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Ruling

Subject: Capital gains tax - CGT events - Appointment of new trustee

Question: Will CGT event A1 (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)), CGT event E1 (section 104-55) or CGT event E2 (section 104-60) happen if, in the circumstances outlined in the scheme, a new trustee is appointed to CGT assets forming part of the property of the trust and those assets are transferred to the new trustee?

Answer: No.

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 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.

Company A Pty Ltd (Company A) is the trustee of the ABC Family Trust (the trust) established under a deed (Trust Deed).

Clause 3 of the Trust Deed states that the potential beneficiaries of the trust include Person B, Person C, their spouses, children, grandchildren or remoter issue, the spouses of any such individuals, trusts from which any of those persons may benefit, and any charitable institution within the Commonwealth of Australia.

The directors of Company A are Person A and Person B.

Person A and Person B each own 50% of the ordinary shares in Company A. (Previously existing preference shares have been cancelled.)

The trust's main assets are ordinary shares in Company B Pty Ltd (Company B) which is a company registered in Victoria and which operates a business.

There are currently no amounts owed by Company A to Company B or vice versa. In addition, there are no amounts owed by Company A to any of the beneficiaries of the trust or vice versa.

Although there is a small amount currently owed by the trust to Company B, it will be cleared before any shares are transferred.

The trust does not have a bank account.

The Scheme

It is proposed to execute a Deed of Variation and Appointment of Trustee.

That deed will vary clause 12 of the Trust Deed. As currently drafted, clause 12 gives the trustee the power to remove any trustee and appoint a new or additional trustee (whether in addition to or in substitution for any other trustee). The deed will delete that clause and replace it with this:

The Trustee shall have the power, by instrument in writing at any time and from time to time, to remove any Trustee of these presents and to appoint a new or additional Trustee or Trustees, in respect of all or any part of the Trust Fund, whether in addition to or in substitution for any other Trustee or Trustees.

Pursuant to the new clause 12, Company A will, under the Deed of Variation and Appointment of Trustee, appoint a new trustee - Company C Pty Ltd (Company C) - as trustee of the trust in respect of half of the Company B shares; and those shares will be transferred to Company C.

Company A will be removed as trustee of these Company B shares transferred to the new trustee, Company C (but will continue as trustee in respect of the remaining Company B shares).

The costs of and in connection with the variation and the appointment of new trustee will be borne equally by each trustee out of their respective shares of the trust fund.

The Deed of Variation and Appointment of Trustee is said to contain the entire agreement between the parties with respect to its subject matter and is said to supersede all prior agreements, deeds and understanding between the parties in connection with it.

Person B will be the sole director and secretary of Company C. Person B will hold 100% of the shares in Company C.

Person B will resign as director of Company A and transfer all their Company A shares to Person A. Person A will become the sole director, secretary and 100% shareholder of Company A.

The relevant Company B shares will be held by each of Company A and Company C as a trustee of the trust and for the benefit of all beneficiaries of the trust.

Each trustee will therefore be required to consider the interests of all beneficiaries or potential objects of the trust. However, the applicant advises that it is expected that as a practical matter:

Company A will hold its Company B shares on behalf of, and distribute to, Person A's family, and

Company C will hold its Company B shares on behalf of, and distribute to, Person B's family.

There will be no agreement (written or otherwise) to formalise this expectation.

The trustee will clear the amount owed to Company B before any shares are transferred.

Neither trustee (that is, neither Company A nor Company C) will be released by the other from any right to be indemnified out of any of the trust's assets, including the Company B shares - whether in respect of liabilities incurred before or after the appointment of the new trustee, Company C.

Following the appointment of the new trustee any dividends owed to the trust by Company B will be owed to the trustees jointly; and any liabilities incurred by each trustee (including any future unpaid present entitlement) will be owed by the trustees jointly.

That is, Company A and Company C will be jointly and severally liable for any debts or obligations incurred in administering the trust. Therefore, expenses incurred by one trustee may be charged against assets held by the other trustee. However, the decision to charge expenses will be made by the trustees jointly.

Accordingly, the trust will prepare a single set of accounts in respect of each financial and income year.

However, as a practical matter, assets and liabilities will be dealt with by the trustee primarily responsible. For example, if there is an unpaid present entitlement that has become a liability owed to (a particular named beneficiary), it would be shown in the trust's single balance sheet as a liability of the trust, but as a practical matter Company A and Company C would agree that the obligation should be discharged by Company C out of the assets and income held by Company C as trustee of the trust.

All other trustee powers and duties will also be exercised by the two trustees jointly.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Subsection 102-25(1),

Income Tax Assessment Act 1997 Subsection 104-10(1),

Income Tax Assessment Act 1997 Subsection 104-10(2),

Income Tax Assessment Act 1997 Subsection 104-55(1),

Income Tax Assessment Act 1997 Subsection 104-60(1) and

Income Tax Assessment Act 1997 Subsection 960-100(2).

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Neither CGT event A1 (section104-10 of the ITAA 1997), CGT event E1 (section 104-55) nor CGT event E2 (section 104-60) will happen if, in the circumstances outlined in the scheme, a new trustee is appointed to CGT assets forming part of the property of a trust and those assets are transferred to the new trustee?

Detailed reasoning

You can only make a capital gain or loss if a CGT event happens (section 102-20 of the ITAA 1997). Most CGT events happen in relation to your ownership of a CGT asset (or assets).

The term 'CGT asset' is defined to mean any kind of property or a legal or equitable right that is not property (subsection 108-5(1) of the ITAA 1997). In your case, the shares in Company B that you are transferring to Company C are the relevant CGT asset.

In determining whether the capital gains provisions (Part 3-1 of the ITAA 1997) apply, you must work out if any CGT events (other than CGT events D1 and H2) happen in your situation (subsection 102-25(1) of the ITAA 1997). Given the facts of your case, the relevant CGT events to consider here are CGT events A1, E1 and E2.

If more than one CGT event can happen, then you use the one that is the most specific to your situation (subsection 102-25(1) of the ITAA 1997).

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997). Disposal of a CGT asset requires there to be a change of ownership from you to another entity (subsection 104-10(2) of the ITAA 1997).

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).

CGT event E2 happens if you transfer a CGT asset to an existing trust (subsection 104-60(1) of the ITAA 1997).

At issue is whether the appointment of the new trustee (Company C) and the transfer of a part of the trust property (half of the Company B shares) to that new trustee will cause a CGT event to happen in respect of the transferred property.

More particularly, the issue is whether the CGT assets in respect of which the new trustee is appointed will be settled on a new trust or transferred to a different trust.

A trust is an entity for income tax purposes (subsection 960-100(1) of the ITAA 1997).

The trustee of a trust is taken to be an entity consisting of the person who is the trustee, or persons who are trustees, at any given time (subsection 960-100(2) of the ITAA 1997). This means that the mere appointment of a new trustee to a trust will not cause there to be a change of entity for income tax purposes.

An important factor that points to the transferred Company B shares continuing to be held on the same trust is that the original trustee (Company A) will continue to be entitled to be indemnified out of the assets transferred to the new trustee (Company C) in respect of any liabilities incurred in the proper administration of the trust by the original trustee before the transfer.

Also relevant is the fact that, following the appointment of the new trustee and the transfer of half of the Company B shares to it, the original and the new trustee will act jointly and will be jointly liable for any expenses properly incurred by either trustee.

It is noted that, as a matter of practice, income in respect of the assets held by Company A will be distributed to Person A and their family and that income in respect of the assets held by Company C will be distributed to Person C's family. But at law each trustee will owe an obligation to each beneficiary; and each beneficiary has rights in respect of each trustee regarding the due administration of the trust.

It is also noted that, as a matter of practice, liabilities incurred by each trustee will be met out of the assets held by that trustee. But in your circumstances this amounts to no more than an indication that the trustees will together agree that particular expenses are to be met from particular assets. And it is clear that if the assets held by a particular trustee are not sufficient to meet the expenses incurred by it (with the consent of the other trustee) then such expenses can be met from assets held by the other trustee.

It is considered that in the circumstances of this case there is no difference in substance between the proposed scheme (which involves splitting the legal ownership of trust assets between two trustees obliged to act jointly in respect of all of the trust property) and the appointment of an additional trustee in respect of some or all of the trust property (which involves joint trustees holding relevant trust property jointly and being obliged to act jointly in respect of that property).

In short, the appointment of the new trustee and the transfer of assets to it will not, in the particular circumstances of this case, materially alter the trust relationship in respect of the transferred assets. It is therefore considered that, under the scheme, there will be a continuing trust estate in respect of the relevant assets.

It is considered that the transferred Company B shares will not be settled on a new trust when they are transferred to the new trustee (Company C); nor will they commence to be held on a new or different trust. Therefore, neither CGT event E1 nor CGT event E2 will happen.

Rather, it is considered that following the appointment of the new trustee (Company C) and the transfer of half of the Company B shares to it, these shares will continue to be held on the same trust as they were held immediately before the appointment.

Consequently, the transfer of the Company B shares to the new trustee will amount to no more than a mere change of trustee in respect of those assets. Therefore, the Company B shares that you transfer to Company C will continue to be held by the same entity.

CGT event A1 will not happen either as there won't be a change of ownership from you to another entity when you transfer half of the Company B shares to Company C.