Edited version of your written advice

Authorisation Number: 1012879003182

Date of advice: 25 September 2015

Ruling

Subject: Family Trust Distribution Tax

Question 1

Will Q Pty Ltd as trustee for the Q Trust be eligible to make a family trust election under subsection 272-80(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) nominating X as the test individual and 2015 as the specified income year?

Answer

Yes.

Question 2

Will Z Pty Ltd be liable to pay Family Trust Distributions Tax (FTDT) pursuant to section 271-15 of Schedule 2F to the ITAA 1936 if trust income is distributed from The Z Trust to B Pty Ltd in the 2016 income year?

Answer

No.

Question 3

If the Principal (being the person with the power to remove and appoint the trustee) of the Q Trust changes will it result in the resettlement of the trust thereby invoking the application of section 104-55 or section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 4

Will the trustee of the Q Trust be liable for FTDT pursuant to section 271-15 of Schedule 2F to the ITAA 1936 if it makes Y (or any entity owned by the Q Trust) presently entitled to the trust income after Y becomes the Principal of the Q Trust?

Answer

No.

This ruling applies for the following periods

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

The scheme commenced on

The scheme has commenced.

Relevant facts and circumstances

The Z Trust

The trustee of The Z Trust is Z Holdings Pty Ltd (Z Holdings).

Y is a former spouse of X but remains a named beneficiary of the trust.

Y and X are both residents of Australia.

The Z Trust has a family trust election in place nominating X as the test individual.

The share capital of Z Investments Pty Ltd (Z Investments) includes ordinary shares, which are owned by The Z Trust. Z Investments had retained earnings.

B Pty Ltd

B Pty Ltd was incorporated during the year ended 30 June 2015 with Y as the sole director. The share capital of B Pty Ltd includes one ordinary share, which is beneficially owned by the Q Trust. B Pty Ltd is a beneficiary of The Z Trust.

Q Trust

The trustee of the Q Trust is Q Pty Ltd and the beneficiaries of the Q Trust are Y and the children from the marriage with X.

The terms of the trust deed for Q Trust provide that the Principal has the right to remove and appoint the trustee of Q Trust.

Further, the trust deed provides for the resignation of the Principal and the appointment of a replacement Principal.

Distribution of Franked Dividends

Prior to a marital property settlement between X and Y, a franked dividend is proposed to be declared and paid by Z Investments to Z Holdings, the trustee of The Z Trust. The dividend will equate to 100% of the retained earnings of Z Investments and will be fully franked.

Z Holdings as trustee for The Z Trust will make B Pty Ltd specifically entitled to part of the dividend. P Investments Pty Ltd, an entity controlled by X, will be made specifically entitled to the remainder of the dividend.

Family Trust Election

A family trust election is proposed to be made by Q Pty Ltd to treat the Q Trust as a family trust prior to 30 June 2015 and 2015 will be the income year specified in the election. The Trustee intends to nominate X in the family trust election as the individual whose family group is to be taken into account in relation to the election.

In the year ending 30 June 2016 by an instrument duly executed under the terms of the Q Trust, X will resign as Principal of the Q Trust and Y will be appointed.

The change in the Principal of the Q Trust will not result in the following:

• There will be no change to the beneficial interests in the trust property;

• There will be no redefinition of the beneficiary class;

• The beneficiaries will have the same rights in the trust property after the change of Principal;

• The change will not affect the rights or obligations of the Trustee;

• The change will not affect the rights or obligations of the Principal;

• The change will not result in the addition or depletion of Trust property

It is proposed that a distribution of trust income will be made by the trustee of the Q Trust to Y or an entity owned by the Q Trust.

Assumptions

In providing this ruling we have made the following assumptions.

1 Q Pty Ltd will make the proposed family trust election for the 2015 income year in writing and in the approved form.

2 In relation to the entity owned by the Q Trust, the trust will have a fixed entitlement and for its own benefit, to all the income and capital of that entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

Section 271-15

Subsection 271-15(1)

Sections 272-10 and 272-75

Subsections 272-80(1), (2), (3) and (4)

Subparagraph 272-87(1)(a)(i)

Paragraph 272-87(2)(e)

Section 272-90

Paragraph 272-90(2A)(a)

Subsections 272-90(3) and (5)

Paragraph 272-90(5)(b)

Income Tax Assessment Act 1997

Sections 104-55, 104-60 and 207-10

Subsection 207-15(2)

Subdivision 207-B

Subsections 207-35(1), (2), (3) and (4)

Sections 207-37, 207-145, 207-150 and 960-115

Reasons for decision

Question 1

Summary

The trustee of the Q Trust may make a family trust election nominating X as the test individual. The Trust would pass the family control test if the election with this nomination is made.

Detailed reasoning

The various requirements for a family trust election are outlined in section 272-80 of Schedule 2F to the ITAA 1936. Broadly speaking:

• The trustee of the trust may make an election: subsection 272-80(1).

• The election must be in writing and in the approved form: subsection 272-80(2).

• The election must specify an individual whose family group is to be taken into account in respect of the election: subsection 272-80(3).

• The trust must pass the family control test at the end of the specified income year: subsection 272-80(4).

As trustee for the Q Trust, Q Pty Ltd may make a family trust election under section 272-80(1), subject to the other conditions being met in section 272-80.

If Q Pty Ltd nominates X as the specified individual under subsection 272-80(3), the trust must pass the family control test determined on the basis of X as the specified individual. If this test is not satisfied at the end of the specified income year, Q Pty Ltd must not make the election: subsection 272-80(4).

The family control test prescribed in section 272-87 requires that a specified 'group' under subsection 272-87(1) possess any one of the attributes listed in subsection 272-87(2). In this regard:

• Under subparagraph 272-87(1)(a)(i), a "group" can consist of "the individual (the primary individual) who is to be specified in the family trust election."

It is intended that X be made the primary individual in the present case, and may thereby be regarded as the relevant 'group' for the purposes of subparagraph 272-87(1)(a)(i).

• The next question is whether the "group" comprising of X as the primary individual can satisfy any one of the requirements in subsection 272-87(2). One such requirement is that "the group is able to remove or appoint the trustee of the trust" (paragraph 272-87(2)(e)).

In this regard, X is named as the Principal of the Q Trust. The trust deed of the Q Trust provides that the Principal has the power to remove and appoint the trustee of Q Trust. Consequently, paragraph 272-87(2)(e) will be satisfied in this case.

Therefore, the Q Trust passes the family control trust in section 272-87. Accordingly, as all of the relevant requirements in section 272-80 are satisfied, Q Pty Ltd is eligible to lodge a family trust election for the 2015 income year nominating X as the specified individual.

Question 2

Summary

Z Holdings will not be required to pay tax under the Family Trust Distribution Tax (Primary Liability) Act 1998 in respect of the conferral of entitlement, or distribution of trust income, from The Z Trust to B Pty Ltd. This is because B Pty Ltd is a member of the 'family group' of X, who is the specified individual of The Z Trust.

Detailed reasoning

It is proposed that The Z Trust confer upon B Pty Ltd a present entitlement to certain dividends received by the trust. The question is whether the trustee of the trust, Z Holdings, will be liable to pay FTDT in respect of this conferral.

The trustee of a trust is liable to pay FTDT in the circumstances prescribed in section 271-15 of Schedule 2F to the ITAA 1936. Subsection 271-15(1) applies where:

(a) a trustee makes a family trust election in relation to a trust; and

(b) at any time while the election is in force (including a time before it was made), the trust confers a present entitlement to, or distributes, income or capital of the trust:

(i) upon or to a person who is neither the individual specified in the family trust election nor a member of the individual's family group in relation to the conferral or distribution; or

(ii) upon or to the individual specified in the election or a member of the individual's family group, where the individual or member is the trustee of a trust, or the member is a trust, that is not included in the individual's family group in relation to the conferral or distribution.

On the facts of the present matter:

• It is established that The Z Trust is a family trust (that is, a family trust election has been made in in relation to The Z Trust under subsection 272-80(1));

• X is the specified individual of the trust under subsection 272-80(3); and

• It is proposed that Z Holdings as trustee for The Z Trust will make B Pty Ltd specifically entitled to part of the dividend it receives from Z Investments.

The issue is whether B Pty Ltd is "'a member of the individual's family group" (that is, a member of X's family group) such that the conferral of the entitlement upon B Pty Ltd by The Z Trust can be considered to be one made within the family group, thereby falling outside the scope of the FTDT provisions in section 271-15.

B Pty Ltd will be a member of the "family group" of X (the primary individual) under subsection 272-90(5) on the basis of the following:

• X is the primary individual specified in The Z Trust, and is also the primary individual specified in the Q Trust.

Question 3

Summary

The change of Principal proposed in respect of the Q Trust does not constitute a resettlement of the trust. This is because the change is made in accordance with the terms of the Trust and does not result in a separate charter of obligations such that the assets of the Trust are now held on terms of a distinct and separate trust.

Detailed reasoning

CGT event E1 in section 104-55 of the ITAA 1997 happens where a trust is created over a CGT asset by settlement. CGT event E2 in section 104-60 of the ITAA 1997 will apply if a CGT asset is transferred to another trust.

In the present case, the issue is whether the change of Principal proposed in respect of the Q Trust will constitute a "resettlement" of the trust, thereby triggering the operation of the abovementioned provisions.

Tax Determination TD 2012/21 (TD 2012/21) considers whether CGT Event E1 or E2 happens if there is a variation to the terms of a trust pursuant to a valid exercise of a power contained within a trust's constituent document. The general view held in TD 2012/21 is that an amendment to the trust made in accordance with the terms of the trust would generally not break the continuity of the trust property. In particular, paragraph 21 of TD 2012/21 provides as follows:

Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees , as explained by Edmonds and Gordon JJ in Clark,³ is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power. Relevantly, in Commercial Nominees the Full Federal Court had stated that:

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.

In the present case, the change in the Principal to the Q Trust will involve an amendment to its trust deed. Specifically, the Schedule to the deed (which forms part of the deed) may need to be amended following the change in Principal given that it currently names X as the Principal.

The change in Principal is authorised under the deed. Accordingly it is considered that any amendment resulting from the change will be "in accordance with the terms of the original trust".

Paragraph 24 of TD 2012/21 provides:

Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts 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, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

Paragraph 27 then provides:

Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

It cannot be said that the assets of the Q Trust will be held "under a separate charter of obligations as a result of a change to the terms of the trust'" as the sole result of the change of Principal. This is based on the following:

• There will be no change to the beneficial interests in the trust property;

• There will be no redefinition of the beneficiary class;

• The beneficiaries will have the same rights in the trust property after the change of Principal;

• The change will not affect the rights or obligations of the Trustee;

• The change will not affect the rights or obligations of the Principal;

• The change will not result in the addition or depletion of Trust property.

Consistent with the view in TD 2012/21, it is considered that the change of Principal as proposed under the terms of the assumed facts will not amount to a resettlement of the trust.

Accordingly, neither CGT Event E1 in section 104-55 nor CGT Event E2 in section 104-60 will happen upon the proposed change of Principal of Q Trust, as described in the scheme.

Question 4

Summary

Where Q Pty Ltd as trustee of the Q Trust has made a family trust election, no FTDT is payable by the trustee on a distribution or conferral of entitlement by the trust to:

(1) Y; or

(2) an entity owned by the Q Trust to the extent that ownership means having "fixed entitlements, directly or indirectly, and for their own benefit, to all the income and capital of the company, partnership or trust".

Detailed reasoning

The question of whether FTDT is payable depends on whether the conferral of present entitlement is made to a member of the relevant individual's family group.

In this regard, the relevant provisions which are contained in section 271-15 in Schedule 2F are outlined above in question 2 of this Ruling.

Where present entitlement is conferred on Y

If the Q Trust confers a present entitlement to trust income upon Y after Y becomes the Principal of the Q Trust, it will not be liable for FTDT in respect of that conferral for the following reasons:

• The specified individual of the Q Trust is X.

• X's family group includes Y as "a person who was a spouse of…the primary individual" (Paragraph 272-90(2A)(a) in Schedule 2F).

• Given that Y is a member of X's "family group", no FTDT will be payable in respect of the conferral.

Where present entitlement is conferred on an entity owned by the Q Trust

If the Q Trust confers a present entitlement to trust income upon an entity "owned' by the Q Trust after Y becomes the Principal of the Q Trust, it will not be liable for FTDT in respect of that conferral provided that, by virtue of such ownership, the Trust has "fixed entitlements, directly or indirectly, and for their own benefit, to all the income and capital of the company, partnership or trust" for the purposes of section 272-90(5) in Schedule 2F. Specifically:

• Q Trust is a member of X's family group pursuant to subsection 272-90(3) as the trust in respect of which the family trust election was made.

• If Q Trust, as a member of the primary individual's family as referred to in paragraph 272-90(5)(b), has fixed entitlements, and for its own benefit, to all the income and capital of that entity, the entity will be deemed to be a member of the primary individual's family group under subsection 272-90(5).

Accordingly, the conferral of trust income by Q Pty Ltd as trustee of the Q Trust on an entity owned by the Q Trust will not be subject to FTDT pursuant to section 271-15.