Edited version of your written advice

Authorisation Number: 1013068026289

Date of advice: 8 August 2016

Ruling

Subject: Income tax

Question 1

Will CGT event A1 (section104-10 of the ITAA 1997), CGT event E1 (section 104-55) or CGT event E2 (section 104-60) happen upon the execution of the draft Deed of Amendment to the Trust Deed?

Answer

No

Question 2

Will income accumulated by the Trustee be subject to taxation at the top marginal tax rate of 47% plus 2% Medicare Levy for the purposes of section 99A of the ITAA 1936?

Answer

Yes

Question 3

Will the income distributed to the exempt entities from the Trustee be exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust was established on 1 July 20XX.

The Trustee is a company incorporated in Australia, the shareholders and directors of which are resident in Australia.

The beneficiaries of the Trust include certain exempt entities that are Australian residents for taxation purposes and are entities covered by a table in Subdivision 50-A of the ITAA 1997.

The Trust Deed had previously been amended during the 20YY income year.

It is intended that the Trust Deed will be amended to reverse amendments that were made in the 20YY income year.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 6-10

Section 10-5

Subdivision 50-A

Section 50-1

Section 102-25

Section 104-55

Section 104-60

Income Tax Assessment Act 1936

Section 97

Subparagraph 97(1)(a)(i)

Section 99

Subsection 99(1)

Section 99A

Subsection 99A(2)

Subsection 99A(4)

Paragraph 102AG(2)(c)

Division 6C

Income Tax Rates Act 1986

Subsection 12(9)

Reasons for decision

Question 1

Will CGT event A1 (section104-10 of the ITAA 1997), CGT event E1 (section 104-55) or CGT event E2 (section 104-60) happen upon the execution of the draft Deed of Amendment to the Trust Deed?

Answer

No

Summary

The execution of the draft Deed of Amendment to the Trust Deed, in accordance with the carrying out of the Scheme the subject of this private ruling application, will not cause CGT event A1, E1 or E2 to happen.

Detailed reasoning

CGT event A1 happens if you dispose of a CGT asset to someone else (section 104-10 of the ITAA 1997). CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55). CGT event E2 happens if you transfer a CGT asset to an existing trust (section 104-60). However, none of these events happen merely because of a change of trustee.

If more than one CGT event can happen, then you use the one that is the most specific to your situation (subsection 102-25(1) of the ITAA 1997).

Where the particular facts involve a trust, CGT event E1 or CGT event E2 of the ITAA 1997, if relevant, will be the more specific CGT events rather than CGT event A1 because they are specifically directed to trusts [Taras Nominees Pty Ltd v. Federal Commissioner of Taxation - (28 January 2015) - [2015] FCAFC 4; (2015) 2015 ATC 20-483 - Federal Court of Australia; Healey v. Federal Commissioner of Taxation - (23 March 2012) - [2012] FCA 269; (2012) 2012 ATC 20-309; (2012) 208 FCR 300; [2013] ALMD 3073; [2013] ALMD 3074; (2012) 87 ATR 848 - Federal Court of Australia Healey v. Federal Commissioner of Taxation - (21 December 2012) - [2012] FCAFC 194; (2012) 208 FCR 333; (2012) 2012 ATC 20-365; (2012) 91 ATR 671 - Federal Court of Australia].

Taxation Determination TD 2012/21 provides the ATO view on whether CGT event E1 or E2 in section 104-55 or 104-60 of the ITAA 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court.

TD 2012/21, relevantly states:

24. 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.

…………….

27. 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.

Whether the draft Deed of Amendment of the Trust will amount to an amendment to the Trust Deed pursuant to an existing power of amendment contained in the Trust Deed is a matter of fact.

In relation to the content of the proposed amendment it is noted that:

• they will comply with and are within the power set out in the Trust Deed; and

• the amendments themselves aim to reverse previous amendments made in accordance with the power to amend in the Trust Deed;

• the Recitals to the draft Deed of Amendment state that:

• the Trust Deed empowers the Trustee to amend the Trust Deed by deed.

• In accordance with the Trust Deed, the Parties consider the amendments made by this Deed will not prejudicially affect the beneficial entitlements of any beneficiary as at the date of this Deed.

• The parties confirm that the assets of the Trust do not change as a consequence of the amendments contained in this Deed.

Therefore, it is concluded that, as the result of the execution of the draft Deed of Amendment:

• CGT event E1 will not happen;

• CGT event A1 and CGT event E2 are also necessarily precluded from happening; and

• No assets held as part of the trust property of the Trust immediately before the execution of the draft Deed of Amendment will commence to be held under a separate charter of obligations.

Question 2

Will income accumulated by the Trustee be subject to taxation at the top marginal tax rate of 47% plus 2% Medicare Levy for the purposes of section 99A of the ITAA 1936?

Answer

Yes

Summary

As the Trust is not of a kind referred to in subsection 99A(2) of the ITAA 1936 the accumulated income will be assessable to the Trustee under section 99A and taxed at the top marginal tax rate of 47% plus 2% Medicare Levy (i.e., 49%).

Detailed reasoning

Where income is accumulated by the Trustee the income may be assessed under section 99 or section 99A of the ITAA 1936 (subsection 99A(4)).

Section 99 of the ITAA 1936 will apply only if section 99A does not apply in relation to the Trust in relation to the income year (subsection 99(1)).

Section 99A of the ITAA 1936 broadly applies in relation to all trust estates unless the trust estate is of a kind referred to in subsection 99A(2) (i.e., broadly, a deceased estate, a bankrupt estate or a trust that consists of property of a kind referred to in paragraph 102AG(2)(c)) and the Commissioner forms the opinion that the application of section 99A would be unreasonable in the circumstances.

As the Trust is not of a kind referred to in subsection 99A(2) of the ITAA 1936 the income will be assessable to the Trustee under section 99A.

The rate of tax payable by the Trustee in respect of the net income of a trust estate in respect of which the trustee is liable under section 99A of the ITAA 1936 is 47% from 1 July 2014 onwards (subsection 12(9) of the Income Tax Rates Act 1986).

The rate of Medicare Levy payable by the Trustee in respect of the net income of a trust estate in respect of which the trustee is liable under section 99A of the ITAA 1936 is 2% from 1 July 2014 onwards (subsection 6(3) of the Medicare Levy Act 1986).

Question 3

Will the income distributed to the exempt beneficiaries from the Trustee be exempt from income tax under section 50-1 of the ITAA 1997?

Answer

Yes

Summary

The income distributed to the exempt beneficiaries is exempt from income tax under section 50-1 of the ITAA 1997.

The income distributed will not be assessable income of the Trustee under section 99A of the ITAA 1936.

Detailed reasoning

Subparagraph 97(1)(a)(i) of the ITAA 1936 effectively provides that where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident.

Section 50-1 of the ITAA 1997 provides that the total ordinary income and statutory income of entities covered by the tables in Subdivision 50-A is exempt from income tax.

The exempt beneficiaries are entities covered by a table in Subdivision 50-A of the ITAA 1997.

As income that is assessable income in accordance with section 97 of the ITAA 1936 is statutory income for the purposes of sections 6-10 and 10-5 of the ITAA 1997 the income distributed to the exempt beneficiaries from the Trustee will be exempt from income tax (refer to ATO ID 2003/161).