X of the Trust Deed meets the definition of Express Power and is sufficient to allow for the extension of the Vesting Date.

Accordingly, it is considered that the Trustee does have an express power to alter the Vesting Date under clause X.

Trust Period

It is provided in the Statement of Principles that in some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations the subject matter of the trust can be most accurately be described as the income and other benefits arising from the trust property over a particular period.

In this case, the Trust was established for the benefit of the beneficiaries as listed. With the exception of one, all beneficiaries are of the family. The Trust is for the benefit of the family and not as a vehicle for a particular project or to hold an asset of intrinsically limited duration.

The Deed also empowers the Trustee to appoint an earlier date to be the Vesting Date.

Therefore, the deed and surrounding circumstances do not indicate that the current term of the Trust is a fundamental feature of the Trust.

Fundamental change to the trust

A Clause of the Deed provides for the Trust Fund to vest in the beneficiaries when the trust ends. Although the Trustee has absolute discretion to determine shares and proportions on distribution of the trust assets, the Trust Fund has to be transferred to at least one of the beneficiaries once the Trust ends.

In Stein v. Sybmore Holdings Pty Ltd [2006] NSWSC 1004; 2006 ATC 4641; 64 ATR 325 (Stein's case), an application was made to the New South Wales Supreme Court for an order under section 81 of the Trustee Act 1925 (NSW) empowering the Trustee to defer the vesting date.

The Court was aware that the effect of the extension of the vesting date would be to change the beneficial interests in the Trust Fund from what they were at the time of the application. Campbell J considered, at page 4747, that section 81 of the Trustee Act 1925 (NSW) could be used in a way that altered beneficial interests and the fact that the extension of the vesting date would likely to alter who ultimately had beneficial interests in the Trust Fund, was not necessarily fatal to the application.

The Statement of Principles, at chapter 5.1, considers the addition and removal of beneficiaries and confirms that the identity of those for whose benefit the trust exists is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amounting to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.

The relevant beneficial interests in a trust fund obviously constitute a critical element in a trust relationship. In circumstances where default beneficiaries have vested, but defeasible, interests in the trust capital, an extension to the vesting date means there may be changes in those beneficial interests. That is, the change may be considered likely to alter who ultimately has the beneficial interests.

But, even before the existing vesting date, those interests might have been defeated. That is, the beneficial interests remain vested and defeasible, both before and after the change to the vesting date, though the likelihood of their being defeated may in some cases be considered greater after the change. Further, the class of beneficiaries may be unchanged. Where the class of beneficiaries includes children unborn at the original vesting date, any children who may come to hold relevant beneficial interests after that date, were always part of the original class of beneficiaries who might ultimately take.

In your case, the extension of the Vesting Date will potentially vary the beneficial interests. The question is whether this potential change to beneficial interest is fundamental enough to cause a resettlement of the Trust.

It is the Commissioners opinion that whilst there will be a potential variation in the beneficial interest as a result of the amendment of the Vesting Date, the variation is consistent with changes in the membership of a continuing class and therefore not significant enough to cause a resettlement.

The facts in this case do not disclose any fundamental change in the trust relationship. As discussed above the potential variation to beneficial interests in the Trust fund is not considered to result in a fundamental change in the essential nature and character of the Trust.

Conclusion

As all three requirements under part 5.2 of the Statement of Principles are satisfied, the extension of the Vesting Date will not be treated as giving rise to a new trust estate. Therefore, the extension of the Vesting Date in these circumstances will not give rise to CGT Event E1 under section 104-55 of the ITAA 1997.

Appointing corporate appointor

The examples in the Statement of Principles on this point demonstrate that it is the interests of the beneficiaries, not necessarily their rights, which are integral to determining whether or not there is a fundamental change to the trust relationship.

Part 5.5 of the Statement of Principles states:

Changes which are merely procedural or administrative generally will not in themselves amount to the creation of a new trust. These could include:

· changes in the person acting as trustee or manager; or

· changes which merely affect administrative and housekeeping procedures without substantially altering the rights of the beneficiaries in respect of the trust property.

Conclusion

Since the proposed are administrative and of "housekeeping" nature and since they would not affect the discretionary nature of the Trust or the purpose of the Trust, namely holding the trust for the benefit of the general Beneficiaries, no new trust is considered to be created either by the variation of the Trust Deed or the execution of the Deed Poll.

Part IVA of the ITAA 1936

Part IVA of the ITAA 1936 is a general anti-avoidance provision. It gives, in section 177F of the ITAA 1936, the Commissioner discretion to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936 be obtained by a taxpayer in connection with a scheme to which Part IVA applies.

Before the Commissioner can exercise the discretion in section 177F of the ITAA 1936, the requirements of Part IVA must be satisfied. Those requirements are that:

· a tax benefit, as identified in section 177C of the ITAA 1936, was obtained or would have been obtained, but for subsection 177F(1) of the ITAA 1936

· the tax benefit was or would have been obtained in connection with a scheme as defined in section 177A of the ITAA 1936, and

· having regard to the factors in section 177D of the ITAA 1936, the scheme is one to which Part IVA applies.

Subsection 177A(1) of the ITAA 1936 defines a scheme widely as follows:

"scheme" means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct;

Subsection 177A(3) of the ITAA 1936 states that the reference in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.

For Part IVA to apply, a taxpayer must have obtained, or would, but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit, relating broadly to:

· an amount not being included in the assessable income of the taxpayer of a year of income

· a deduction being allowable to the taxpayer in relation to a year of income

· a capital loss being incurred by the taxpayer during a year of income, and

· a foreign tax credit being allowable to the taxpayer.

Subsection 177C(1) of the ITAA 1936 allows two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out.

The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an alternative hypotheses or an alternative postulate. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. This alternative hypothesis or postulate also forms the background against which the objective ascertainment of the dominant purpose of a person occurs in accordance with section 177D of the ITAA 1936.

Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit. The person referred to need not be the taxpayer.

Subsection 177A(5) of the ITAA 1936 clarifies that the purpose referred to includes the dominant purpose where there are two or more purposes. Section 177D of the ITAA 1936 requires an objective conclusion as to purpose to have been reached having regard to the objective facts. The actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion under section 177D.

Conclusion

On the basis of the facts you have disclosed, and having regard to the eight matters provided for in section 177D of the ITAA 1936, it is concluded that the scheme is an ordinary business or family arrangement, and the dominant purpose is not to obtain a tax benefit.

Accordingly, Part IVA does not apply to this arrangement.