Edited version of your written advice

Authorisation Number: 1013121619608

Date of advice: 8 November 2016

Ruling

Subject: Schedule 2F of the Income Tax Assessment Act 1936

Question 1

Is the transfer of XX ABC Pty Ltd (ABC) shares by the Trustee of the Yellow Family Trust (the Family Trust) to the Trustee of the XYZ Discretionary Trust (the Discretionary Trust) a distribution pursuant to section 272-45 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

Is the transfer of XX shares in ABC by the Trustee of the Family Trust to the Trustee of the Discretionary Trust a distribution pursuant to section 272-60 of Schedule 2F of the ITAA 1936?

Answer

No

Question 3

In the event that the Family Trust made a family trust election, will the Trustee of the Family Trust be liable to family trust distribution tax on the transfer of XX shares in ABC pursuant to section 272-15 of Schedule 2F of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

BACKGROUND

Yellow Pty Ltd (Yellow)

You state that Yellow was at all relevant responsible for Yellow Pty Ltd (Yellow).

Yellow is the trustee for the Yellow Family Trust (Family Trust)

Yellow Family Trust (Family Trust)

You state that:

a. 123 Pty Ltd is a beneficiary of the Family Trust, and

b. neither Blue nor the Discretionary Trust have been a beneficiary of the Family Trust

XYZ Holdings Pty Ltd (XYZ Holdings)

You state that Blue was at all relevant times was responsible for XYZ Holdings Pty Ltd (XYZ Holdings).

ABC Pty Ltd (ABC)

You state that until sometime in 200X Blue was employed with MNMN Pty Ltd. You state that at the time of ceasing their employment, they became subject to a non-compete clause such that they were prevented from engaging in certain competitive actions until a specified date.

You also state that Blue wished to commence a company in the same industry prior to the specified date and approached their former colleague, Yellow, with a proposal to start a new business venture.

Red registered ABC Pty Ltd (ABC) and became responsible for the company and held all of the XX of the issued shares. You explain that:

a. Red ran the company with Blue and another colleague.

b. there was an understanding that ABC was to be held by Red on Blue's behalf and that, upon expiration of the non-compete clause, the company would be transferred to Blue, and

c. Blue provided:

i. finance and premises for ABC, and

ii. mentoring to Yellow to operate and grow the business of ABC.

Blue arranged a loan facility with Three Pty Ltd (Three) and over $X.X million was advanced to ABC without an executed loan agreement.

a. The administrators of Three are business associates of Blue, with one being a family member.

You state that Red worked at ABC at a reduced salary until a loan from Three was repaid.

It was understood that initially all the shares in ABC would be held by Red and XX% would be transferred to Yellow, or their nominated entity. It was then intended that XX% of these shares would be transferred to Blue, or their nominated entity, at a time of their choosing. As a result, Yellow and Blue would ultimately end up holding XX% of the shares in ABC.

Any tax payable as a result of the transfer of the ABC shares was intended to be funded by ABC.

Transfer of ABC shares

You claim that a verbal agreement was entered into which provided that:

a. the Family Trust would acquire all of the existing XX shares in ABC from  Red for $X per share

b. ABC would issue a further XX shares such that the total number of shares on issue would equal X00

c. the Family Trust would acquire an additional XX shares in ABC for $X per share, and

d. XX shares in ABC would be purchased by XYZ Holdings, as Blue's nominated entity, for $X per share at a time of Blue's choosing.

Sometime later, Red transferred their XX ordinary shares in ABC to the Family Trust and resigned from their position. On the same day, the Family Trust was allotted with an additional XX shares in ABC for $X per share. Yellow was also appointed to the company.

Upon Yellow's appointment, they signed the loan agreement between ABC and Three.

Sometime later, the Family Trust transferred XX shares in ABC to the Discretionary Trust.

Family Trust Election

You state that the Family Trust now wishes to make a family trust election with Yellow as the test individual.

a. You have not sought the Commissioner's views whether the election would be considered valid or the date on which the election would be considered to be applicable.

Relevant legislative provisions

Schedule 2F of the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Is the transfer of XX ABC shares by the Trustee of the Family Trust to the Trustee of the Discretionary Trust a distribution pursuant to section 272-45 of Schedule 2F of the ITAA 1936?

FAMILY TRUST DISTRIBUTIONS TAX

Schedule 2F of the ITAA 1936 contains provisions dealing with family trust elections. Broadly, Division 271 provides that where:

a. a trustee of a trust estate has made a family trust election, and

b. a company, partners of a partnership or trustee of a trust has made an interposed entity election, and

c. the trustee of the initial trust makes a distribution outside the family group of the test individual during a time when the election is in force,

then the trustee is liable to family trust distributions tax (FTDT). FTDT is payable at the top marginal tax rate applicable to individuals, including the Medicare levy.

The meaning of the term 'distributes' is provided by section 272-45 of Schedule 2F, which states that income or capital will be distributed to a person in their capacity as a beneficiary of a trust if the trust:

a. pay or credits income or capital in the form of money to the person

b. transfers property to the person

c. reinvests or otherwise deals with income or capital on behalf of, or at the direction, the person, or

d. applies income or capital for the benefit of the person.

Application to your circumstances

You state that the Family Trust proposes to make a family trust election with Yellow as the test individual.

For section 272-45 to be satisfied in your circumstances, income or capital of the Family Trust must be distributed to the Discretionary Trust in its capacity as a beneficiary of the relevant Trust. As you state that the Discretionary Trust was never a beneficiary of the Family Trust, section 272-45 is not satisfied and the transfer of XX ABC shares to the Discretionary Trust is not a distribution for the purposes of Schedule 2F.

Question 2

Is the transfer of XX shares in ABC by the Trustee of the Family Trust to the Trustee of the Discretionary Trust a distribution pursuant to section 272-60 of Schedule 2F of the ITAA 1936?

OTHER DISTRIBUTIONS OF INCOME AND CAPITAL

Section 272-60 also provides other situations which will be considered to be distribution to a person in circumstances not covered by section 272-45, 272-50 and 272-55. Section 272-60 is silent on whether the section is to apply to persons in their capacity as a beneficiary of a trust, or more broadly.

Guidance on whether section 272-60 applies solely to persons in their capacity as a beneficiary of a trust can be found in ATO Interpretative Decision ATO ID 2012/12 Income Tax Trust Losses: whether the writing off of a trade debt by a trustee constitutes a distribution to the debtor (ATO ID 2012/12). ATO ID 2012/12 clearly states that it is the Commissioner's view that in interpreting the meaning of the term 'persons' in the context of section 272-60, the term is to mean in their capacity as a beneficiary of a trust.

Application to your circumstances

Consistent with the Commissioner's view in ATO ID 2012/12, in order for section 272-60 to be applicable, for the circumstances listed in paragraphs 272-60(1)(a) to (e) to be considered to be a distribution of income or capital, these transactions need to be made to a person in their capacity as a beneficiary of the relevant trust. Although the transfer of the XX shares in ABC by the Trustee of the Family Trust to the Trustee of the Discretionary Trust is a transfer of property as contemplated by paragraph 272-60(1)(b), the transfer is not as a result of the Trustee of the Discretionary Trust being a beneficiary of the Family Trust. Consequently, subsection 272-60(1) is not satisfied and does not apply to your circumstances.

Question 3

In the event that the Family Trust made a family trust election, will the Trustee of the Family Trust be liable to FTDT on the transfer of XX shares in ABC pursuant to section 272-15 of Schedule 2F of the ITAA 1936?

FAMILY TRUST DISTRIBUTIONS TAX

As explained above, FTDT is payable where a trustee has made a family trust election and distributes outside the family group of the test individual when the election is in force. Where this occurs, the trustee is liable to FTDT is payable at the top marginal tax rate applicable to individuals, including the Medicare levy.

Application to your circumstances

You state that the Family Trust proposes to make a family trust election with Yellow as the test individual and an election commencement date of 1 July 20XX.

In order to establish whether the FTDT is payable by the trustee of the Family Trust, there must first be a distribution from the Trust. As explained in questions 1 and 2 above, the transfer of the XX ABC shares is not a distribution for the purposes of sections 272-45 and 272-60 of Schedule 2F of the ITAA 1936. Without the existence of a distribution from the Family Trust, FTDT cannot apply.