Edited version of your private ruling

Authorisation Number: 1012447455036

Ruling

Subject: Income Tax - Capital Gains Tax - proposed amendment to "Vesting Day"

Question 1

Will the extension of the vesting date of the Family Trust as contemplated by the proposed amendment give rise to CGT events E1, E2 or A1 under sections 104-55, 104-60 or 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proposed amendments to clause 1(u) of the trust deed during the year in which it is executed or in subsequent income years, change pre-CGT assets to the Trust to post CGT assets because of Division 149 of the ITAA 1997?

Answer

No

Question 3

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the proposed amendment to clause 1(u) of the trust deed?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2015

The scheme commences on:

1 July 2012

Relevant facts and circumstances

1. The Family Trust was established by a deed ("Trust Deed") dated 1 July 1975 between the settlor and XXXX Pty Limited as the trustee.

2. Pursuant to clause 24 of the Trust Deed the Family Trust is governed by the laws of New South Wales.

3. The Trust Deed was amended by deeds dated 19ZZ and 19VV.

4. Clause 1(u) of the Trust Deed currently defines the vesting day as follows:

1(j) "the vesting day" shall mean the first to occur of:

(ii) the 1^st day of July, 2025, and

(ii) the day being the tenth anniversary of the date of the death of the last survivor of the lineal descendants of King George VI living of the United Kingdom of great Britain and Northern Ireland living on the date hereof,

Or such earlier date as the Trustee may with the written approval of the Appointer but otherwise in absolute discretion appoint;

…

5. Clause 19 of the Trust Deed allows with prior written approval of the Appointer the Trustee to, add to or vary the terms of the Family Trust.

Specifically, clause 19 provides:

19. AMENDMENT OF DEED

With the prior written approval of the Appointor and not otherwise the Trustee for the time being may at any time and from time to time by deed:

(a) add to or vary all or any of the trusts herein- before limited or the trusts limited by any variation or alteration or addition made thereto from time to time;

(b) declare any new or other trusts or powers concerning the Trust Fund or any part thereof the trusts whereof shall have been so added to or varied (including without limiting the generality hereof the addition of any person to the category of General Beneficiaries exclusive of the Settlor or the Trustee or the Appointor); and

(c) at any time and from time to time pay or apply all or any part of the Trust Fund to any new or other trust under which any of the General Beneficiaries (as added to as hereinbefore provided) or the next of kin of any of them or the next of kin of the Primary Beneficiaries or any of them or any such additional beneficiary appointed as herein provided presently entitled, but so that the law against perpetuities is not in any such case thereby infringed and so that such new or other trust, powers, discretions, alterations or variations:

(d) may relate to the management or control of the Trust Fund or the investment thereof or to the Trustee's powers or discretion in this Deed contained;

(e) shall not be in favour of or for the benefit of the Appointor or the Settlor but shall otherwise be for the benefit of all or any one or more of the General Beneficiaries (as added to as herein- before provided) or the next of kin of any of them or the next of kin of the Primary Beneficiaries or any of them; and

(f) shall not affect the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation, a1teration addition, payment or application.

1. The Trustee proposes to amend the Trust Deed to extend the vesting date to ensure that the Family Trust is not required to vest in 2025.

2. It is proposed that the Trust Deed will be amended by:

2.1 Deleting the existing definition of the "vesting day" in a clause of the Trust Deed and inserting the following new definition of the "vesting day" as follows:

"1(v) the "vesting day" means:

the day being the tenth anniversary of the date of the death of the last survivor of the lineal descendants of King George VI living of the United Kingdom of great Britain and Northern Ireland living on the date hereof,

Or such earlier date as the Trustee may with the written approval of the Appointer but otherwise in absolute discretion appoint;

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Reasons for decision

Summary

Amendments to a trust deed may result in the termination of the existing trust and the creation of a new trust. This may have significant income tax consequences. In particular, amendments to the trust deed may cause the trust property to be realised at the trustee level with potential capital gains tax (CGT) consequences.

A capital gain or loss can only arise if a CGT event happens: section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997). The Commissioner accepts that the extension of the vesting date of the Family Trust as contemplated by the proposed amendment will not cause CGT events E1, E2 or A1 under sections 104-55, 104-60 or 104-10 of the Income Tax Assessment Act 1997¹ to happen.

Detailed reasoning

The Creation of a New Trust - Statement of Principles August 2001 was withdrawn on Friday 20 April 2012 as a result of the decision in Federal Commissioner of Taxation v. Clark and Anor (Clark) [2011] FCAFC 5 and the High Court's refusal to grant the Commissioner leave to appeal that decision.

The Decision Impact Statement issued in relation to Clark outlines the ATO view of the case. It provides that, "following Clark, there will not be a loss of continuity sufficient to deny a trustee access to any capital losses being carried forward without a termination of the existence of the trust estate."

As a result of Clark the ATO has stated that it accepts that the principles set out in Clark may have broader application. In relation to this the Decision Impact Statement provides "In particular, the case is relevant to the question of the circumstances in which CGT Event E1 may happen by reason of a new trust coming into existence consequent on changes being made to an existing trust".

The Commissioner, as per Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? is of the view that CGT event E1 will not happen if the terms of a trust are changed pursuant to a valid exercise of power contained with the trust deed, unless:

· the amendment causes the trust to terminate for trust law purposes, or

· the effect of the amendment is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

CGT event E1 under section 104-55 can happen if a new trust would be created over the CGT assets of the Trust, however CGT event E2 under section 104-60 can not happen as there would be no transfer of a CGT asset to an existing trust.

If the proposed amendments to the deed cause the resettlement of the Family Trust, CGT event A1 under section 104-10 happens when there is a disposal of the Trust's CGT assets, You are deemed to dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. The cessation of one trust and the creation of a new trust may result in CGT event A1 in section 104-10 of the ITAA 1997 happening.

For the reasons outlined above it is considered that the proposed amendments to the deed would not cause the cessation of one trust and the creation of a new trust. Accordingly, there will not be a disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997 and the proposed amendments to vesting date in the deed will not trigger CGT event A1 under section 104-10 of the ITAA 1997.

When considering whether the proposed amendment can be validly exercised under the Trustees power we must determine whether the terms of the Trust Deed provide the Trustee with the ability to first amend the Trust.

The proposed amendment to the deed will be a valid exercise of power contained with the Trust Deed, because it will comply with clause 19:

Allows the trustee to amend the deed with the prior written approval of the Appointor and not otherwise the Trustee for the time being may at any time and from time to time by deed:

(a) add to or vary all or any of the trusts herein- before limited or the trusts limited by any variation or alteration or addition made thereto from time to time;

(b) declare any new or other trusts or powers concerning the Trust Fund or any part thereof the trusts whereof shall have been so added to or varied (including without limiting the generality hereof the addition of any person to the category of General Beneficiaries exclusive of the Settlor or the Trustee or the Appointor); and

(c) at any time and from time to time pay or apply all or any part of the Trust Fund to any new or other trust under which any of the General Beneficiaries (as added to as hereinbefore provided) or the next of kin of any of them or the next of kin of the Primary Beneficiaries or any of them or any such additional beneficiary appointed as herein provided presently entitled, but so that the law against perpetuities is not in any such case thereby infringed and so that such new or other trust, powers, discretions, alterations or variations:

(d) may relate to the management or control of the Trust Fund or the investment thereof or to the Trustee's powers or discretion in this Deed contained;

(e) shall not be in favour of or for the benefit of the Appointor or the Settlor but shall otherwise be for the benefit of all or any one or more of the General Beneficiaries (as added to as herein- before provided) or the next of kin of any of them or the next of kin of the Primary Beneficiaries or any of them; and

(f) shall not affect the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation, alteration addition, payment or application.

The Trust Deed gives the Trustee the ability to revoke, add to or vary all or any of the provisions of the Deed with the written consent of the Appointor. It does not expressly provide for an extension of the vesting day. It merely provides a general variation power. However, the above clause confers wide discretionary powers on the trustee to amend any of the provisions of the trust deed.

In relation to whether the wide powers provided to the trustee under the trust deed are sufficient to determine that the deed confers an 'express power' to extend the vesting date, the Full Federal Courts comments in Federal Commissioner of Taxation v. Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158 are relevant:

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 (emphasis added).

The comment in the above case support the conclusion that the implied power conferred in the relevant clause of the trust deed meets the definition of express power and is sufficient to alter the "Vesting Day".

The proposed amendment to the clause extending the vesting day will not impact on the continuity of the trust and trust membership principles as set out in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550.

Furthermore, as the extension of the Family Trust's vesting date will have no impact on the beneficiaries' interests, the proposed amendment will not lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

Conclusion

In addition to CGT events A1 and E2 under sections 104-10 and 104-60 not happening as a result of the extension of the vesting date of the Family Trust as contemplated by the proposed amendment to the term 'Vesting Day" the Commissioner accepts that CGT event E1 under section 104-55 will also not happen.

Question 2

Will the proposed amendments to clause 1(u) of the trust deed during the year in which it is executed or in subsequent income years, change pre-CGT assets to the Trust to post CGT assets because of Division 149 of the ITAA 1997?

A capital gains tax (CGT) asset is a pre-CGT asset if it was last acquired prior to 20 September 1985, and no income tax provision has operated to treat it as having been acquired after that date.

Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) 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 of the ITAA 1997 are principally companies and trusts.

Section 149-10 of the ITAA 1997 defines what a pre-CGT asset is in relation to Division 149 of the ITAA 1997 as follows:

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.

Subsection 149-15(1) of the ITAA 1997 states that:

Majority underlying interests in a CGT asset consist of: more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and 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. In accordance with subsection 149-15(2) of the ITAA 1997, 'underlying interest' simply means a beneficial interest that an ultimate owner may have in the asset or any ordinary income derived from the asset.

An ultimate owner is defined to mean an individual or an entity listed in subsection 149-15(3) of the ITAA 1997.

Subsection 149-30(1) of the ITAA 1997 sets out a factual test to determine when an asset of a non public entity stops beings a pre-CGT asset. Under the factual test, the asset stops being a pre-CGT asset at the earliest time when majority underlying interest in the asset were not held by the ultimate owners who held the interests immediately before 20 September 1985.

Subsection 149-30(2) of the ITAA 1997 provides the Commissioner with a discretion to overlook the factual test in subsection 149-30(1) of the ITAA 1997.

Under subsection 149-30(2) of the ITAA 1997, if the Commissioner is satisfied, or thinks it reasonable to assume, that majority underlying interests have not changed up to a particular time, the asset continues to be a pre CGT asset.

Taxation Ruling IT 2340 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 outlines the circumstances when the Commissioner considers that subsection 149-30 of the ITAA 1997 (formerly 160ZZS of the ITAA 1936) will apply.

Paragraph 6 of IT 2340 states:

Where a trustee continues to administer a trust for the benefit of members of a particular family, section 160ZZS will not apply 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.

In such a case the Commissioner would, in terms of subsection 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed.

Paragraph 8 of IT 2340 states:

as recipients of distributions from the trust in place of persons who were formerly the object 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 of such distributions - the section would have its intended application as described.

In the current case, as discussed previously, after the proposed amendment in relation to the meaning of the "Vesting Day", in the deed the trust will continue to exist for the same original beneficiaries. In accordance with paragraphs 6 and 8 of IT 2340, there has not been change of 50% or more in the underlying interests in the trust. The pre CGT assets of the Trust will therefore maintain their pre CGT status.

In addition, as Division 149 of the ITAA 1997 is not applicable, even if more than 50% of the income is distributed to the additional beneficiaries which are to be included as a result of the amendments, the status of the pre CGT trust assets will remain unchanged. The distribution of more than 50% of the income to the additional beneficiaries will therefore not result in the trustee being subject to capital gains on pre CGT assets.

As the proposed amendments relate specifically to 1(u) and the "Vesting Day" the application of the Division 149 it is considered that the proposed amendments to the Deed do not substantially alter the rights of the existing beneficiaries, or the charter rights and obligations for the following reasons:

The amendment to the meaning of "Vesting Day" is merely an extension of the trust which is consistent with a continuing trust, the trust property and the trust, continue unchanged.

It is not considered that the proposed arrangement will change the pre-CGT character of the pre-CGT assets of the trust in accordance with Taxation Ruling IT 2340 for the following reasons:

The trustee will continue to administer the trust for the benefit of members of the same family.

There are no changes to the beneficiaries of the trust. The proposed amendments will not give rise to a change of 50% or more in the ownership of the underlying interests in the trusts assets. Section 149-30 of the ITAA 1997 will therefore not apply.

Question 3

Will Part IVA of the ITAA 1936 apply to the proposed amendments?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) has no application.

Detailed reasoning:

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) contains general anti-avoidance provisions designed to prevent the avoidance of tax.

Part IVA of the ITAA 1936 will only apply where a scheme has been entered into or carried out to obtain a tax benefit and it can be concluded that the dominant purpose of entering the scheme was to obtain a tax benefit. In such situations, the Commissioner can apply the provisions to deny the tax benefit obtained.

Subsection 177A(1) of the ITAA 1936 defines a scheme to mean:

(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 or proposal, action, course of action or course of conduct

Subsection 177C(1) of the ITAA 1936 stipulates that a reference to the obtaining of a tax benefit in connection with a scheme shall be read as a reference to:

(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out, or

(ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out; or

(bb) a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out.

The determination of whether there is a tax benefit involves a comparison between the actual tax position and that which would or might reasonably be expected to have been the position if the scheme had not been entered into. The determination of whether there has been a tax benefit is made in respect of each income year.

The conclusion that the sole or dominant purpose of entering a scheme was to obtain a tax benefit must be determined with regard to the criteria set down in paragraph 177D(b) of the ITAA 1936.

Application to your circumstances

As previously determined, the proposed amendments to the clause in the trust deed do not result in a resettlement of the trust.

As it has been determined that the proposed amendments to the trust deed are consistent with a continuing trust and go to the management of the trust, it is considered that there is no basis for concluding that the taxpayer entered into a scheme for the dominant purpose of obtaining a tax benefit.

¹ All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.