Edited version of your written advice

Authorisation Number: 1051447189145

Date of advice: 2 November 2018

Ruling

Subject: Income tax, capital gains tax, CGT events, CGT events E1 to E9 and trusts

Question 1

Does the proposed Deed of Variation to exclude a certain category (or categories) of persons from being, or becoming beneficiaries in respect of the ABC Trust give rise to capital gains tax (CGT) event E1 under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does the proposed Deed of Variation to exclude a certain category (or categories) of persons from being, or becoming beneficiaries in respect of the ABC Trust give rise to CGT event E2 under Division 104 of the ITAA 1997?

Answer

No

Question 3

Does the proposed Deed of Variation to exclude a certain category (or categories) of persons from being, or becoming beneficiaries in respect of the ABC Trust give rise to CGT event A1 under Division 104 of the ITAA 1997?

Answer

No

Question 4

Does the proposed Deed of Variation to exclude a certain category (or categories) of persons from being, or becoming beneficiaries in respect of the ABC Trust give rise to CGT events not already considered in Questions 1, 2 or 3 under Division 104 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

The income year in which the proposed Deed of Variation is executed and Trust Deed is amended.

The scheme commences on:

The date in which the proposed Deed of Variation is executed and Trust Deed is amended.

Relevant facts and circumstances

The ABC Trust

The ABC Trust (‘the Trust’) was established by way of a Trust Deed involving Mr ABC as the Settlor (‘the Settlor’), and ABC Holdings Pty Ltd as the Trustee (‘the Trustee’).

ABC Holdings Pty Ltd is currently a trustee of The ABC Trust.

Trust Deed of the ABC Trust

Under the Trust Deed of the ABC Trust (‘the Trust Deed’):

● the Settlor has paid to the Trustee the sum of $1 (‘Initial Sum’); and

● the Initial Sum of $1 forms part of the Trust Fund and the Trustee has consented to hold the Trust Fund on trust subject to the terms contained in the Trust Deed.

Clause 1.1 of the Trust Deed contains the following definitions relevant to the Scheme:

Under Clause 3.1 of the Trust Deed, the Trustee holds the Trust Fund and the income of the Trust Fund upon trusts. Amongst other things, under Clause 3.1:

● the Trustee has the power to exercise discretion as to how income and capital can be allocated; and

● the beneficiaries are not entitled to call for any part of the trust income or capital, and have to await in the hope of having the Trustee exercise its discretion to appoint in their favour, and as such the beneficiaries lack an interest of a proprietary nature in the estate of the ABC Trust.

With regards to the variation of the Trust, the Trust Deed specifies the following under Clause 11:

11.1. Subject to Clause 11.2, the Trustee for the time being may at any time and from time to time by supplemental deed or by oral resolution or instrument in writing amend this Deed or alter, vary or absolutely revoke all or any of the trusts contained in this Deed from time to time and may in such manner declare any new or other trusts or powers concerning the Trust Fund or any part of the Trust Fund.

11.2. The power conferred by Clause 11.1 must not be exercised in such a way as to infringe any laws against perpetuities or to result in any benefit to any Excluded Person.

The Schedule to the Trust Deed lists Capital Beneficiaries and Income Beneficiaries as:

1. Mr XYZ;

2. Ms XYZ;

3. Any child or children of Mr XYZ and Ms XYZ;

4. Any corporation in which any one or more of the persons referred to in (1) - (3) is a director or has a legal or beneficial interest in at least one issued share;

5. Any trust in which any one or more of the persons referred to in (1) - (3) is named as a beneficiary and/or has any interest whatsoever in whether in capital or income and whether absolutely contingent presumptive or prospective but so that no such trust may be included if such inclusion would infringe the law against perpetuities; and

6. Any company in which ABC Trust has a legal or beneficial interest in at least one issued share.

The Schedule to the Trust Deed lists Default Capital Beneficiaries and Default Income Beneficiaries as:

1. Mr XYZ;

2. Ms XYZ; and

3. Any child or children of Mr XYZ and Ms XYZ.

Proposed changes to the Trust Deed of the ABC Trust

The trustee for the ABC Trust lodged a private ruling application with the Australian Taxation Office (‘the ATO’) (‘the private ruling application’).

In the private ruling application, it was explained that:

● The Trustee wishes to vary the Trust Deed as provided for in the draft Deed of Variation enclosed with the private ruling application;

● The proposed variations to the Trust Deed are in response to New South Wales and Victoria having introduced new taxing obligations. Broadly, the changes to the legislation say that a discretionary trust will be treated as a foreign person for the new land tax surcharge rules if any entity described as a beneficiary is a ‘foreign person’, even though that discretionary object has no actual interest in the underlying assets of the trust; and

● As a precaution, the Trustee wishes to implement the changes in the draft Deed of Variation to ensure that the ABC Trust is not “deemed” to be foreign for the abovementioned land tax surcharge rules.

In relation to the private ruling application, in response to the request for further information, the following information and documents were provided via e-mail:

● An updated draft Variation Deed Poll of ABC Holdings Pty Limited as trustee for the ABC Trust (‘draft Deed of Variation’);

● A draft minute of meeting whereby, once effected, it would be resolved that the proposed changes to the Trust Deed as effected by ABC Holdings Pty Ltd as trustee for the ABC Trust through the execution of the Deed of Variation would be given effect; and

● An explanation of what is included in the definition of “Excluded Individual” as per the draft Deed of Variation, and clarification regarding the term “Excluded Individual”.

Draft Deed of Variation

The following is extracted from the draft Deed of Variation:

…

THIS DEED witnesses:

1. In the exercise of the power to amend the Trust Deed contained in clause 11.1 of the Trust Deed and of every other power enabling it to do so, the Trustee amends the Trust Deed as follows:

1.1. At the end of the definition of “Beneficiary” in clause 1.1 (Definitions), insert:

"Despite the foregoing and other provision of this Deed, no Excluded Individual:

a) is, or will be, a beneficiary of The ABC Trust; or

b) is, or may become, entitled to any income or capital of the Trust Fund.”

1.2. Add the following definition to clause 1.1 (Definitions):

“Excluded Individual means:

a) any person who, if a beneficiary, would result in the Trustee being a “foreign person” within the meaning of the Land Tax Act 1956 (NSW); or

b) any "absentee beneficiary" within the meaning of the Land Tax Act 2005 (Vic); or

c) any other person who, if a beneficiary, would require the Trustee to pay an amount of land tax in any State or Territory of Australia at rates over and above the rates other taxpayers must pay on account of the Trustee being taken to be a foreign person or entity."

2. The amendments to the Trust Deed recorded in this deed take immediate effect.

3. For the avoidance of doubt, it is acknowledged that nothing in this Deed is a declaration, re-declaration or resettlement of the trust set out in the Trust Deed.

4. …

“Excluded Individual” in the draft Deed of Variation

In response to the request for further information, it was confirmed that the term “Excluded Individual” in the draft Deed of Variation includes references to the following State and Territory provisions:

● a reference to “foreign person” is a reference to the definition of “foreign person” in section 2A of the Land Tax Act 1956 (NSW);

● a reference to “absentee beneficiary” is a reference to the definition of “absentee beneficiary” in section 3 of the Land Tax Act 2005 (Victoria); and

● the definition in (c) of “Excluded Individual” may include a reference to the following:

● “foreign person” and “foreign trust” as defined in Division 2, subsection 14 of the Stamp Duties Act 1923 (South Australia);

● “foreign person” as defined in Chapter 4, section 234 of the Duties Act 2001 (Queensland);

● once the changes proposed by the Duties Amendment (Additional Duty for Foreign Persons) Bill 2018 (Western Australia) come into effect or operation: “foreign person” as defined in Chapter 1, section 3 of the Duties Act 2008 (Western Australia);

● “foreign person” as defined in Part 2A, section 17A of the Land Tax Act 2004 (Australian Capital Territory); and

● “foreign person” as defined in Part 2, section 2 of the Duties Act 2001 (Tasmania).

Relevant legislative provisions

Duties Act 2001 (Queensland) Chapter 4, section 234

Duties Act 2001 (Tasmania) Part 2, section 2

Duties Act 2008 (Western Australia) Chapter 1, section 3 (as amended by Duties Amendment (Additional Duty for Foreign Persons) Bill 2018 (Western Australia))

Foreign Acquisitions and Takeovers Act 1975

Income Tax Assessment Act 1997 subsection 100-25(1)

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

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

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

Income Tax Assessment Act 1997 subsection 104-60(1)

Income Tax Assessment Act 1997 subsection 104-60(2)

Income Tax Assessment Act 1997 section 108-5

Land Tax Act 1956 (NSW) section 2A

Land Tax Act 2004 (Australian Capital Territory) Part 2A, section 17A

Land Tax Act 2005 (Victoria) section 3

Stamp Duties Act 1923 (South Australia) Division 2, subsection 14

Reasons for decision

Question 1

Summary

As the proposed changes to the Trust Deed do not result in the creation of a trust over a CGT asset by declaration or settlement, the changes to the Trust Deed through the proposed Deed of Variation will not give rise to CGT Event E1.

Detailed reasoning

CGT Event E1 occurs when a person or entity creates a trust over a CGT asset by declaration or settlement (subsection 104-55(1)), with the timing of the event being when the trust over the asset is created (subsection 104-55(2)).

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 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) is a document which contains the Commissioner’s opinion on situations where the terms of a trust are changed such that it gives rise to CGT Events E1 or E2.

Particularly, paragraph 1 of TD 2012/21 states that where the terms of a trust are changed pursuant to a valid exercise of a power contained within a trust’s constituent document, it will not give rise to CGT Event E1 unless:

● the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

● the effect of the change is such as to 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 the scheme described in this private ruling, the proposed changes to the Trust Deed of the ABC Trust (a discretionary trust), through the insertion of “Excluded Individuals” in the Trust Deed, and additions made to the definition of “Beneficiaries” to exclude “Excluded Individuals”, are done to exclude a certain category (or categories) of persons or entities which could otherwise benefit under the trust and such persons or entities could be treated as a “foreign person”, or cause the trustee to be treated as a “foreign person”, under the various State and Territory provisions in relation to Land Tax, Stamp Duties or other Duties.

We note that the proposed changes to the Trust Deed are done under Clause 11.1 of the Trust Deed, which allows the Trustee to amend the Trust Deed by supplemental deed. You have also confirmed with us that the Trustee is exercising its power to amend the Trust Deed by supplemental deed, and is not exercising any other powers contained within Clause 11.1. There is no information to suggest that the powers to amend under Clause 11.1 will not be validly exercised through the execution of the draft Deed of Variation.

We also note that, per Clause 3.1 of the Trust Deed, the trustee of the ABC Trust currently has the power to exercise discretion as to how income and capital can be allocated prior to the proposed changes to the Trust Deed, and there is no information to suggest that this will change after the proposed changes to the Trust Deed. There is no information to suggest that the proposed changes to the Trust Deed will cause any other changes to the trust or cause the trust to terminate, cause any other changes to the trust assets, or change or create any other rights or obligations contained in the Trust Deed.

Accordingly, the changes to the Trust Deed will not give rise to CGT Event E1.

Question 2

Summary

As the proposed changes to the Trust Deed do not result in the transfer of a CGT asset into the ABC Trust, the changes to the Trust Deed through the proposed Deed of Variation will not give rise to CGT Event E2.

Detailed reasoning

CGT Event E2 occurs when a person or entity transfer a CGT asset into an existing trust (subsection 104-60(1)), with the timing of the event being when the asset is transferred (subsection 104-60(2)).

Paragraph 1 of TD 2012/21 states that where the terms of a trust are changed pursuant to a valid exercise of a power contained within a trust’s constituent document, it will not give rise to CGT Event E2 unless:

● the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

● the effect of the change is such as to 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.

As previously discussed, the proposed changes to the Trust Deed are done to exclude a certain category (or categories) of persons or entities which could otherwise benefit under the trust and such persons or entities could be treated as a “foreign person”, or cause the trustee to be treated as a “foreign person”, under the various State and Territory provisions in relation to Land Tax, Stamp Duties or other Duties. The proposed changes are allowable under Clause 11.1 of the Trust Deed, and the Trustee is only exercising its power under Clause 11.1 to amend the Trust Deed. Further to what was previously discussed, there is no information to suggest that the proposed changes to the Trust Deed will cause a CGT asset to be transferred to the ABC Trust, an existing trust.

Accordingly, the changes to the Trust Deed will not give rise to CGT Event E2.

Question 3

Summary

As the changes to the Trust Deed do not result in the disposal of a CGT asset, the changes to the Trust Deed through the proposed Deed of Variation will not give rise to CGT Event A1.

Detailed reasoning

CGT Event A1 occurs when a person or entity disposes of a CGT asset (subsection 104-10(1)), where disposal occurs if a change of ownership occurs from the person or entity disposing of the asset to another entity (subsection 104-10(2)). The timing of CGT Event A1 is either when a contract is entered into for the disposal, or if there is no contract, when the change of ownership occurs (subsection 104-10(3)).

As previously discussed, the proposed changes to the Trust Deed are done to exclude a certain category (or categories) of persons or entities which could otherwise benefit under the trust and such persons or entities could be treated as a “foreign person”, or cause the Trustee to be treated as a “foreign person”, under the various State and Territory provisions in relation to Land Tax, Stamp Duties or other Duties. The proposed changes are allowable under Clause 11.1 of the Trust Deed, and the Trustee is only exercising its power under Clause 11.1 to amend the Trust Deed. Further to what was previously discussed, there is no information to suggest that the proposed changes to the Trust Deed will cause a change in ownership of a CGT asset relating to the ABC Trust.

Accordingly, the changes to the Trust Deed will not give rise to CGT Event A1.

Question 4

Summary

As the proposed changes to the Trust Deed do not appear to involve a CGT Event, or involve or result in capital receipts, the changes through the proposed Deed of Variation will not give rise to any other CGT Events.

Detailed reasoning

A list of CGT Events is set out in Division 104, particularly, in section 104-5. Most CGT events involve a CGT asset, however, many CGT events are concerned directly with capital receipts and do not involve a CGT asset (subsection 100-25(1)).

CGT asset is defined in section 108-5 as follows:

108-5(1)

A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

108-5(2)

To avoid doubt, these are CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1);

(b) goodwill or an interest in it;

(c) an interest in an asset of a partnership;

(d) an interest in a partnership that is not covered by paragraph (c).

As previously discussed, the proposed changes to the Trust Deed are done to exclude a certain category (or categories) of persons or entities which could otherwise benefit under the trust and such persons or entities could be treated as a “foreign person”, or cause the trustee to be treated as a “foreign person”, under the various State and Territory provisions in relation to Land Tax, Stamp Duties or other Duties. The proposed changes are allowable under Clause 11.1 of the Trust Deed, and the Trustee is only exercising its power under Clause 11.1 to amend the Trust Deed. On the basis of the information available (to date), and as previously discussed, once the draft Deed of Variation is executed, there does not appear to be:

● changes or alterations to the trustees of the ABC Trust;

● changes or alterations to the assets of the ABC Trust, or that result in the creation of new assets;

● alterations to the rights of the proposed beneficiaries – that is, under the current Trust Deed (particularly from Clause 3.1), the proposed beneficiaries are not entitled to call for any part of the trust income or capital, and have to await in the hope of having the Trustee exercise its discretion to appoint in their favour, and as such the proposed beneficiaries lack an interest of a proprietary nature in the estate of the ABC Trust, and this remains the same once the proposed changes to the Trust Deed are implemented via execution of the draft Deed of Variation; or

● alterations to the rights, obligations and powers of the Trustee in relation to the administration of the ABC Trust – apart from the change in the definitions as introduced by the proposed changes to the Trust Deed.

Further to this, the information available (to date) does not suggest that any amounts are to be exchanged or transacted in relation to the proposed changes to the Trust Deed. As such it does not appear that the proposed changes to the Trust Deed, when effected, will involve or result in capital receipts.

Accordingly, the changes will not give rise to any other CGT Events.

We note that Example 1 in TD 2012/21 describes a situation involving a family discretionary trust whereby:

● the trust was settled to benefit the members of a family;

● under the terms of the trust deed, the trustee (a private company which husband and wife are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries, which are defined in the trust deed;

● the General Beneficiaries are defined under the terms of the trust deed as husband and wife, their children, their grandchildren, and a private company through which the family runs a business; and

● the trust deed was amended by trustee resolution (to change the following) in relation to the class of General Beneficiaries (the amendment is allowed under the trust deed):

● remove the private company; and

● add the following to the class of General Beneficiaries:

● the respective spouses of the children;

● trusts and companies in which the family has a majority controlling interest; and

● a philanthropic charity unrelated to the family.

In relation to the above situation, The Commissioner’s view is contained in paragraph 5 of TD 2012/21, specifically “the making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event (emphasis added)”. It is considered that the scheme described in this private ruling is similar to Example 1, and thus Example 1 of TD 2012/21 supports the view that the proposed changes to the Trust Deed in the scheme described in this private ruling will not give rise to any other CGT Event.