Edited version of your written advice

Authorisation Number: 1013085287239

Date of advice: 6 September 2016

Ruling

Subject: Trust

Questions and Answers

1. Did the Settlement create two separate trust estates (Trust A & Trust B) for the purpose of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes

2. Is the trustee of the Settlement required to lodge separate income tax returns for Trust A and Trust B pursuant to section 161 of the ITAA 1936?

Yes

3. Does CGT Event A1 happen when X Ordinary shares held by the Trustee of the Settlement in the Company are cancelled and replaced with newly issued X 'A' Ordinary Shares (held for the benefit of Trust A)?

No

4. Does CGT Event A1 happen when X Ordinary shares held by the Trustee of the Settlement in the Company are cancelled and replaced with newly issued X 'B' Ordinary Shares (held for the benefit of Trust B)?

No

5. Does CGT event E1 happen when the Trustee of the Settlement accept the newly issued 'A' Ordinary Shares and 'B' Ordinary Shares?

No

6. Can the Trustee of the Settlement choose to apply the Replacement Asset Rollover for the cancellation of the Ordinary Shares in the Company and their replacement with newly issued 'A' Ordinary Shares and 'B' Ordinary Shares?

Yes

7. Will CGT Event H2 happen insofar as the proposed shareholder agreement provides for the segregation of each new class of Ordinary Shares?

No

This ruling applies for the following period

Year ending 30 June 2017

Year ended 30 June 2018

The scheme commenced on

1 July 2016

Relevant facts

Background

The Settlement was created by deed. Broadly, the Settlement established two separate funds to provide for Person A and the children and remoter descendants of Person B (Person A's spouse). They had two children, Person C (the sole child at the time of the the Settlement) and Person D (who was born subsequent to the Settlement). Each of the separate funds is entitled to one half of the property and the income arising therefrom.

The recitals of the Settlement provide:

The settlor doth hereby direct and the trustees hereby agree that the said sum and any other moneys or property which the settlor may hereafter pay transfer or deliver to the trustees … and the investments and moneys for the time being representing the same … shall be divided into two equal parts which shall be held upon the trusts and with and subject to the powers and provisions following ….

Clause 1 (Trust A) of the deed provides that:

… the trustees shall apply the whole of the income of one of the said parts and so much (if any) of the capital of the said part as the trustees in their absolute discretion think fit for or towards the maintenance education advancement or benefit as a class of such of the then Person A and the children and remoter descendants of Person B…. as are for the time being alive …. The said Person C and each descendent of the said Person C for the time being living shall be excluded from any benefit under the foregoing provision.

Clause 2 (Trust B) of the deed provides that:

The income of the other part of the trust fund shall be held … for the benefit of the said Person C during their lifetime.

Clause 2 then provides benefits to the children of Person C after their death.

It is noted that Person A has recently died, and currently Person D and their adult children are the only beneficiaries of this trust fund under the Settlement. The discretionary period of Trust A ends 21 years after the death of the last survivor of Person A, Person C, and related individuals. At the expiration of the discretionary period, the remaining income and capital is to be distributed in equal shares to the surviving beneficiaries, being Person D, their remote issues and their parent. If no one is alive, Person C becomes entitled to such amounts.

Upon Person C's death, the capital of Trust B is to be passed in equal shares to the children of Person C when they have attained the age of 25. If no one is entitled to the capital, such portion of the trust fund is to increase Person D's Share.

The only material assets of the Settlement are Y shares held in the Company. The shares were issued as follows:

• XY original shares gifted to the Settlement in 19XX;

• XZ bonus shares issued on dd/mm/yyyy.

Because of the operation of section s 130-20(2) of the Income Tax (Transitional Provisions) Act 1997, the bonus shares are deemed to have been acquired prior to 20 September 1985.

The current directors of the Company are Person D and Person C. The Company is an investment company which holds various assets such as listed shares, managed funds, cash deposits, freehold land and a stratum titled apartment. Greater than 75 percent of the assets, by market value, have been acquired after the introduction of capital gains tax.

The shareholders register indicates that the Company has the following shares on issue:

• X $2 Ordinary Shares Trust A;

• X $2 Ordinary Shares Trust B; and

• Y $2 redeemable preference shares held by the Estate of the late Person A.

Proposed Restructure

For some time, each of Person D and Person C has wished to manage each of the two trust funds, to which they are the principal beneficiaries, separately from each other. This includes pursing differing approaches to investing the funds currently held by the Company. Their joint intention is that each of the separate trust funds will gain or decline in value, produce income or losses, according to the success or otherwise of their separate investment management.

To achieve this intended outcome, it is proposed to implement the following restructure:

1. The Z redeemable preference shares in the Company owned by the Estate of the late Person A will be redeemed, for cash.

2. Pursuant to section 256B of the Corporations Act 2001, the Company will cause the cancellation of all the Ordinary Shares on issue and, in replacement thereof issue X fully paid 'A' Ordinary Shares (on account of Trust A) and X fully paid 'B' Ordinary Shares (on account of Trust B). The effect of the transaction is that the Ordinary Shares are to be replaced with 'A' and 'B' Ordinary Shares.

A shareholders' Agreement, or similar, will be entered into between the Trustee of the Settlement, the Company, Person D, a new company to be established referred to herein as Person D's Company, Person C and a new company to be established referred to herein as Person C's Company.

All of the shares issued in Person D's Company and Person C's Company will be held by the Company.

This agreement will establish, amongst other matters:

• That the shares in Person D's Company and the income arising therefrom will accrue solely for the benefit of the 'A' shareholders; and

• That the shares in Person C's Company and the income arising therefrom will accrue for the benefit of the 'B' shareholders.

The Company will elect to form a Tax Consolidated Group between the Company and the two new subsidiary companies, Person D's Company and Person C's Company.

The Company is to divide its assets, net of any liabilities, equally (by value) between Person D's Company and Person C's Company.

In exchange for the equal division of assets and assumption of any liabilities of the Company, each of Person D's Company and Person C's Company will issue ordinary shares of equivalent value to the Company.

The companies will enter into tax sharing agreements to ensure that the tax effects resulting from different investment strategies in the two new investment companies do not give rise to any inequality between the two interests as a result of the tax consolidation.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Subsection 161(1)

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 104-55(1)

Income Tax Assessment Act 1997 Subsection 104-55(2)

Income Tax Assessment Act 1997 Subsection 104-155 (1)

Income Tax Assessment Act 1997 Section 124-240

Reasons for decision

1. Did the Settlement create two separate trust estates (Trust A & Trust B) for the purpose of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Division 6 of the ITAA 1936 provides rules for working out and assigning tax liability in respect of the 'net income of a trust estate'. The statutory scheme is to calculate the net income of a trust estate as though the trustee were a taxpayer in respect of the assessable income, and to allocate tax liability to the trustee or beneficiaries. Court authorities suggest that 'trust estate' may mean the trust property, but the structure of the legislation indicates that if so, it must be the property which is the subject matter of a particular trust relationship or 'trust'.

For this reason the ATO believes that if changes are such that a new trust relationship arises, there must also be a new trust estate for Division 6 purposes. If the trustee remains the same, it would dispose of the trust property in its capacity as trustee of one trust estate and reacquire it as trustee of another. The disposal would trigger consequences under the capital gains and other provisions of the tax legislation.

Trust settlements are recognised under Australian State stamp duty legislation and have generated extensive case law on when a trust is 'settled' or 'resettled'. Relevant decisions include:

• Davidson v. Armytage (1906) 4 CLR 205

• Davidson v. Chirnside (1908) 7 CLR 325

• CSD (NSW) v. Perpetual Trustee Company Ltd (Quigley's case) (1926) 38 CLR 272

• Wedge v. CS (Vic) (1940) 64 CLR 75

• Buzza v. CS (Vic) (1951) 83 CLR 286

• CSD (NSW) v. Buckle 98 ATC 4097.

The stamp duty cases indicate that a new settlement arises when the changes amount to a 'new charter of rights and obligations', or there are 'created in the trust fund as a whole different equitable interests to those which had existed under the pre-existing trust'. In the ATO's view there is considerable overlap between the terms 'settlement' and 'trust estate'. Exceptions include bare trusts (which may not be settlements) and multiple trust estates arising under one instrument (which may comprise a single settlement). Nonetheless, these cases give valuable insights into the nature of trusts and the circumstances in which new trusts arise.

The ATO also refers to United Kingdom estate duty decisions. Gartside v. IRC [1968] 1 All ER 121, often referred to in Australia as an authority on discretionary trusts, arose in this jurisdiction. A line of cases, discussed and explained in Re Weir's Settlement [1970] 1 All ER 297, considered when changes to a trust which took place in consequence of a death would result in a 'passing' of the trust property. Weir's Settlement supports the proposition that property passes where changes amount to a 'new trust in favour of a new group with new qualifications', as opposed to a situation where the 'same trust purpose or theme continues unchanged'.

It has been argued that a new trust estate for Australian income tax purposes may only arise in situations that would amount to the creation of a new settlement under United Kingdom capital gains tax legislation. Relevant cases on the UK provisions include:

• Roome v. Edwards [1981] 1 All ER 736 per Lord Wilberforce at 739 to 741

• Bond v. Pickford [1983] STC 517

• Swires v. Renton [1991] BTC 362.

Although situations that would amount to a new settlement or resettlement under UK CGT principles could result in a new trust estate under Division 6, in some circumstances the one settlement (in this sense) may comprise a number of separate trust estates for Australian income tax purposes, either concurrently or in succession.

Was there two separate trust estates created by the settlement?

An express trust is a trust which is created deliberately and demonstrates, usually in writing, an intention to create a trust. These trusts are sometimes referred to as direct or declared trusts. The creation of a private express trust requires what are called 'the three certainties':

• Certainty of intention to create a trust. This may be an issue where there was only preparation or a desire, rather than an actual intention to create a trust, which is judged by the words used. There must be an actual transfer of property or a sure declaration of trust.

• Certainty of subject matter. The subject matter of the trust must be described with sufficient certainty.

• Certainty of object. The beneficiaries must be identifiable according to the class or criteria set by the trust, either before or at the time of distribution of the property from the trust: McPhail v Doulton [1971] AC 424; [1970] 2 All ER 228.

The recitals of the Settlement provide:

The settlor doth hereby direct and the trustees hereby agree that the said sum and any other moneys or property which the settlor may hereafter pay transfer or deliver to the trustees … and the investments and moneys for the time being representing the same … shall be divided into two equal parts which shall be held upon the trusts and with and subject to the powers and provisions following ….

Clause 1 of the deed provides that:

… the trustees shall apply the whole of the income of one of the said parts and so much (if any) of the capital of the said part as the trustees in their absolute discretion think fit for or towards the maintenance education advancement or benefit as a class of such of the then Person A and the children and remoter descendants of Person B …. as are for the time being alive …. The said Person C and each descendent of the said Person C for the time being living shall be excluded from any benefit under the foregoing provision.

Clause 2 of the deed provides that:

The income of the other part of the trust fund shall be held … for the benefit of the said Person C during her lifetime.

Clause 2 then provides benefits to the children of Person C after their death.

It is clear from the Settlement that there is a clear intention to create two trusts, the subject matter of each trust is certain and the beneficiaries of each trust are identifiable. Therefore, the Commissioner accepts that the settlement created two distinct trusts.

2. Is the trustee of the Settlement required to lodge separate income tax returns for Trust A and Trust B pursuant to section 161 of the ITAA 1936?

Under subsection 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice

The due dates for lodgement of the income tax returns and other statements are set out under legislative instrument - Federal Register of Legislative Instruments at www.legislation.gov.au.

For example, the legislative instrument for the 2016 income year requires lodgement of Income Tax Returns:

In accordance with section 161 and related provisions of the Income Tax Assessment Act 1936 I require every person described in Tables A, B, C, D, E, F, G, H, I, J, K or L to give me a return of income for the year of income ended 30 June 2016 (or approved period in lieu).

In this instrument a 'person' includes:

• ……

• a trustee of a trust estate; and

• ……

Tables A, B, C, D, E, F, G, H, I, J, and K are not relevant for the purposes of this ruling.

Table L

Where the trustee of a trust estate has derived income (including capital gains) and the trustee is not covered by Tables M, N or O, a trust return is required to be lodged by the trustee resident in Australia. If there is no trustee resident in Australia, the return is to be lodged by the trust's public officer or, where no public officer is appointed, by the trust's agent in Australia.

In this case the trustee is not covered by Tables M, N or O. therefore a return is required for each trust estate.

Similar notifications have been made in prior income years. The Commissioner will accept the income tax returns lodged by the trustee in prior income years, but will expect separate returns for all future income tax returns.

3. Does CGT Event A1 happen when X Ordinary shares held by the Trustee of Settlement in the Company are cancelled and replaced with newly issued X 'A' Ordinary Shares (held for the benefit of Trust A)?

Section 102-25 of the ITAA 1997 states the 'If more than once CGT event can happen, the one you use is the one that is the most specific to your situation.

CGT event A1 occurs if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity (section 104-10 of the ITAA 1997).

CGT event C2 occurs if your ownership of an intangible CGT asset ends by the asset being cancelled, abandoned or expiring (section 104-25 of the ITAA 1997).

In this case, the X ordinary shares will be cancelled; therefore CGT event C2 will happen.

4. Does CGT Event A1 happen when X Ordinary shares held by the Trustee of Settlement in the Company are cancelled and replaced with newly issued X 'B' Ordinary Shares (held for the benefit of Trust B)?

Section 102-25 of the ITAA 1997 states the 'If more than once CGT event can happen, the one you use is the one that is the most specific to your situation.

CGT event A1 occurs if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity (section 104-10 of the ITAA 1997).

CGT event C2 occurs if your ownership of an intangible CGT asset ends by the asset being cancelled, abandoned or expiring (section 104-25 of the ITAA 1997).

In this case, the X ordinary shares will be cancelled; therefore CGT event C2 will happen.

5. Does CGT event E1 happen when the Trustee of the Settlement accepts the newly issued 'A' Ordinary Shares and 'B' Ordinary Shares?

CGT event E1 happens when a trust is created by declaration or settlement over a CGT asset (subsection 104-55(1) of the ITAA 1997). The time of the event is when the trust is created (subsection 104-55(2) of the ITAA 1997).

As there is no specific appointment to either part of the Settlement, the cancellation of shares and the reissue of new shares to the Trustee, does not result in the Trustee entering into a new settlement nor does it result in the Trustee making a declaration.

Accordingly, CGT event E1 will not happen.

6. Can the Trustee of the Settlement choose to apply the Replacement Asset Rollover for the cancellation of the Ordinary Shares in the Company and their replacement with newly issued 'A' Ordinary Shares and 'B' Ordinary Shares?

A taxpayer may choose a replacement asset roll-over where a company redeems or cancels shares held by the taxpayer, and issues new shares in substitution for the redeemed or cancelled shares, provided the following conditions of section 124-240 of the ITAA 1997 are satisfied:

• the company redeems or cancels all of the shares in a particular class of shares held by the taxpayer

• the company issues new shares to the taxpayer in substitution for the shares that have been redeemed or cancelled

• the taxpayer receives nothing else from the company in the course of the redemption/cancellation and reissue

• the market value of the new shares issued to the taxpayer, immediately after their issue, is at least equal to the market value of the original shares immediately before their redemption or cancellation

• the paid-up share capital of the company does not change as a result of the redemption/cancellation and reissue of the share, and

• either:

• the taxpayer was an Australian resident at the time of the redemption or cancellation, or

• if the taxpayer was not an Australian resident at that time, the redeemed or cancelled shares have the necessary connection with Australia.

In this case:

• The company intends to cancel all the ordinary shares on issue pursuant to section 256B of the Corporations Act.

• The Company intends to replace the cancelled shares with the same amount of 'A' and 'B' ordinary shares. The new shares will rank equally, with the same voting and capital rights.

• No other consideration will be paid in relation to the transaction.

• The cancellation and reissue of shares is to occur simultaneously. The new shares will have the same market value as the cancelled shares.

• The paid up capital of the company will remain unchanged following the cancellation and reissue of new shares.

• The Company and the Trust are Australian residents at the time of the cancellation.

As a result the Trust can choose to apply the roll-over relief under section 124-240 and disregard the capital gain or loss arising from the cancellation of the shares.

7. Will CGT event H2 happen insofar as the proposed shareholder agreement provides for the segregation of each new class of Ordinary Shares?

CGT event H2 happens if 'an act, transaction or event' occurs in relation to a CGT asset and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (subsection 104-155 (1) of the ITAA 1997.

CGT event H2 does not happen when the Company issues or allots shares in the Company.

A shareholder agreement is a contract between the shareholders of the company in which they agree to regulate their rights as shareholders.

The shareholder agreement will not trigger CGT event H2.