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Ruling

Subject: Trust resettlement and Subdivision 126-G

Question 1

Will the Commissioner confirm that the execution of a proposed amendment to the Trust Deed of Trust 1 will not result in the happening of CGT Event E1 (section 104-55) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner confirm that Trustee Co as trustee for Trust 1 will be eligible to choose capital gains tax (CGT) rollover relief under Subdivision 126-G of ITAA 1997 in relation to the proposed transfer of shares in Head Co. to the Trustee of a new trust, Trust 2?

Answer

Yes

Relevant facts and circumstances

The Group wishes to undertake a restructure to simplify the group structure in order to achieve greater operational, financial reporting and tax compliance efficiency.

The Restructure, if implemented, will bring certain nominated companies within the Group beneath Head Co, as wholly owned group entities. It is intended that all transactions under the Restructure take place at market value to ensure no dilution of relative shareholder value.

As part of the Restructure, the parties to the Restructure Deed wish to separate the assets held by Trust 1. That is, the shares held by Trust 1 in Head Co are to be separated from the real property and other assets in Trust 1, through the creation of a new trust to hold the shares in Head Co.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6B

Income Tax Assessment Act 1936 Division 6C

Income Tax Assessment Act 1997 Subsection104-55

Income Tax Assessment Act 1997 Subsection104-70

Income Tax Assessment Act 1997 Subdivision126-G

Income Tax Assessment Act 1997 Section 126-225

Income Tax Assessment Act 1997 Subsection126-225(1)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(a)

Income Tax Assessment Act 1997 Subparagraph126-225(1)(a)(i)

Income Tax Assessment Act 1997 Subparagraph126-225(1)(a)(ii)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(b)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(c)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(i)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(ii)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(iii)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(d)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(e)

Income Tax Assessment Act 1997 Subsection 126-225(2)

Income Tax Assessment Act 1997 Subsection 126-225(3)

Income Tax Assessment Act 1997 Subsection 126-230

Income Tax Assessment Act 1997 Subsection 126-230(1)

Income Tax Assessment Act 1997 Paragraph 126-230(1)(a)

Income Tax Assessment Act 1997 Paragraph 126-230(1)(b)

Income Tax Assessment Act 1997 Paragraph 126-230(1)(e)

Income Tax Assessment Act 1997 Subsection 126-230(2)

Income Tax Assessment Act 1997 Subsection 126-230(3)

Income Tax Assessment Act 1997 Subsection 126-230(4)

Income Tax Assessment Act 1997 Section 126-235

Income Tax Assessment Act 1997 Paragraph 126-235(1)(b)

Income Tax Assessment Act 1997 Subsection 126-235(2)

Income Tax Assessment Act 1997 Subsection 126-235(3)

Income Tax Assessment Act 1997 Section 126-260

Income Tax Assessment Act 1997 Subsection 126-260(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Trust resettlement

The Commissioner of Taxation has published Creation of a new trust - Statement of Principles (Statement of Principles) to provide guidance on when the Commissioner will treat changes made to a trust deed as giving rise to a new trust estate/s. The Statement of Principles was released on 9 June 1999 and updated on 29 August 2001.

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 outlines some changes which may result in the creation of a new trust, including:

§ any change in beneficial interests in trust property;

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

§ a possible redefinition of the beneficiary class;

§ a change in the essential nature and purpose of the trust; and

Depending on their nature and extent, and their combination with other indicators, these 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 is 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 a new trust has been created.

Capital gains tax implications from a Trust resettlement

Section 104-55 of the ITAA 1997 provides that CGT event E1 occurs when a trust is created over the CGT asset.

Application to the Taxpayer's circumstances

The Statement of Principles states that if a change to the trust deed results in a change to the essential nature and character of the original trust relationship, a trust resettlement will result.

The administrative amendments proposed to the Trust 1 deed will not affect the essential nature or character of the trust. The proposed changes will merely alter the administrative arrangements for the trust by clarifying various procedural elements.

Consequently, the proposed administrative changes to the Trust Deed will not affect the essential nature of the trust relationship. These proposed administrative amendments will not result in the creation of a new trust, on the basis that the relationship between the trustee and the beneficiaries of the trust will not be fundamentally altered. Therefore, no CGT consequences will result from these administrative changes.

Question 2

Summary

Trust 1 will be eligible to choose rollover relief under section 126-225 of the ITAA 1997 in relation to the transfer of shares in Head Co to Trust 2 under the proposed restructure.

Detailed reasoning

Subdivision 126-G of the ITAA 1997 provides for CGT roll-over relief in circumstances where there is a transfer of assets between certain trusts. Subsection 126-225(1) of the ITAA 1997 stipulates when a roll-over may be chosen:

126-225(1) A roll-over may be chosen for a *CGT asset (the roll-over asset) if:

(a) the trustee of a trust (the transferring trust):

(i) creates a trust (the receiving trust), by declaration or settlement, over one or more CGT assets that include the roll-over asset; or

(ii) transfers the roll-over asset to an existing trust (the receiving trust);

at a particular time (the transfer time); and

(b) if subparagraph (a)(ii) applies - the receiving trust has no CGT assets, other than small amounts of cash or debt, just before the transfer time; and

(c) just after the transfer time:

(i) each of the trusts has the same beneficiaries; and

(ii) the receiving trust has the same *classes of *membership interests that the transferring trust had just before, and has just after, the transfer time; and

(iii) the sum of the *market values of each beneficiary's membership interests of a particular class in both trusts is substantially the same as the sum of the market values, just before the transfer time, of the beneficiary's membership interests of that class in both trusts; and

(d) the requirement in section 126-230 is met; and

(e) the exceptions in section 126-235 do not apply.

For Trust 1 to be eligible to choose roll-over relief under section 126-225 of the ITAA 1997 in relation to the transfer of shares in Head Co from Trust 1 to Trust 2, the conditions contained in subsection 126-225(1) of the ITAA 1997 must be satisfied.

1. Paragraph 126-225(1)(a) - the trustee of a trust transfers roll-over asset to an existing trust at a particular time

Subparagraph 126-225(1)(a)(ii) of the ITAA 1997 requires the trustee of the transferring trust to transfer a CGT asset, known as the "roll-over asset", to the trustee of an existing trust (the receiving trust) at a particular time (the "transfer time").

Based on the facts, the existing Trust 1 will be cloned to establish a new trust, Trust 2. This will happen prior to the transfer of the shares in Head Co (the rollover asset). All of the fully paid ordinary shares owned by Trust 1 in Head Co will be transferred to Trust 2. As a result, the rollover asset will be transferred to an existing trust and the requirements of subparagraph 126-225(1)(a)(ii) will be satisfied.

2. Paragraph 126-225(1)(b) - the receiving trust has no CGT assets, other than small amounts of cash or debt, just before the transfer time

As subparagraph 126-225(1)(a)(ii) of the ITAA 1997 applies, paragraph 126-225(1)(b) of the ITAA 1997 requires that the receiving trust has no CGT assets, other than small amounts of cash or debt, just before the transfer time.

Just before the start of the Asset Transfer Completion Period, Trust 2 will have no CGT assets or cash. Accordingly, subparagraph 126-225(1)(b) of the ITAA 1997 will be satisfied.

3. Paragraph 126-225(1)(c) - the beneficiaries

Beneficiaries

Paragraph 126-225(1)(c) of the ITAA 1997 requires that, just after the transfer time, three conditions must be satisfied in relation to the beneficiaries (or unit holders) of the transferring trust and the receiving trust.

Subparagraph 126-225(1)(c)(i)

Same beneficiaries just after transfer time

Further guidance in relation to what is meant by the phrase 'same beneficiaries' is found in paragraph 1.46 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 (enacted as the Tax Laws Amendment (2009 Measures No. 6) Act 2010). It states that:

Both trusts must have the same 'direct' beneficiaries. In other words, the same entities, acting in the same capacities, must be beneficiaries of both trusts. It is not sufficient that the 'indirect' or ultimate beneficiaries of both trusts are the same.

Just after the transfer time, Trust 2 will have identical unit holdings and beneficiaries to Trust 1. Trust 2 will have exactly the same number and type of units on issue as Trust 1. Trust 2 will also have the same unit holders holding the same proportion of units (being 50% each) as Trust 1.

Therefore, the identity of the unit holders and percentage of ownership is identical for each trust.

Accordingly, just after the transfer time, the transferring trust and the receiving trust will have the same beneficiaries, such that subparagraph 126-225(1)(c)(i) of the ITAA 1997 will be satisfied.

Subparagraph 126-225(1)(c)(ii)

Same class of membership interests

Subparagraph 126-225(1)(c)(ii) of the ITAA 1997 requires that, just after the transfer time, the receiving trust (Trust 2) has the same classes of membership interests that the transferring trust (Trust 1) had just before, and has just after, the transfer time.

Trust 1 will be cloned to create the new Trust 2. Given Trust 2 is a clone of Trust 1, both trusts will have identical classes of membership interests immediately before and after the transfer of the shares in Head Co. There will no change in the rights attached to the membership interests in either trust as a result of transferring the roll-over asset (shares in Head Co) to Trust 2.

The units in Trust 1 are held in equal proportions by the trustees of Trust 1 and Trust 2. Income is distributed to beneficiaries by the trustee in proportion to their unit holdings in the trust. Trust 2 will have identical unit holders to Trust 1. The Trust Deeds reflect this unit holding.

Therefore, it is considered the requirements of s126-225(1)(c)(ii) have been satisfied.

Subparagraph 126-225(1)(c)(ii)

Beneficiaries must have the same interests - the market value test

Subparagraph 126-225(1)(c)(ii) of the ITAA 1997 requires that, just after the transfer time, the receiving trust (Trust 2) has the same classes of membership interests that the transferring trust (Trust 1) had just before, and has just after, the transfer time.

The EM provides:

1.48 The market value test determines whether beneficiaries have the same proportionate membership interests before and after the transfer.

1.49 Under this test, the total market value of each beneficiary's interests in the transferring trust of a particular class and their interests of the matching class in the receiving trust must be substantially the same just before and just after the transfer time.

The only class of membership interests for both trusts (Trust 1 and Trust 2) will be ordinary units. Units in both trusts will be owned by the same beneficiaries. The units in both Trust 1 and Trust 2 will be held in equal proportion by the two unitholders and will carry the same rights, just before and just after the transfer time. As confirmed by paragraph 1.48 of the EM, these are the primary considerations under subparagraph 126-225(1)(c)(iii) of the ITAA 1997.

The proposed restructure will involve a transfer of shares in Head Co from Trust 1 to Trust 2. On an aggregate basis, the collective net asset values should remain substantially the same just before and just after the transfer time given a receivable will be owed by Trust 2 to Trust 1 equal to the value of shares transferred. This should translate into substantially the same market value for units in the trusts just before and just after the transfer time as the payable owed by Trust 2 to Trust 1 will offset the value of Head Co shares.

Therefore, it is considered the three conditions of paragraph 126-225(1)(c) of the ITAA 1997 will be satisfied.

4. Paragraph 126-225(1)(d) - The requirement in section 126-230 is met

Paragraph 126-225(1)(d) of the ITAA 1997 requires that the conditions in section 126-230 of the ITAA 1997 must be met:

126-230(1)

The conditions in subsections (2) and (3) must be met:

(a) if subsection 126-225(2) applies - at all times during the period:

(i) starting at the start time; and

(ii) ending at the transfer time; and

(b) otherwise - at the transfer time.

125-230(2)

The first condition is met at a particular time if, at that time, *CGT event E4 is capable of happening to all of the *membership interests in each of the trusts.

125-230(3)

The second condition is met at a particular time, if at that time, the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being significantly affected by the exercise, or non-exercise, of a power.

CGT event E4 is capable of happening

Subsection 126-230(2) of the ITAA 1997 is met at a particular time if, at that time, CGT event E4 is capable of happening to all of the membership interests in each of the trusts. The Note to subsection 126-230(2) of the ITAA 1997 states that "A roll-over cannot be chosen if either trust is a discretionary trust."

Under section 104-70(1) of the ITAA 1997, CGT event E4 happens if:

(a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (with some exceptions); and

(b) some or all of the payment is not included in your assessable income.

Subsection 126-230(2) does not require that CGT event E4 must actually happen to the transferring trust and the receiving trust. It is a notional test, establishing whether CGT event E4 is capable of happening to an interest in a trust.

Further guidance in relation to CGT event E4 can be obtained from paragraph 1.29 of the EM, which provides:

This requirement ensures that so-called discretionary trusts cannot access the roll-over. This is because it is difficult to establish, with any degree of certainty, the real underlying ownership of the assets of a discretionary trust. Therefore, it is equally difficult to test whether that ownership has been maintained.

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?

at paragraph 4 of states:

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 unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests.

In this case, at all times during the period starting at the start time and ending at the transfer time, CGT event E4 is capable of happening to all of the membership interests (being ordinary units) in Trust 1 and Trust 2 on the basis that both trusts are unit trusts.

The units in Trust 1 are held in equal proportions by the two unitholders. Income is distributed to beneficiaries by the trustee in proportion to their unit holdings in the trust. Trust 2 will have identical unit holdings to Trust 1. The applicant has confirmed that there are no discretionary interests in either trust.

On the basis of the above analysis, it is considered that CGT event E4 is capable of happening to all of the membership interests in the transferring and the receiving trust at the transfer time. Accordingly, subsection 126-230(2) of the ITAA 1997 will be met at the transfer time.

Beneficiary's entitlements not discretionary

Subsection 126-230(3) of the ITAA 1997 states:

Guidance in relation to what powers must be considered for the purposes of subsection 126-230(3) of the ITAA 1997 can be found in paragraph 1.31 of the EM, which provides that:

The quality or extent of each beneficiary's interest should not be capable of being defeated or substantively altered by the exercise, or non-exercise, of a power …

For these purposes, a power includes both trust powers (that is, powers that must be exercised but which allow discretion as to when or how they are exercised) and mere powers (that is, discretions), but does not include trustees' duties. A trustee duty is a thing a trustee must do as prescribed, or refrain from doing, to avoid being in breach of trust…

It is considered that the requirements of subsection 126-230(3) of the ITAA 1997 are satisfied given the position that the Trust 1 and Trust 2 unitholders entitlements are not discretionary, as they have fixed entitlements to both the income and capital of the trust.

In summary, on the basis that subsections 126-230(2) and 126-230(3) of the ITAA 1997 are met at the transfer time, paragraph 126-225(1)(d) of the ITAA 1997 will be satisfied.

No trusts are managed investment trusts

The applicant has confirmed that neither the transferring trust nor the receiving trust constitute a MIT. Accordingly, subsection 126-230(4) of the ITAA 1997 is not relevant.

5. Paragraph 126-225(1)(e) - exceptions to obtaining roll-over are not applicable

Paragraph 126-225(1)(e) of the ITAA 1997 requires that the exceptions in section 126-235 of the ITAA 1997 do not apply. There are three exceptions.

Foreign trusts

Subsection 126-235(1) of the ITAA 1997 provides that an exception for roll-over applies for a CGT asset if:

(a) the receiving trust is a *foreign trust for CGT purposes for the income year that includes the transfer time; and

(b) the roll-over asset is not *taxable Australian property just after the transfer time.

The phrase 'foreign trust for CGT purposes' is defined in subsection 995-1(1) of the ITAA 1997 as 'a trust that is not a resident for CGT purposes'. Subsection 995-1(1) of the ITAA 1997 provides that a unit trust is a 'resident trust for CGT purposes' for an income year if, at any time during the income year, any property of the trust is situated in Australia and the central management and control of the trust is in Australia.

The applicant has confirmed that Trust 2 is an Australian resident trust, and not a foreign trust for CGT purposes.

Therefore, the exception in subsection 126-235(1) of the ITAA 1997 does not apply.

Corporate unit trusts and public trading trusts

Subsection 126-235(2) of the ITAA 1997 provides an exception where either trust is a trust to which section 102K (i.e. Division 6B of Part III of the ITAA 1936 - corporate unit trusts) or 102S (i.e. Division 6C of Part III of the ITAA 1936 - public trading trusts) of the ITAA 1936 applies for the income year that includes the transfer time.

The transferring trust and the receiving trust are not corporate unit trusts or public trading trusts under Division 6B and Division 6C of Part III of the ITAA 1936, respectively, for the income year that includes the transfer time.

Therefore, the exception in subsection 126-235(2) of the ITAA 1997 will not apply.

'Mirror' Choices

Subsection 126-235(3) of the ITAA 1997, as qualified by subsections 126-235(4) and 126-235(5) of the ITAA 1997, provides in broad terms that an exception applies if, just after the transfer time, a choice under a provision of a taxation law is in force for either trust in relation to particular circumstances, a mirror choice is not also in force for the other trust, and the absence of the mirror choice would or could have an income tax effect.

Trust 1 and Trust 2 will ensure that mirror choices are in place, in regards to any choices made under a provision of the tax law, just after the transfer of shares in Head Co takes place.

Therefore, the exception in subsection 126-235(3) of the ITAA 1997 will not apply.

In summary, paragraph 126-225(1)(e) of the ITAA 1997 will be satisfied as none of the exceptions in section 126-235 of the ITAA 1997 will apply.

6. Subsection 126-225(3) - both trustees must choose roll-over

Subsection 126-225(3) of the ITAA 1997 states that the roll-over only happens if both the trustee of the transferring trust and the trustee of the receiving trust choose to obtain it.

The trustee of the transferring trust (Trust 1) and the trustee of the receiving trust (Trust 2) will choose to obtain the roll-over. Accordingly, subsection 126-225(3) of the ITAA 1997 will be satisfied.

Giving information to the beneficiaries

Subsection 126-260(1) of the ITAA 1997 states that the trustee of the transferring trust must, within 3 months after the end of the transfer year, send written notice of the particulars set out in subsection (2) to each of the trust's beneficiaries.

The trustee of Trust 1 will provide details of the rollover to the unit holders within 3 months of the transfer. Accordingly section 126-260 of the ITAA 1997 will be satisfied.

Conclusion

On the basis of the above analysis, it is considered all the requisite conditions contained in Subdivision 126-G of the ITAA 1997 will be satisfied. Therefore, Trust 1 will be eligible to choose roll-over relief under Subdivision 126-G of the ITAA 1997 for the transfer by Trust 1 of shares in Head Co to Trust 2.