Edited version of your private ruling

Authorisation Number: 1012495111790

Ruling

Subject: Capital gain tax events

Issue 1

Question 1

Will the proposed changes to the trust property of the Trust give rise to any of the following capital gain tax (CGT) events; A1, E1, E2, H2, as described in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997), or any other CGT event?

Answer

Yes

Issue 2

Question 1

Will the proposed changes to the trust estate of the Trust cause a new trust estate to be created for the purposes of Division 6 of Part III of the Income tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

01 July 2013 to 30 June 2014

The scheme commences on:

On or after 1 June 2013

Relevant facts and circumstances

The Trust is a discretionary family trust.

The Trust has property.

The Appointor of the Trust plans to transfer certain assets out of the Trust to new trustees.

The beneficiaries of the Trust will be unchanged.

The beneficial interest in the property to be transferred out of the Trust will be unchanged.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6 of Part III

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Division 4

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-155

Reasons for decision

Issue 1

Question 1

Detailed reasoning

Division 104 of the ITAA 1997 sets out all of the CGT events for which a capital gain or loss can be made. Generally, a capital gain or loss is made when a CGT event happens to a CGT asset acquired after 20 September 1985.

To determine whether CGT events happen as a consequence of the proposed arrangement, it is necessary to consider the acts that make up the proposed arrangement.

The proposed arrangement

The proposed arrangement will see parts of the trust property of the Trust transferred out of the Trust to new trustees.

The beneficiaries of the Trust will be unchanged, and the beneficial interest in the transferred property will be unchanged.

The appointment of the new trustees, and associated transfer of trust property, will be undertaken in accordance with the terms of the Trust (as amended).

The proposed instrument appointing the new trustees vests specified property in a new trustee who will hold the specified property subject to the trust created by that instrument, and the terms of the Trust.

CGT events

The ruling application asks whether the proposed arrangement will give rise to an A1, E1, E2 or H2 CGT event.

The proposed arrangement is not considered to give rise to an A1 or E2 event. An A1 event occurs where an entity disposes of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that a disposal does not occur where legal ownership changes but beneficial ownership does not change. Under the proposed arrangement there is no change in beneficial ownership of any of the trust property of the Trust (including the property to be transferred). An E2 event occurs where an entity transfers a CGT asset to an existing trust. Under the proposed arrangement no property will be transferred to an existing trust.

An E1 event occurs where an entity creates a trust over a CGT asset by declaration or settlement. Taxation Determination TD 2012/21 considers whether an E1 event occurs where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, and provides that no E1 event happens unless:

· the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

· the effect of the change or court approved variation is such as 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.

Whether or not E1 events happen as a result of the proposed arrangement will depend on whether the transfer of property out of the Trust will cause a termination and resettlement of that trust, or whether the appointments of the new trustees will cause a new settlement over the trust property transferred to each new trustee.

The Trust

A trust will not terminate if there is continuity of the trust. Whether there is continuity of the trust was considered by the High Court in Commissioner of Taxation v Commercial Nominees of Australia Limited [2001] HCA 33 (Commercial Nominees), in the context of part IX of the ITAA 1936. The court stated that:

As the Full Court, and the Administrative Appeals Tribunal held, the question is one of continuity … The three main indicia of continuity … are the constitution of the trusts under which the fund (if a trust) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity …, to destroy the necessary continuity … (at 36)

In coming to its decision in Commercial Nominees the High Court cited with approval the reasoning of the Full Federal Court (Commissioner of Taxation v Commercial Nominees of Australia Ltd [1999] FCA 1455). Relevantly, paragraphs 55 and 56 of the Full Federal Court decision state:

55 … in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust.

56 So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the "taxpayer" for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself.

The decisions of the High Court and Full Federal Court in Commercial Nominees were followed in Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark). In that case the Full Federal Court had to determine whether changes to the property, membership and operation of the trust had caused a termination of the trust for the purposes of Division 6 of Part III of the ITAA 1936. In finding there was a continuity of the trust the court stated:

When the High Court in Commercial Nominees spoke of trust property and membership as providing two of the indicia for the continued existence of the eligible entity or trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question. In the present case, the Commissioner never contended, nor on the evidence could he, that there was a severance in the continuum of trust property and objects of the CU Trust. Their identity changed from time to time, but not their continuum (at 87).

Paragraph 24 of TD 2012/21 states that the principles in Commercial Nominees and Clark are relevant to CGT event E1, and that:

… a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and therefore…, will not result in CGT event E1 happening.

Under the proposed arrangement property will be transferred out of the Trust to new trustees in accordance with the terms of the Trust. The Trust will continue to hold specified property. There will be no change to the beneficial interest in the property remaining in the Trust, and there will be no change to the regime of trust obligations affecting the property in the Trust.

The above shows that the separation of property out of the Trust will be in accordance with the terms of that trust, there will continue to be identifiable property of the Trust, and there will be continuum in the membership and obligations of the Trust. As such, there is continuity of the Trust, and no CGT event E1 will happen with regards to the property remaining in the Trust.

Appointment of new trustee

As stated above, Taxation Determination TD 2012/21 provides that where a change to a trust causes a particular asset to be 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 will occur.

The terms of the proposed instrument provide the following:

· a new trustee will be appointed over the property described in the schedule, to be known as New Trust

· the interests of the existing trustee in the property described in the schedule and the subject of the New Trust shall vest in the new trustee

· the existing trustee will transfer to the new trustee all of the property described in the schedule to be subject to the New Trust

· the new trustee will hold the property vested in it upon the trusts of the New Trust and subject to the powers and provisions of the Trust.

· the new trustee indemnifies the existing trustee from and against the debts described in the schedule (if any) to the extent of the assets of the New Trust

By the terms of the proposed instrument a new trust will be created over the property transferred to each new trustee. The property so transferred will be subject to separate charters of rights and obligations to that of the Trust. The affect of the proposed arrangement is to settle different trusts. As such, CGT event E1 will happen for each item of property transferred out of the Trust in accordance with the proposed instrument, which was acquired on or after 20 September 1985.

CGT event H2 occurs where an act, transaction or event occurs in relation to a CGT asset owned by an entity, which does not result in an adjustment being made to the asset's cost base or reduced cost base. Section 102-25 of the ITAA 1997 provides that CGT event H2 will not apply if another CGT event applies.

As CGT event E1 will happen for each item of property transferred out of the Trust in accordance with the proposed instruments, CGT event H2 will not apply to the transfers. With regards to the property that will remain in the Trust, no act, transaction or event will occur that will give rise to CGT event H2.

Conclusion

CGT events A1, E2 and H2 will not happen as a consequence of the proposed arrangement. CGT event E1 will happen for the property transferred out of the Trust to the new trustees, but event E1 will not happen for the property remaining in the Trust. No other CGT event is considered to arise as a consequence of the proposed arrangement.

Issue 2

Question 1

Detailed reasoning

Division 6 of Part III of the ITAA 1936 sets out the income tax treatment of the net income of a trust estate.

The decision in Commissioner of Taxation v Clark (supra) was made in the context of Division 6 of Part III of the ITAA 1936, and the above discussion and conclusion on continuity of trust is considered relevant to the current question.

Based on the above discussion on the continuity of trust, new trust estates will be created when the proposed instruments are executed and the relevant property is transferred. The property transferred under each instrument will be subject to separate charters of rights and obligations to that of the Trust, giving rise to different trust estates.