Edited version of private advice

Authorisation Number: 1051792836924

Date of advice: 23 December 2020

Ruling

Subject: Vesting of a trust

Question 1

Will Capital Gains Tax event (CGT event) A1, CGT event E1, CGT event E5 or CGT event H2 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the Trustee in relation to the Units if the Trust vests in favour of Ms X on the Perpetuity Date?

Answer

No.

Question 2

Will CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 happen to Ms X if the Trust vests in favour of Ms X on the Perpetuity Date?

Answer

No.

Question 3

Will CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 happen to the Trustee in relation to the Units if the Trust vests in favour of the Children on the Perpetuity Date?

Answer

No.

Question 4

Will CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 happen to the Children if the Trust vests in favour of the Children on the Perpetuity Date?

Answer

No.

Question 5

Will section 99B of the ITAA 1936 apply upon the vesting of the Trust?

Answer

No.

This ruling applies for the following period

1 July 202X to 30 June 202X

The scheme commences on

1 July 202X

Relevant facts and circumstances

This description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are:

•         The Private Ruling Application dated XX of X month 2020 (and attachments);

•         Emails between the ATO and the applicant on several dates.

The Trust

The Trust was established by a deed of settlement between X as settlor and the Trustees. A copy of the Trust Deed was provided with the ruling application and forms part of the facts for this ruling.

The Trust is a resident trust estate for the purposes of the ITAA 1936 and a resident trust for the CGT purposes as defined in the ITAA 1997.

The Trustee

Trustee Holdings Pty Ltd (formerly known as Trustee Pty Ltd) is the current Trustee (the Trustee).

The Trustee was incorporated in State A.

The Trustee currently holds units (the Units) in the XYZ Unit Trust (the Unit Trust).

The Trustee has not accumulated any income or gains.

Under the Trust Deed it is within the Trustee's powers for the Trustee to give effect to a Perpetuity Date of 30 June 202X. A draft Trustee Resolution was provided to the ATO and this document forms part of the facts.

The Trust Deed has not been amended.

There is no power to amend the Trust Deed and there is no statutory power that enables the Court to amend or permit the Trustee to amend the Deed to extend the Perpetuity Date.

Under Clause x of the Trust Deed the Trustee may release and revoke any power or powers conferred on them under the Trust Deed. Also, any other person or persons upon whom any power is conferred by the Trust Deed may release and revoke any power or powers so conferred on him or them.

Key terms of the Trust Deed that are defined in the Deed are:

•         "Eligible Beneficiaries"

•         "Nominated Beneficiary":

•         "Perpetuity Date":

Is defined to mean: "the date being sixty years from the date of execution of this Deed or the date of death of the last survivor of all the lineal descendants male and female of His late Majesty King George the Sixth of England living at the date hereof (which ever shall first occur) or such earlier date as the Trustees shall in their absolute discretion appoint to be the Perpetuity Date for the purposes of this Deed".

•         Powers of appointment and resettlement:

Clauses give the Trustee a wide discretion as regards to the appointment and payment or application of income and capital prior to the Perpetuity Date. A clause allows for the Trust Fund to be resettled. In particular:

•         A clause gives the Trustee absolute discretion at any time to pay or apply all or any part of the Trust Fund to or for the advancement, maintenance education or benefit of all or some of the Eligible Beneficiaries

Noting the requirement in a clause to hold the Trust Fund for living children at the Perpetuity date is 'in default of and subject to' this discretion

•         A clause gives the Trustee absolute discretion 'notwithstanding anything hereinbefore contained' to hold all or any part of the Trust Fund on a separate trust for the Eligible Beneficiaries. Such funds are thereby 'freed and discharged from the trust powers and provisions' of the existing trust.

•         Vesting clause:

This Clause effectively provides that absent any other determination made by the Trustee, on the Perpetuity Date the Trustee stands possessed of the Trust Fund and the income thereof upon trust for the children of the Father who are living at that date and have attained the age of 21 provided that if a child of the Father has passed away and left children who are alive at the Perpetuity Date and have attained the age of 21, then the children of the deceased child of the Father shall take in equal shares on a per stirpes basis the share that the deceased child would have taken.

•         Powers to deal with property and sale:

Under this Clause the Trustee has wide powers to deal with the property of the Trust including power of sale. In particular:

•         A clause gives the Trustee the power to retain property belonging to the Trust fund without beneficiary consent for so long as they think proper

•         A clause gives the Trustee the power to sell, alienate, dispose of property forming part of the Trust fund without beneficiary consent on for whatever consideration and on whatever terms they think proper

•         A clause gives the Trustee the power to exchange property for different property for whatever consideration and on whatever terms they consider advisable

•         A clause gives the Trustee the power to compromise or settle all matters relating to the trust fund for whatever consideration and on whatever terms the consider advisable

•         A clause gives the Trustee the absolute discretion to Invest the trust fund in various ways, without beneficiary consent; and the power to perform all acts of alienation and hypothecation and 'acts of ownership' they would have in the absence of the trust

•         Discretionary powers:

This Clause provides that every Trustee who is a corporation or company may exercise or concur in exercising any discretion or power conferred by the Deed by, inter alia, a resolution of its board of directors.

•         Clauses on Governing law:

Under these clauses the law of the State is the governing law.

The Beneficiaries

Daughter X is the only child of the Father.

Daughter X has three adult children all of whom are over 21 (the Children).

No "Nominated Beneficiary" has been appointed.

The UPEs of the Trust are those of Daughter X.

AB X Trust distributed to YZ X Pty Ltd on at least three occasions. These amounts were income of the AB X Trust to which YZ X Pty Ltd was presently entitled, they were satisfied and are not UPEs.

The Unit Trust

No Units in the Unit Trust have been redeemed.

Assumptions

The following Assumptions have been made:

1. The Trustee will hold the Units at the Perpetuity Date.
2. The Trust will remain a resident trust estate and a resident trust for CGT purposes up to and beyond the Perpetuity Date.
3. The Trustee will not accumulate any future income or gains prior to the Perpetuity Date.
4. Notwithstanding the vesting of the Trust, the Trustee will continue (in its capacity as trustee of the Trust and not in some other capacity) as the registered holder of the Units and no new unit certificates will be issued.
5. The Trustee will not make a determination prior to the Perpetuity Date to appoint or pay or apply the capital of the Trust Fund in favour of a beneficiary or to resettle it.
6. All of Daughter X's children will survive her.
7. There will be no UPEs at the Perpetuity Date.
8. The Trustee will borrow from a third-party sufficient funds to wholly discharge any UPEs prior to the Perpetuity Date.
9. Aside from the debt referred to directly above, the Trustee will have discharged all other liabilities relating to the administration of the Trust.
10. The Trust Deed will not be amended prior to the Perpetuity Date to allow any beneficiaries to be absolutely entitled to any of the assets of the Trust.
11. The power in Clause x of the Trust Deed will not be utilised by the Trustee or any other person prior to the Perpetuity Date.
12. If the Perpetuity Date has not happened by 29 June 202X (because the last life in being under the "royal lives clause" by which the Perpetuity Date is defined has not passed away) the Trustee will resolve to make 30 June 202X the Perpetuity Date in accordance with the draft Trustee Resolution provided to the ATO.
13. Daughter X has not been, and will not be, appointed as sole Trustee during the Ruling Period.

Relevant legislative provisions

Income Tax Assessment Act 1936

section 99B

subsection 99B(1)

subsection 99B(2)

paragraph 99B(2)(a)

paragraph 99B(2)(b)

Income Tax Assessment Act 1997

subsection 102-25(1)

Division 104

section 104-10

section 104-55

subsection 104-55(1)

subsection 104-55(5)

section 104-75

subsection 104-75(1)

section 104-155

paragraph 104-155(1)(a)

Reasons for decision

Question 1

Summary

If the trust vests in favour of Ms X on the Perpetuity Date CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to the Trustee in respect of the Units.

Detailed reasoning

Overview of the relevant legislation

CGT event A1 of the ITAA 1997 happens if you dispose of a CGT asset to someone else (section 104-10). CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55). CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee (subsection 104-75(1)). However, none of these events happen merely because of a change of trustee.

CGT event H2 of the ITAA 1997 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (section 104-155).

If more than one CGT event can happen, then you use the one that is the most specific to your situation (subsection 102-25(1) of the ITAA 1997).

The relevant facts and circumstances

Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting considers the immediate income tax consequences of a trust vesting.

Paragraph 5 of TR 2018/6 states:

A trust deed will nearly always specify a date on which the interests in the trust vest and contain a clause which specifies the consequence of that date being reached (for example, that the property is to be held from that date for the takers on vesting in equal shares absolutely). This is to ensure that the rule against perpetuities is not breached. The date is commonly labelled in the deed as the 'Vesting Date' or 'Termination Date'.

The Perpetuity Date (as defined in the Trust Deed) is, effectively, the 'Vesting Date',(as that term is referred to in paragraph 5 of TR 2018/6.

The Assumptions to this ruling include that:

xii. If the Perpetuity Date has not happened by 29 June 202X (because the last life in being under the "royal lives clause" by which the Perpetuity Date is defined has not passed away) the Trustee will resolve to make 30 June 202X the Perpetuity Date in accordance with the draft Trustee Resolution provided to the ATO.

Paragraph 4 of TR 2018/6 defines 'takers on vesting' to mean:

those beneficiaries that, under the deed, hold a fixed interest in the capital (and income thereon) after the trust vests. 'Takers on vesting' are sometimes called 'capital beneficiaries' but that term is also used in a different sense to describe beneficiaries who are entitled to receive distributions of capital pre-vesting.

In this case the takers on vesting will depend upon who is alive on the Perpetuity Date. Under a clause Clauses 19 and 21 - Governing law Clauses 19 and 21 - Governing law of the Trust Deed Ms X will be the taker on vesting if she is alive, whereas if she has passed away the Children who are alive will be the takers on vesting.

Reading the trust deed as a whole, it is evident that the trust continues following the Perpetuity Date. This is consistent with paragraph 13 of TR 2018/6 which states:

The vesting of beneficial interests in a trust, even if described as a 'Termination Date', does not ordinarily cause the trust to come to an end, nor cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, or that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting). (citations omitted)

Rather, the consequences are as follows (Paragraph 14 of TR 2018/6):

where a trustee continues to hold property for takers on vesting, the property is held on the same trust as existed pre-vesting; albeit the nature of the trust relationship changes.

As there will be no deed of appointment (or similar instrument) executed prior to the Perpetuity Date the Trustee will continue to hold property for the takers on vesting on, and after, the Perpetuity Date.

Certain powers in the Trust Deed will continue to operate following the Perpetuity Date. A number of clauses remain relevant.

CGT event A1 of the ITAA 1997

CGT event A1 of the ITAA 1997 happens if you dispose of a CGT asset to someone else (section 104-10).

In this case, on the Perpetuity Date, the Trustee will continue to hold the Trust Fund for the takers on vesting on the same trust as existed pre-vesting (albeit the nature of the trust relationship will change).

As there will be no change of ownership of the Units on the Perpetuity Date CGT event A1 will not happen in respect of the Trustee.

CGT event E1 of the ITAA 1997

CGT Event E1 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1)).

However, CGT event E1 of the ITAA 1997 will not happen if you are the sole beneficiary of the trust and:

a)    You are absolutely entitled to the asset as against the trustee; and

b)    The trust is not a unit trust (subsection 104-55(5)).

Paragraph 17 of TR 2018/6 explains:

17. The vesting of a trust, of itself, does not ordinarily cause the trust to come to an end and its property to settle on the terms of a new trust. As such CGT event E1 need not happen merely because a trust has vested.

In this case CGT event E1 of the ITAA 1997 will not happen as the same trust as existed pre-vesting will continue (albeit the nature of the trust relationship will change).

CGT event E5 of the ITAA 1997

When a trust vests, CGT Event E5 of the ITAA 1997 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee (subsection 104-75(1)).

Having regard to the Clauses in the Trust Deed, including the clause which provides the Trustee with the power to sell trust property without beneficiary consent, the powers retained by the Trustee following the Perpetuity Date are inconsistent with Ms X becoming absolutely entitled to an asset of the Trust as against the Trustee.[1]

CGT event H2 of the ITAA 1997

CGT event H2 of the ITAA 1997 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (section 104-155).

For CGT event H2 to happen, paragraph 104-155(1)(a) of the ITAA 1997 requires that an act, transaction or event occurs in relation to a CGT asset that you own. In the current circumstances it is considered that no such relevant act, transaction or event happens for the purposes of CGT event H2. The Units held by the Trustee will not be made subject to a separate charter of rights and obligations. Therefore, as paragraph 104-155(1)(a) does not apply in respect of the scheme, CGT event H2 will not happen.

Question 2

Summary

If the Trust vests in favour of Ms X on the Perpetuity Date CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to Ms X in respect of the Units.

Detailed reasoning

If Ms X is alive on the Perpetuity Date then she will be the taker on vesting.

CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to Ms X in respect of the Units as:

•         the Trustee will continue to hold the Trust Fund (including the Units) on the same trust with no transfer of ownership occurring; and

•         no taker on vesting will be absolutely entitled to the Units as against the Trustee (as discussed above under 'CGT event E5 at Question 1).

Question 3

Summary

If the Trust vests in favour of the Children on the Perpetuity Date, CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to the Trustee in respect of the Units.

Detailed reasoning

If Ms X is deceased on the Perpetuity Date then the Children that are alive will be the takers on vesting.

CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to the Trustee in respect of the Units as:

•         the Trustee will continue to hold the Trust Fund (including the Units) on the same trust with no transfer of ownership occurring; and

•         no taker on vesting will be absolutely entitled to the Units as against the Trustee (as discussed above under 'CGT event E5 at Question 1).

Question 4

Summary

If the Trust vests in favour of the Children on the Perpetuity Date, CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to the Children in respect of the Units.

Detailed reasoning

CGT event A1, CGT event E1, CGT event E5 or CGT event H2 of the ITAA 1997 will not happen to the Children in respect of the Units as:

•         the Trustee will continue to hold the Trust Fund (including the Units) on the same trust with no transfer of ownership occurring; and

•         no taker on vesting will be absolutely entitled to the Units as against the Trustee (as discussed above under 'CGT event E5 at Question 1).

Question 5

Summary

Section 99B of the ITAA 1936 will not apply on vesting of the Trust.

Detailed reasoning

Subject to subsection 99B(2) of the ITAA 1936, subsection 99B(1) requires a beneficiary to include in their assessable income an amount of trust property that is paid to, or applied for their benefit, provided the beneficiary was resident at any time during the income year in which the payment or application was made.

Section 99C of the ITAA 1936 provides further detail on the meaning of 'applied for the benefit of a beneficiary of a trust estate' for the purpose of section 99B.

Subsection 99B(2) of the ITAA 1936 excludes certain amounts from the scope of subsection 99B(1). Most relevantly:

•         paragraph 99B(2)(a) excludes an amount representing corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by 'a taxpayer being a resident', would have been included in the assessable income of that taxpayer for a year of income; and

•         paragraph 99B(2)(b) excludes an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income.

In this case, given all that happens upon vesting (the passing of the Perpetuity date) is that the interests in the trust property become fixed at law, without more, no amount will be included in the assessable income of a taker on vesting under subsection 99B(1) of the ITAA 1936 due to the vesting of the Trust on the Perpetuity Date This is because, without more, no amount of trust property will be paid to, or applied, for the benefit of a taker on vesting.

[1] Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242.