Edited version of your written advice

Authorisation Number: 1051332044491

Date of advice: 29 January 2018

Ruling

Subject: Trusts – resettlement – majority underlying interest

Question 1

Do the proposed amendments of the Trust Deed cause CGT event E1 to happen?

Answer:

No

Question 2

Will the proposed amendments to the Trust Deed cause an asset of the Trust to cease being a pre CGT asset under Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 3

If the property is sold, will a capital gain arising from CGT event A1 be disregard under paragraph 104-10(5) of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Trust was established before 20 September 1985.

The Trust owns one asset which was transferred to the Trust before 20 September 1985.

The Deed has not been previously amended or varied.

Under Clause XX of the Deed the Trustee has the power to vary the Deed.

The Trustee wants to exercise its power under clause XX of the Deed to vary the Deed by:

● Increasing the vesting date to 80 years.

● Remove certain persons as beneficiaries of the Trust.

The persons to be removed as beneficiaries have never received a distribution from the Trust.

The only persons who have received distributions from the Trust will not be removed as beneficiaries of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 149-15

Income Tax Assessment Act 1997 Subsection 149-15(1)

Income Tax Assessment Act 1997 Section 149-30

Reasons for decision

Amendments to the Deed

CGT event E1 is triggered when a trust resettlement occurs, that is, when one trust estate has ended and another has replaced it.

Tax Determination TD 2012/21 sets out the Commissioner’s view in respect to trust resettlements and whether or not a resettlement has occurred.

TD 2012/21 asserts that a valid amendment to a trust will not result in the termination of a trust as long as:

● the amendment is made pursuant to an existing power;

● the amendment does not cause the trust to terminate for trust law purposes; and

● the effect of the amendment does not lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

In this case, the proposed variations to the existing Trust Deed would be a valid amendment to the Trust, not resulting in a termination of the trust or the creation of a new trust and will not result in the happening of CGT event E1.

Majority underlying interest

Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:

(a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and

(b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset.

The expression ‘beneficial interests’ as used in the definition of majority underlying interests is not defined.

Taxation Ruling IT 2340 (IT 2340) reflects an approach of determining which natural persons hold the beneficial interests. Where assets are held by the trustee of a discretionary trust, the assets are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained.

In this regard, paragraphs 6 and 7 of IT 2340 make it clear that if a trustee continues to administer a trust for the benefit of members of a particular family, section 160ZZS of the ITAA 1936 (Subdivision 149-B of ITAA 1997) will not apply. The ruling explains that if there is an amendment to the trust deed which results in a practical effect of a change of more than 50% of the underlying interests of the trust assets, then subsection 160ZZS(1) (Subdivision 149-B of ITAA 1997) would apply. The ruling also states that in considering whether majority underlying interests have been maintained in the assets of a trust it will be relevant to take into account the way in which the discretionary powers of the trustee have been exercised.

Application to Trust’s circumstances

Having regard to IT 2340, it is considered that the proposed amendments to the Trust Deed will not result in a change to the majority underlying interests in the Property held by the Trust. Consequently Division 149 of the ITAA 1997 would not operate to remove the pre-CGT status of the Property held by Trust.

Accordingly, the Property held in the Trust will not stop being a pre-CGT asset under section 149-30 of the ITAA 1997.

Disposal of the property

Section 104-10 of the ITAA 1997 provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset is transferred to another entity.

Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985.

As the property is a pre-CGT asset of the Trust, the Trustees can disregard the capital gain made from the disposal of the property.