Edited version of private advice

Authorisation Number: 1051640781794

Date of advice: 6 March 2020

Ruling

Subject: Capital gains tax

Question 1

Does CGT event A1 in section104-10, E1 or E2 in section104-55 or section104-60 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.

Answer

No

Question 2

Does the property retain its pre-CGT status on execution of the 2001 Deed?

Answer

Yes

This ruling applies for the following period:

30 June 2020

The scheme commences on:

01 July 2019

Relevant facts and circumstances

The Trust was settled by trust deed executed in 197X.

A deed amending the trust deed was executed in 198X.This deed was amended to include that particular powers in the trust deed only be exercised with the consent of the Bank.

On January 200X, a further deed (200X Deed) was executed. While this deed was amended the Trustee still remained the Trustee of the Trust.

Your tax agent advised:

• The new 200X Deed did not result in any change in the legal ownership of the property, and the Trustee remained the legal owner of the trust property until death. There was also no change in the beneficial ownership of the trust property.

The property was not transferred to or held on a separate and exclusive trust.

• The 200X Deed did not alter the potential beneficiaries nor were any new beneficiaries introduced or removed. The amendments were effected in accordance with the terms of the preceding trust deed.
• While the 200X Deed refers to the Property being held upon trust for the beneficiary, it was not immediately held on separate and exclusive trust. There has been no separate trust created.
• The 200X Deed retains the same Trustee. The income from the property would still be available to the other beneficiaries prior to the vesting date, and the property itself could also go to the other beneficiaries due to the powers under clause 5 of the trust deed being exercised.
• The property was not appointed to the beneficiary immediately for absolute benefit. There was no right to the income or the property and any future rights and interests are defeasible before the vesting date.
• The executor still holds the property in the same trust and there is no intention to transfer to another trust.

In reference to the Taxation Determination TD 2012/21, your tax agent advised that neither CGT event E1 nor E2 in sections 104-55 or 104-60 of ITAA 1997 happened:

·         As the terms of a trust were not 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.

·         The amendments were a valid exercise of the power to amend as per earlier trust deed.

·         The variation did not terminate an existing trust, or cause trust assets to be held on a separate charter of rights and obligations. The trust continued in its own rights. (FCT v Clark and Anor [2011] FCAFC 5 (Clark)).

·         The terms of the trust deed were appropriately followed to ensure the amendment power was properly exercised in creating the 200x deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section104-10

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

Summary

The 2001 Deeddoes not give rise to CGT event A1 in section104-10, E1 or E2 in section 104-55 or section 104-60 of the Income Tax Assessment Act 1997. The property will also retain its pre-CGT status on execution of the 200x Deed.

Detailed reasoning

Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) details CGT Events in relation to Trusts.

CGT event A1

Section 104-10 of the ITAA 1997 outlines the disposal of a CGT asset, in particular CGT event A1. It states that:

·         CGT event A1 happens if you dispose of a CGT asset.

·         You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

·         A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (subsection 960-100(2)). This means that CGT event A1 will not happen merely because of a change in the trustee.

In addition, CGT Event A1 (section 104-10 of the ITAA 1997) will occur where the Trustee disposes of a CGT asset. The disposal would involve a change of ownership. This is likely to apply when a Trustee disposes of assets to beneficiaries or third parties for consideration. Even though the beneficiary may not pay any consideration for the Trust asset, the deemed market value consideration rules will apply in these circumstances.

The 2001 Deed did not alter the rights and obligations of the Trustee over the property. There was also no disposal or transfer of the property. Therefore, the property under the 200x Deed is still an asset of the trust and CGT event A1 did not occur.

CGT event E1

Section 104-55 of the ITAA 1997 outlines CGT event E1 which deals with the creation of a Trust over a CGT asset. This CGT event happens if you create a trust over a CGT asset by declaration or settlement. The timing of the event is when the trust is created. A capital gain is created when the capital proceeds from the Trust at creation are less than the asset's cost base. A capital loss arises where the asset's reduced cost base is less than the capital proceeds.

In this case, the new 200x Deed did not give rise to a CGT Event E1 as there was no new Trust created or the property being transferred to another trust. The property under the 200x Deed is still an asset of the trust.

TD 2012/21

The TD 2012/21 provides some examples of where CGT event E1 may not occur:

·         Changing the beneficiaries of discretionary trust where it was established to benefit the members of a specified family.

·         The trustee validly exercises its power under the trust deed to amend the deed to remove an existing beneficiary (a company that was sold by the family), and add new beneficiaries (the spouses of the children, trusts and companies that the family has a majority interest in, and a charity unrelated to the family).

As the amendments were a valid exercise of the power in this case, by resolution of the trustee and as per powers vested in the Trustee by the prior deeds, no CGT event E1 occurred.

CGT event E2

Section 104-60 of the ITAA 1997 states that CGT Event E2 occurs where a CGT asset is transferred to an existing trust. The timing of the event is the date that the asset is transferred. A capital gain on a CGT Event E2 is created where the capital proceeds from the transfer of the asset are less than the asset's cost base. A capital loss arises where the asset's reduced cost base is less than the capital proceeds from the transfer of the asset.

Section 104-60 of the ITAA 1997 states that where there is no beneficiary absolutely entitled, then the Trustee will use the market value of the asset on transfer as the first element of the asset's cost base and reduced cost base.

In your circumstance, the 2001 Deed did not transfer the CGT asset to another Trust. The property remained in the same trust. As such, CGT event E2 did not occur.

Division 149 of the ITAA 1997

A CGT asset that an entity owns is a pre-CGT asset if the entity last acquired the asset before 20 September 1985 and the asset has not stopped being a pre-CGT asset of the entity.

Division 149 of the ITAA 1997 can result in pre-CGT assets held in a company or trust becoming post-CGT assets when there is a change in the majority underlying ownership of the company or trust post-19 September 1985 such that those majority underlying owners of the company or trust as at 19 September 1985 cease to hold majority underlying ownership in the company or trust post-19 September 1985.

Where there is a change in majority underlying ownership, the pre-CGT assets in the company / unit trust will become post-CGT assets as from that date.

Therefore, as the property was still an asset of the Trust when the 200x Deed was executed and there was no change in majority underlying ownership of the property, the pre-CGT status of the property was retained.

Application to your circumstances

In your circumstances it is accepted that the amendment to the trust deed known as 2001 Deed does not give rise to CGT events A1, E1 and E2 under s 104-10, s104-55 and s104-60. There are no changes to the beneficiaries, trust assets and there is continuity of the trust that was established prior to the 200x Deed, therefore the Trust still withholds its pre-CGT status of the property.

Any future changes may change the status of the property and this ruling will have no effect and you cannot rely on it.