Edited version of private advice

Authorisation Number: 1051645819995

Date of advice: 13 March 2020

Ruling

Subject: Trust resettlement

Question

Will the proposed amendments to the trust deed of the Trust cause any of CGT events E1 to E8, to happen?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

The relevant documents are:

·         the trust deed (the Deed), and

·         the draft deed of variation of trust deed.

Background Facts

The Trust was established by the Deed approximately XX years ago.

The Deed has not previously been varied.

The nominator of the Trust is Y, the head of a family.

Y is the sole director and secretary of the corporate Trustee.

The Trust is currently a discretionary trust, and the 'Nominated Beneficiaries' are Y and their children.

The 'Eligible Beneficiaries' of the Trust are the Nominated Beneficiaries, plus a broader class of beneficiaries which includes the spouses, parents, children and siblings of the Nominated Beneficiaries and any corporation or trust in which any of the Nominated Beneficiaries have an interest.

Clause X of the Deed provides that until the 'Distribution Date' the Trustee holds the income of the Trust Fund on trust for the Nominated Beneficiaries, unless none are living in which case the Trustee holds the income on trust for the Eligible Beneficiaries.

Clause X of the Deed provides that until the 'Distribution Date' the Trustee holds the capital of the Trust Fund on trust for the Nominated Beneficiaries, unless none are living in which case the Trustee holds the capital on trust for the Eligible Beneficiaries.

Clauses X and X of the Deed provide that the Trustee has a discretion to pay the whole or any part of the capital of the Trust to any one or more of the Eligible Beneficiaries to the exclusion of the others in such proportions as it may determine.

Clause X of the Deed provides that the Trustee may at any time alter, revoke or add to any of the provisions of the Deed, and make new provisions. The power granted to the Trustee to vary the Deed is subject to certain restrictions which are that no such alteration, revocation or addition shall:

·         Result in the Trust Fund or any part thereof becoming payable to the Settlor;

·         Have the effect of divesting or varying in any way the interest of any beneficiary in income or capital of the Trust Fund which has been distributed to that beneficiary; or

·         Extend the Distribution Date beyond the latest date provided for in the Deed.

Since making a significant loss from an investment early in its existence, the Trust has been in an accumulated loss position.

The Trust has also been making a loss in each income year apart from one income year. For that year the Trustee chose not to distribute any income because of the Trust's accumulated loss position.

The Trust has never made any distributions to a beneficiary.

Assets of the Trust

The assets of the Trust are:

·         X,XXX shares that have a current value of circa $XX per share;

·         Two investment properties.

The Proposal

The Trustee proposes to amend the Deed, in effect to convert the trust from a discretionary trust to a unit trust.

The proposal is such that each of the Nominated Beneficiaries will be unit holders of the Trust.

The proposal removes the class of Eligible Beneficiaries and fixes the interests of each of the surviving Nominated Beneficiaries.

The reason for the proposal is to make the Trust a fixed trust for NSW land tax purposes in order to reduce the Trust's land tax liability.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-65

Income Tax Assessment Act 1997 Section 104-70

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 104-80

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 104-90

Reasons for decision

Summary

The proposed amendments to the Deed will be pursuant to a valid exercise of the amendment power contained in the Deed and will not result in a resettlement of the Trust or a particular asset being settled on terms of a different trust. Therefore, CGT events E1 and E2 will not happen. Also, having regard to the conditions required for CGT events E3 to E8 to happen, it is concluded that none of these CGT events will arise as a result of the proposed amendments.

Detailed reasoning

You have queried whether CGT events E1 to E8 will happen as a consequence of the proposed amendments to the Deed.

CGT events E1 and E2

A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue as a result of various CGT events including E1 and E2.

CGT event E1 happens if you create a trust over a CGT asset (section 104-55)and CGT event E2 happens if you transfer a CGT asset to an existing trust (section 104-60).

The Commissioner has released 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? It was published as a result of the court case Commissioner of Taxation v. David Clark ; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark's case). Whilst Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application.

TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or E2 happening 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 or court approved variation 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 this case the proposed amendments are within the power to amend provided by clause X of the Deed. Given the degree of continuity of the property and membership of the Trust, we accept that the proposed amendments would not cause the existing trust to terminate and a new trust to arise for trust law purposes. It is also considered that the proposed amendments do not result in a particular asset being settled on terms of a different trust. Consequently, neither CGT event E1 nor E2 arises in relation to the changes proposed.

CGT event E3

Subsection 104-65(1) provides that CGT event E3 happens if a trust over a CGT asset is converted to a unit trust and just before the conversion, a beneficiary was absolutely entitled to the asset as against the trustee.

The issue of absolute entitlement is discussed in Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997. It states:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

In this case, prior to the conversion the Trustee has the discretion to pay the whole or any part of the capital of the Trust to any one or more of the Eligible Beneficiaries to the exclusion of the others in such proportions as the Trustee may determine. Consequently, none of the beneficiaries was absolutely entitled to any of the assets of the Trust. Therefore, CGT event E3 will not happen on the Trust's conversion to a unit trust.

CGT event E4

Subsection 104-70(1) provides that CGT event E4 happens if the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6, of E7 happening in relation to it) and some or all of the payment is not included in your assessable income.

The Revised Explanatory Memorandum to the New Business Tax System (Miscellaneous) Act (No. 2) 2000 summarises the operation of the provision as follows:

10.8 Section 104-70 of ITAA 1997 reduces the cost base of a unit or fixed interest in a trust where the trustee pays a non-assessable amount to the beneficiary. If the payment is more than the beneficiary's cost base, a capital gain is made.

It is clear that the CGT event E4 is not applicable in this case.

CGT event E5

Subsection 104-75(1) provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 28 applies) as against the trustee.

TR 2004/D25 states that where more than one beneficiary has an interest in a trust's assets, it will not be possible for a beneficiary to be absolutely entitled to any of the assets unless the assets are fungible. Properties are not fungible but shares may be. However, TR 2004/D25 also states that it is the Commissioner's view that for CGT purposes, a unit holder is not considered to be absolutely entitled to assets of the unit trust (see paragraphs 5, 134 and 135 of TR 2004/D25).

In any case, in this instance it could only be argued that a beneficiary may be absolutely entitled to their proportion of the shares once the trust has become a unit trust and on this happening the exception for a unit trust provided for in subsection 104-75(1) would apply.

Therefore, it is concluded that CGT event E5 will not occur in this case.

CGT events E6, E7 and E8

CGT event E6 or E7 will happen if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's right to income or capital, respectively (see subsections 104-80(1) and 104-85(1)).

CGT event E8 may happen where a beneficiary disposes of their capital interest in a trust to a party other than the trustee.

In this case, there will not be any disposal of a CGT asset by the trustee to a beneficiary or any disposal by a beneficiary of their capital interest in the trust.

Therefore, CGT events E6, E7 and E8 will not happen in this case.