Edited version of your written advice

Authorisation Number: 1012741603070

Ruling

Subject: Trust - resettlement

Question 1

Will the proposed amendments to the deed of the Trust give rise to the happening of capital gains tax (CGT) event E1 or CGT event E2 in sections 104-55 and 104-60 respectively, of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the Trust as varied constitute a fixed trust for income tax purposes within the meaning of section 995-1(1) of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

The trust is a non-fixed (discretionary) unit trust ('the trust') established by deed ('the Trust Deed') for investment purposes.

The settlor settled the trust with a sum of money.

The trustee is a company ('the trustee').

The trust was settled for the primary purpose of benefiting the beneficiaries, being the unit holders.

Changes to the trust property and unit holders are clearly contemplated by the Trust Deed and are within the trustee's power.

One clause of the Trust Deed details the powers of the trustee to alter or vary the deed and states that the Trustee may at any time by deed, revoke, alter, modify, vary or add to all or any provisions of the Deed, provided the variation is with the consent of the Unit Holders and that laws against perpetuities are not infringed.

The trustee intends to convert the existing discretionary trust into a fixed trust. In order to do so, it proposes to vary the Trust Deed in the manner set out in the Deed of Variation.

In the First Schedule to the Trust Deed, the unit holders are named as two companies and one individual.

In the Schedule to the Deed of Variation, the unit holders are named as one of the original company unitholders and one company related to the individual in the First Schedule.

The Deed of Variation will also have the effect of removing some of the discretionary powers of the trustee and making the current holders of the units entitled to a fixed proportion of any distributable income or capital of the trust based on the proportion of income or capital units which each entity holds in the trust.

After the changes, some continuity of property and membership of the Trust will be maintained.

Each of the unit holders will have a vested interest in the income and capital of the trust as varied.

The Deed of Variation will result in the trust being a fixed trust for Land Tax purposes.

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 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-70

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

Reasons for decision

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.

Tax Determination TD 2012/21 sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred for tax purposes following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5 (Clark).

Clark highlighted circumstances in which it may be concluded, for income tax purposes, that the nature of a trust has fundamentally changed such that the trust that originally incurred losses is not the same trust as that which has derived gains against which losses are sought to be recouped.

The decision in Clark 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 various CGT events.

The Commissioner also considers that the decision in Clark does not change the basic proposition that, based on the authority in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455, the relevant test to be applied looks to whether changes to one or more of the trust's constituent documents, the trust property, and the identity of those with a beneficial interest in the trust property are such as to terminate the existence of the trust.

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, CGT even E2, CGT event A1 or any other CGT events under Division 104 of the ITAA 1997.

Whether a fixed trust?

Section 995-1(1) of the ITAA 1997 provides that a trust is a fixed trust if entities have fixed entitlements to all of the income and capital of the trust.

Subsection 272-5(1) of Schedule 2F to the ITAA 1936 defines a fixed entitlement in a trust:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

In addition, subsection 272-5(2) of the ITAA 1936 states that:

If:

(a) a person holds units in a unit trust; and

(b) the units are redeemable or further units are able to be issued; and

(c) if units in the unit trust are listed for quotation in the official list of an approved stock exchange - the units held by the person will be redeemed, or any further units will be issued, for the price at which other units of the same kind in the unit trust are offered for sale on the approved stock exchange at the time of the redemption or issue; and

(d) if the units are not listed as mentioned in paragraph (c) - the units held by the person will be redeemed, or any further units will be issued, for a price determined on the basis of the net asset value, according to Australian accounting principles, of the unit trust at the time of the redemption or issue;

then the mere fact that the units are redeemable, or that the further units are able to be issued, does not mean that the person's interest, as a unit holder, in the income or capital of the unit trust is defeasible.

The word 'interest' is a word that is capable of many meanings. In the absence of a definition one must infer its meaning from the context in which it is found (see Gartside v. Inland Revenue Commissioner [1968] AC 553 at 602-602 and 617-618 Commissioner of Stamp Duties (Queensland) v. Livingston (1964) 112 CLR 12 at 28-29; and CPT Custodian Pty Ltd v. Commissioner of State Revenue 2005 HCA 53).

There may be circumstances in which the word 'interest' could be interpreted broadly to include any right or advantage that a person might be able to claim with respect to the income or capital of the trust and/or in respect of the trustee, whether present or future, ascertained or potential. In the context of Schedule 2F, however, it is clear that for an interest to be recognised as a fixed interest it must be a right with respect to a share of the income or of the capital of the trust that is susceptible to measurement. To adopt the words of Lord Wilberforce in Gartside v Inland Revenue the right must have 'the necessary quality of definable extent'.

The term 'vested and indefeasible' is not defined in the taxation legislation. However, the Explanatory Memorandum (EM) to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 does discuss its ordinary meaning at some length, at paragraphs 13.4 to 13.9.

In Colonial First State Investments Ltd v. Commissioner of Taxation [2011] FCA 16 Stone J stated at [97] that in the absence of a definition, and subject to qualification in subsection 272-5(2) of Schedule 2F of the ITAA 1936, the term 'indefeasible' bears its ordinary meaning when applied to an interest, that is that 'the interest cannot be terminated, invalidated or annulled'. The meaning of the term 'vested and indefeasible' (in the context of Schedule 2F to the ITAA 1936) also appears in subsection 95A(2) of the ITAA 1936 and has been considered in that context by the courts - refer to Estate Mortgage Fighting Fund Trust v. FC of T 2000 ATC 4525; Walsh Bay Developments Pty Ltd v. Commissioner of Taxation (1995) 95 ATC 4378; Dwight v. Commissioner of Taxation (1992) 92 ATC 4192; Harmer v. FC of T (1991) 173 CLR 264; 91 ATC 5000.

Also relevant are MSP Nominees Pty Ltd v. Commissioner of Stamps (SA) (1999) 198 CLR 494; 99 ATC 4937; Queensland Trustees Ltd v. Commissioner of Stamp Duties (1952) 88 CLR 54; Glenn v. Federal Commissioner of Land Tax (1915) 20 CLR 490.

It is an essential element of subsection 272-5(1) of Schedule 2F to the ITAA 1936 that in order to have a fixed entitlement to a share of income or capital there must be a vested and indefeasible interest 'under a trust instrument'. In all cases, the determining factor in deciding if fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question.

As the High Court recently stated in CPT Custodians Pty Ltd v. Commissioner of State Revenue (Vic); Commissioner of State Revenue (Vic) v. Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [15], in taking this step:

'…a priori assumptions as to the nature of unit trusts under the general law and principles of equity [will] not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS "Maria Luisa" (No 2), upon the terms of the particular trust. The term "unit trust" is the subject of much exegesis by commentators. However, "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which dictate the application to particular facts of the [relevant statutory definition]…'

For the purposes of the phrase "vested and indefeasible" in subsection 272-5(1) of Schedule 2F to the ITAA 1936, the fact that a power held by the trustee or manager has not yet been exercised is not relevant when determining if the power results in an interest being defeasible. The exercise of the power is relevant to determining whether an interest has in law been defeased, not to whether the interest is defeasible. The key question is whether the power, if exercised, would result in a defeasance of some or all of a unit holder's rights to the income and/or capital of the trust.

For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the constitution consists of the trust deeds and supplementary deeds. The constitution provides that the beneficial interest in the Trust is divided into units. The unit holders' interest is not contingent upon any event. They have a present right to the future income and capital of the trust.

It is accepted that the constitution provides unit holders with a vested interest in the income and capital of the Trust.

However, the Trust Deed (the relevant trust instrument) will still contain a certain clause by which a unit holder's interest in a share of the income or capital of the Trust may be defeased.

One clause of the Trust Deed states that the Trustee may at any time by deed, revoke, alter, modify, vary or add to all or any provisions of the Deed, provided the variation is with the consent of the Unit Holders and that laws against perpetuities are not infringed.

An amendment effected by the Trustee to the trust instrument could permit the amendment of clauses to introduce defeasible powers which do not currently exist.

There is no restriction that the rights of the unit holders can't be adversely affected.

Therefore, it is considered reasonable to conclude, in accordance with subsection 272-5(1) of Schedule 2F to the ITAA 1936, that all unit holders (or beneficiaries) do not have fixed entitlements to all of the income and capital of the trust. The trust is therefore categorised as a non-fixed trust.