Edited version of your written advice

Authorisation Number: 1013053159099

Date of advice: 18 July 2016

Ruling

Subject: Variation to trust vesting date

Question 1

Did the Nominated Beneficiaries become absolutely entitled to the assets of the Separate Fund when the youngest Nominated Beneficiary turned 25 causing capital gains tax (CGT) event E5 to occur?

Answer

No.

Question 2

Did the trust estate comprised by the Separate Fund cease to exist when the youngest Nominated Beneficiary turned 25?

Answer

No.

Question 3

If the trust estate comprised of the Separate Fund has not ceased to exist, will the variation cause the creation of a new trust and give rise to CGT event E1?

Answer

No.

Question 4

Will the variation result in either of the following CGT events occurring in respect of the Nominated Beneficiaries:

(i) CGT event E8?

(ii) CGT event C2?

Answer

Not applicable.

Question 5

Will assessable income derived by the trustee of the Separate Fund after the variation be 'excepted trust income' under paragraph 102AG(2)(a) of the Income Tax Assessment Act 1936?

Answer

Not applicable.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased passed away during the 20vv-ww financial year.

The deceased left the bulk of the estate to the executors to hold on a number of separate testamentary trusts (Separate Funds) for each of the deceased's children and their families.

The initial trustees of the Separate Fund were the executors under the will.

The initial trustees varied the terms of the Separate Funds by deed during the 20xx-yy financial year changing the power to remove the trustee of each Separate Fund.

The deceased's child removed the initial trustees of the Separate Fund by deed during the 20xx-yy financial year and appointed a company as the replacement trustee.

The general provisions and powers that apply to the Separate Fund are set out in clauses 3(g) and 4 of the will.

Clause 3 of the will establishing the trust provides the following:

(b) Separate Fund - To transfer one portion of the rest residue and remainder of my estate both real and personal to my Trustee as trustee to hold the same as a Separate Fund, in respect of which the following shall apply:-

(i) the Nominated Beneficiaries shall be my child, their spouse and their children

(ii) the Nominated Age shall be twenty-five (25) years …

vi. Interpretation… "the vesting Day" means the day on which youngest of the Nominated Beneficiaries or, if any one shall die, the survivor or survivors of them, attains the Nominated Age provided always that the vesting Day may be extended by agreement between my Trustee and the Nominated Beneficiaries but in any event all not be extended beyond the day on which shall expire the period of eighty (80) years after the date of my death provided always that after the expiration of the period of one year from the day of my death, my Trustee, may by deed appoint such earlier date as my Trustee shall determine, to be the Vesting Day;

The youngest Nominated Beneficiary turned 25 during the 20aa-bb financial year.

Your application for a private ruling includes a proposed variation (to be implemented after the issuing of the private ruling) which, with the consent of the Nominated Beneficiaries, would vary the Vesting Day till 30 June 20XX.

The Trustee's power of variation is contained within clause 4.d. of the will which reads:

Variation of Trusts - by deed revoke, add to, release or vary all or any of the trust powers contained in this will in respect of any Relevant Fund or any trusts or powers declared by any variation, alteration or addition made to the trusts or powers from time to time and may by the same or any deed declare any new or other trusts or powers concerning the Relevant Fund or part thereof but so that my Trustee shall not have any power to revoke, add to, vary any of the trusts or powers in relation to any of the Relevant Fund nor declare any new trusts:-

(i) so that my Trustee may acquire a beneficial interest in the Relevant Fund or any part thereof; or

(ii) to affect the beneficial entitlement of any beneficiary to any amount applied for him prior to the date of revocation or alteration; or

(iii) in relation to any declaration of a new trust unless the declaration is for the benefit of any one or more of the Nominated Beneficiaries named in this Will in relation to the Relevant Fund

Upon the exercise of any release and any revocation pursuant to this clause, the power or trust so released and revoked shall be absolutely and irrevocably determined. The expression "trusts or powers" where used in this sub-clause shall be deemed to include all the provisions of this Will or of a Codicil or any deed varying or altering or adding to this Will in its application to the Relevant Fund.

Clause 3.g.iii of the will pertains to the distribution of capital on the Vesting Day and states:

On the Vesting Day, to pay the balance in the Separate Fund to such of the Nominated Beneficiaries as shall survive me and attain the Nominated Age, and if more than one, in equal shares as tenants in common;

The assets held in the Separate Fund consist of:

• cash

• loans to related parties

• shares in an unlisted private company acquired by the deceased prior to 20 September 1985.

The private company constitution states the following:

12.4 A share may be transferred by a member or other person entitled to transfer to any member selected by the transferor but save as aforesaid and save as provided by clause 12.9 or 12.11 hereof no share shall be transferred to a person who is not a member so long as any member (or any person selected by the Directors as one whom it is desirable in the interests of the Company to admit to membership) is willing to purchase the same at the fair value.

12.9 If the Company shall not, within the space of 28 days after being served with a transfer notice, find a purchasing member and give notice in manner aforesaid, the proposing transferor shall at any time within 3 months afterwards be at liberty subject to clause 12.5 hereof, to sell and transfer the share (or where there are more shares than one those not placed) to any person provided however that in each proposed sale if the proposed selling price be at a rate per share which is less than that specified in the transfer notice, the shares proposed to be sold must again be placed in the hands of the Company for sale to a member or persons selected by the Directors in all respects as is provided in clauses 12.4 to 12.8.

12.11 Any share may be transferred by a member to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, wife or husband of such member and any share of a deceased member may be transferred by his executors or administrators to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, widow or widower of such deceased member (to whom deceased member may have specifically bequeathed the same) and shares standing in the name of the trustees of the will of any deceased member may be transferred upon any change of trustees to the trustees for the time being of such will (and the restriction in clause 12.4 hereof shall not apply to any authorised by this clause.)

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-75(1).

Income Tax Assessment Act 1936 Paragraph 102AG(2)(a).

Reasons for decision

Question 1

Summary

Though the Nominated Beneficiaries interest in the balance of the Separate Fund became fixed on the vesting day they did not become absolutely entitled to a CGT asset of the Separate Fund as against the Trustee for CGT purposes, therefore CGT event E5 did not happen.

Detailed reasoning

Subsection 104-75(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

Whether CGT event E5 happens will depend on the beneficiaries' interests and rights under the deed establishing the trust and the meaning of 'absolutely entitled to a CGT asset of the trust' for the purpose of the subsection.

Rights and interests of the Nominated Beneficiaries of the Separate Fund

The Separate Fund is a discretionary trust established by the will of the deceased. Clause 3 of the will establishing the trust provides the following:

(b) To transfer one portion of the rest residue and remainder of my estate both real and personal to my Trustee as trustee to hold the same as a Separate Fund, in respect of which the following shall apply:-

i the Nominated Beneficiaries shall be my child, their spouse and their children

ii the Nominated Age shall be twenty-five (25) years …

vi. Interpretation… "the vesting Day" means the day on which youngest of the Nominated Beneficiaries or, if any one shall die, the survivor or survivors of them, attains the Nominated Age provided always that the vesting Day may be extended by agreement between my Trustee and the Nominated Beneficiaries but in any event all not be extended beyond the day on which shall expire the period of eighty (80) years after the date of my death provided always that after the expiration of the period of one year from the day of my death, my Trustee, may by deed appoint such earlier date as my Trustee shall determine, to be the Vesting Day;

Your private ruling application states that the youngest Nominated Beneficiary turned 25 during the 20aa-bbfinancial year.

The Vesting Day was not varied by the Trustee of the Separate Fund prior this date.

Your application for a private ruling includes a proposed variation (to be implemented after the issuing of the private ruling) which, with the consent of the Nominated Beneficiaries, would vary the Vesting Day till 30 June 20XX.

The Trustee's power of variation is contained within clause 4.d. of the will which reads:

Variation of Trusts - by deed revoke, add to, release or vary all or any of the trust powers contained in this will in respect of any Relevant Fund or any trusts or powers declared by any variation, alteration or addition made to the trusts or powers from time to time and may by the same or any deed declare any new or other trusts or powers concerning the Relevant Fund or part thereof but so that my Trustee shall not have any power to revoke, add to, vary any of the trusts or powers in relation to any of the Relevant Fund nor declare any new trusts:-

i so that my Trustee may acquire a beneficial interest in the Relevant Fund or any part thereof; or

ii to affect the beneficial entitlement of any beneficiary to any amount applied for him prior to the date of revocation or alteration; or

iii in relation to any declaration of a new trust unless the declaration is for the benefit of any one or more of the Nominated Beneficiaries named in this Will in relation to the Relevant Fund

Upon the exercise of any release and any revocation pursuant to this clause, the power or trust so released and revoked shall be absolutely and irrevocably determined. The expression "trusts or powers" where used in this sub-clause shall be deemed to include all the provisions of this Will or of a Codicil or any deed varying or altering or adding to this Will in its application to the Relevant Fund.

Clause 3.g.iii of the will pertains to the distribution of capital on the Vesting Day and states:

On the Vesting Day, to pay the balance in the Separate Fund to such of the Nominated Beneficiaries as shall survive me and attain the Nominated Age, and if more than one, in equal shares as tenants in common;

The Nominated Beneficiaries all survived the passing of the deceased and were still alive on the day on which the youngest Nominated Beneficiary turned 25.

It follows that as the Vesting Day had not been varied prior to this date, clause 3.g.iii took effect on this day. The effect of this is that from the Vesting Day onwards the Nominated Beneficiaries obtained a vested interest in possession as to the balance of the Separate Fund in equal shares as tenants in common.

That is, the Nominated Beneficiaries were no longer discretionary beneficiaries whose interest in the Separate Fund was only that to be considered, instead their interest had become fixed and vested in possession. The trustee had an obligation to pay and, for trust law purposes, the beneficiaries had a vested and indefeasible right to call for payment.

In the context of the trustee's power to vary in clause 4.d of the will, the balance of the Separate Fund's trust assets (that is all of the trust fund) had been applied for the benefit of the Nominated Beneficiaries in equal shares as tenants in common.

Consequently from the date the youngest Nominated Beneficiary turned 25 years old, the trustee no longer had the power to vary the Vesting Day, as to do so would affect the Nominated Beneficiaries beneficial entitlement to the balance of the Separate Fund as applied for them by operation of clause 3.g.iii on this date.

Absolutely entitled to a CGT asset of the trust

Even though for trust law purposes the Nominated Beneficiaries held from the date the youngest Nominated Beneficiary turned 25 a fixed entitlement in the trust fund it does not necessarily follow that they were absolutely entitled to a CGT asset of the Separate Fund.

Draft Taxation Ruling TR 2004/D25 sets out the Commissioners view on the words 'absolutely entitled to a CGT asset as against the trustee of a trust'. Paragraph 9 explains that for the purpose of subsection 104-75(1) of the ITAA 1997 the provision applies separately to each beneficiary and asset of the trust and requires absolute entitlement to the whole of a CGT asset.

That is, it has to be determined separately whether each beneficiary has an absolute entitlement against the whole of each CGT asset. As explained by paragraph 23 of TR 2004/D25 if there is more than one beneficiary who has interests in a trust asset then it will generally not be possible for any one beneficiary to call for the asset to be transferred at their direction.

The exception to this is listed at paragraph 24 of TR 2004/D25 and applies where:

a) The assets are fungible

b) The beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

c) There is a clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust assets

The relevant CGT assets of the Separate Fund are shares in a private company and loans to related parties. The applicant's representatives have provided the following information in respect of the assets.

Private company shares

The trustees hold sufficient shares to be able to apportion the shares among the beneficiaries of the trust.

However, none of the beneficiaries can compel the trustee to transfer shares to them because the other shareholders in the company have pre-emptive rights to acquire the shares as set out in the following provisions of the constitution.

12.4 A share may be transferred by a member or other person entitled to transfer to any member selected by the transferor but save as aforesaid and save as provided by clause 12.9 or 12.11 hereof no share shall be transferred to a person who is not a member so long as any member (or any person selected by the Directors as one whom it is desirable in the interests of the Company to admit to membership) is willing to purchase the same at the fair value.

12.9 If the Company shall not, within the space of 28 days after being served with a transfer notice, find a purchasing member and give notice in manner aforesaid, the proposing transferor shall at any time within 3 months afterwards be at liberty subject to clause 12.5 hereof, to sell and transfer the share (or where there are more shares than one those not placed) to any person provided however that in each proposed sale if the proposed selling price be at a rate per share which is less than that specified in the transfer notice, the shares proposed to be sold must again be placed in the hands of the Company for sale to a member or persons selected by the Directors in all respects as is provided in clauses 12.4 to 12.8.

12.11 Any share may be transferred by a member to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, niece, wife or husband of such member and any share of a deceased member may be transferred by his executors or administrators to any child or other issue, son-in-law, daughter-in-law, father, mother, brother, sister, nephew, widow or widower of such deceased member (to whom deceased member may have specifically bequeathed the same) and shares standing in the name of the trustees of the will of any deceased member may be transferred upon any change of trustees to the trustees for the time being of such will (and the restriction in clause 12.4 hereof shall not apply to any authorised by this clause.)

While the applicant's representative is of the view that the shares in the private company are fungible in order for the Nominated Beneficiaries to be absolutely entitled to them for CGT purposes the Nominated Beneficiaries also have to have a right to have their interested satisfied.

Paragraph 97 of TR 2004/D25 sets out the general rule in Snell's Principles of Equity as:

The general rule is that a person who is indefeasibly entitled to a share in divisible property is entitled to have his share transferred to him, unless there is some good reason to the contrary, as where division in specie of trust property would give one beneficiary a disproportionate advantage

In this case the applicant's representative has stated that none of the beneficiaries can compel the trustee to transfer shares to them because the other shareholders in the company have pre-emptive rights to acquire the shares as set in clause 12.4 of the Company's constitution.

If the Nominated Beneficiaries do not belong to the membership class referred to in clause 12.4 of the Company's constitution (and cannot be admitted) then as per the rule in Snell's Principles of Equity the Nominated Beneficiaries could not compel an in specie transfer and therefore the beneficiaries would not, for CGT purposes, be absolutely entitled to the CGT asset as against the trustee.

Based on the information provided by the applicant's representative the Nominated Beneficiaries cannot have their interest in the company shares satisfied by a distribution or allocation in their favour therefore CGT event E5 does not happen in respect of that CGT asset.

Loans to related parties

The applicant's representatives have stated that the loans to related parties are not fungible because at law a partial interest in a debt is not assignable.

The information provided implies that the loans are to different entities and therefore do not belong to the same class (that is they may have different prospects of recoverability, etc) and may not be easily divisible between the Nominated Beneficiaries if considered at an individual loan basis.

On the views and information given by the applicant's representative the CGT asset, being loans to related parties, are not fungible and are not conveniently divisible between the Nominated Beneficiaries. Therefore CGT event E5 does not happen in respect of the loans to related parties.

Question 2

The consequence of the vesting day having being met of the Separate Fund is set out in clause 3.g.iii and is quoted above, namely that the balance of the Separate Fund is to be paid to the Nominated Beneficiaries in equal shares as tenants in common.

As previously discussed, the effect of this is that the Nominated Beneficiaries obtained a vested interest in possession as to the balance of the Separate Fund (capital). It should also be noted that after the vesting day the Nominated Beneficiaries right to income earned from time to time is an incident of their ownership of the trust capital (equitable title to the assets extending to the ownership of its fruits).

As the Trustee has not paid the balance of the Separate Fund to the Nominated beneficiaries after the vesting day, the trustee continues to be hold the balance of the Separate Fund (and any income arising from these assets) on trust for the Nominated Beneficiaries.

As such it is our view that from the date the youngest Nominated Beneficiary turned 25 the trustee of the Separate Fund ceased to hold the assets pursuant to a discretionary trust and instead held the assets on the terms of a fixed trust. That is, the Separate Trust did not cease to exist however, the nature of the Nominated Beneficiaries' interest under the trust became fixed and the discretionary powers of the trustee, so far as they could affect or alter the Nominated Beneficiaries' fixed interest, ceased to have application.

Question 3

The proposed variation, which is to be executed after the issuing of this ruling, proposes at clause 2 to amend the definition of "the vesting day" in paragraph 3(g)(vi) of the will to mean 30 June 20XX.

As discussed above the trustee's powers of amendment are limited such that they cannot affect the beneficial entitlement of any beneficiary to any amount applied for them prior to the date of the variation.

As the balance of the Separate Fund has been applied for the Nominated Beneficiaries through application of clause 3.g.iii which, as discussed above, has the effect of converting the Nominated Beneficiaries' discretionary interest into a fixed interest, the effect of the proposed variation would be to transform the Nominated Beneficiaries' fixed interest into a contingent, discretionary interest of the kind enjoyed by a discretionary object.

As this would clearly affect the Nominated Beneficiaries' beneficial entitlement it is our view that the trustee does not have the power to vary the vesting day and the proposed variation would have no effect.

As the proposed variation would have no effect it is not necessary to consider whether a new trust arises.

Question 4 and 5

As questions 4 and 5 of the ruling application all pose questions based on the premise that the proposed variation would have legal effect, it is not necessary to answer these questions because, as discussed above, it is our view that the trustee of the Separate Fund does not have the power to make the proposed variation.