Edited version of your private ruling

Authorisation Number: 1012539212332

Ruling

Subject: Trust resettlement - Trust income - Capital gains tax discount

Question 1

Will the proposed amendments to the deed of the Trust give rise to a termination of the existing trust or the creation of a new trust and trigger the happening of capital gains tax (CGT) event E1?

Answer

No

Question 2

In the event that the proposed amendments do not result in a resettlement of the trust, upon the proposed transfer assets in specie in consideration of the determination of the trust, is the trustee capable of distributing only the discounted portion of the capital gain?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The trust is a non-fixed (unit) trust established by deed.

The sole unitholder of the trust is a self-managed superannuation fund, ('the super fund') which is currently a pension fund. It has two members, one of whom is in receipt of an unrestricted account based pension and the other in receipt of a 'transition to retirement' pension.

The trust deed confers a power on the trustee to accumulate or create a reserve from income in certain circumstances.

You hold the view that such a power should not in any way prejudice the rights of the sole unitholder as to ultimate entitlement to the income and capital of the trust.

The trustee has a broad power to vary provisions of the Trust Deed with the consent of not less than 75% of the unitholders.

The trustee has the power to 'repurchase' or redeem any or all units on issue.

One sub-clause of the trust deed provides for the normal vesting of the trust and another sub-clause provides a power for the majority of unitholders to resolve to determine the trust.

A clause of the trust deed refers to the mechanism for the winding up of the trust assets and provides that the trust property be converted to cash and the proceeds there from distributed to unitholders.

The unit holder (the super fund) in conjunction with the trustee, wishes to wind up the trust and distribute all of the assets to the super fund.

The trust property comprises shares in publicly listed (Australian) companies.

In order to facilitate an orderly determination of the trust and to avoid significant transaction costs and potential market risk, the trustee and the super fund propose to undertake a transfer of the assets in specie in satisfaction of the determination.

The unit holders will provide no consideration for the transfer of the property.

The original trust deed contains no definition of income nor does the deed contain a provision permitting the trustee of the trust to stream income.

Relevant legislative provisions

Income Tax Assessment Act 1936 Pt III Division 6

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Paragraph 97(1)(a)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-70

Income Tax Assessment Act 1997 Subsection 104-70(2)

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Subsection 116-30(1)

Reasons for decision

Whether a trust resettlement

A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various CGT events.

The decision in Clark's case is relevant to the question of the circumstances in which, as a result of changes being made to an existing trust, a new trust comes into existence, triggering CGT event E1.

CGT event E1 is triggered when a trust resettlement occurs, that is, when one trust estate has ended and another has replaced it.

Tax Determination TD 2012/21 sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred.

TD 2012/21 asserts that a valid amendment to a trust will not result in the termination of a trust as long as:

· the amendment is made pursuant to an existing power;

· the amendment does not cause the trust to terminate for trust law purposes; and

· the effect of the amendment does 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.

In your case, the proposed variations to the existing trust deed would be a valid amendment to the trust, not resulting in a termination of the trust, and will not result in the happening of CGT event E1 in section 104-55 of the ITAA 1997.

Capital Gains Tax (CGT)

The net income of a trust as calculated under section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) and the income distributions are included in the assessable income of either the trustee of the trust or its beneficiaries under Division 6 of Part III of the ITAA 1936.

Where a beneficiary is presently entitled to a share of the income of a trust estate, paragraph 97(1)(a) of the ITAA 1936 requires the beneficiary to include in their assessable income that share of the trust's net income. In Commissioner of Taxation v. Bamford [2010] HCA 10; 2010 ATC 20-170 the High Court endorsed the proposition that beneficiaries can only be presently entitled to whatever is generally regarded as the distributable income of the trust and that the reference to 'that share' meant the income to which the beneficiary was presently entitled as a proportion of the total trust income.

To determine the share of net income of a trust estate to be included in a beneficiary's assessable income under paragraph 97(1)(a) of the ITAA 1936, the beneficiary must:

(i) calculate how much of the income of the trust estate they are (or are taken to be) presently entitled to, as percentage share of that income; and

(ii) apply that percentage to the net income of the trust estate.

This approach is often referred to as the 'proportionate approach' to the assessment of trust net income.

When the relevant trust property is transferred to the unit holders, CGT event A1 happens for the trustee under section 104-10 of the ITAA 1997. As the trustee will receive no capital proceeds for the CGT event, the trustee will be taken to have received the market value of the property under subsection 116-30(1) of the ITAA 1997.

The transfer of the property gives rise to a CGT event E4 under section 104-70 of the ITAA 1997 for each unit holder. CGT event E4 happens for a unit holder when the trustee makes a payment in respect of the unit and some or all of the payment (the non-assessable part) is not included in the unit holder's assessable income. Under subsection 104-70(2) of the ITAA 1997, the payment can include giving property.

If, in the 2010-11 or a later income year, no capital gains have been streamed to particular beneficiaries, as in your case, the proportionate approach will be relevant to the application of Subdivision 115-C of the ITAA 1997.

Each beneficiary's adjusted Division 6 percentage will be the same as their original Division 6 percentage. A beneficiary's 'adjusted Division 6 percentage' is simply the proportionate share of the income of the trust estate to which they are presently entitled (called their 'Division 6 percentage'), calculated on the assumption that any capital gain or franked distribution to which any beneficiary or the trustee is specifically entitled were disregarded in working out the income of the trust estate.

The trustee's adjusted Division 6 percentage is the share of distributable income to which no beneficiary is presently entitled, ignoring any franked distributions or capital gains of the trust to which an entity is specifically entitled.

In your case, this means that the assessable income of a beneficiary presently entitled to a discounted capital gain made by the trust will only be the discounted proportion of the gain and not the whole gain. However, the beneficiary is required to gross up a discount capital gain (by adding back any discount claimed by the trustee), before applying any capital losses and the relevant CGT discount percentage (33 1/3 % for a complying superannuation entity). This ensures that a beneficiary applies any capital losses against the gross capital gain and not the reduced capital gain.

Where there is income of the trust estate to which no beneficiary is presently entitled, the trustee may also have an adjusted Division 6 percentage share of a capital gain.