Edited version of private advice

Authorisation Number: 1051886979078

Date of advice: 10 November 2021

Ruling

Subject: Trust deed amendment

Question

Will any capital gains tax event occur when the trust deed for the Trust is amended by a deed of variation to convert the current family discretionary trust into a unit trust?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Entity A as trustee for entity B (the Trust) is a family discretionary trust created by deed on xxxx.

The specified beneficiaries of the Trust are provided and the general beneficiaries further extends upon the specified beneficiaries as outlined in the deed provided.

The Discretionary Family Trust Deed for the Trust forms part of this ruling.

The deed gives power to the trustee to amend the deed at Clause xx.

The Trust Deed has not previously been varied.

The Trust wishes to have certainty over future distributions and wishes to enact a deed of amendment for the Trust to be converted into a unit trust with fixed capital and income entitlements for entity C. The trustee will remain as entity A.

The Trust has made distributions to various family members in the past.

The Trust property has been provided. The trustee will continue to hold this property after the deed of variation is enacted to convert the Trust to a unit trust.

The Trustee has determined that the terms of the Trust Deed be varied as outlined.

The Deed of Variation forms part of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

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

Income Tax Assessment Act 1997 Section 104-105

Reasons for Decision

Where a trust deed is amended, consideration needs to be given as to whether a new trust has been established. Where a new trust is created, then capital gains tax events may occur.

Subdivision 104-E of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the various capital gains tax (CGT) events involving trusts.

CGT events E1 and E2

Under section 104-55 of the ITAA 1997, CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT event E2 happens if you transfer a CGT asset to an existing trust (section 104-60 of the ITAA 1997).

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? provides relevant guidelines.

As highlighted in TD 2012/21, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the ITAA 1997 happens 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.

Where there is a fundamental change to the trust relationship and a change in the 'essential nature and character' of the trust relationship, then a new trust may be created.

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 CGT events E1 and E2.

CGT event E1 will occur where there is a specified "trust split" (TD 2019/14). A "trust split" generally refers to an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled by and held for the benefit of one class of beneficiaries, and other trust assets are controlled and held for the benefit of others.

In this case the proposed amendment is within the power to amend provided by clause xx of the Deed. Given the degree of continuity of the property and membership of the Trust, we accept that the proposed amendment would not cause the existing trust to terminate and a new trust to arise. 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 change proposed.

CGT event E3

Subsection 104-65(1) of the ITAA 1997 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, under the current Trust Deed, none of the beneficiaries are 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

Under subsection 104-70(1) of the ITAA 1997, 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.

CGT event E4 is not applicable in this case.

CGT event E5

Subsection 104-75(1) of the ITAA 1997 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 assets. 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).

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

CGT events E6, E7, E8 and E9

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) of the ITAA 1997).

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

Under section 104-105 of the ITAA 1997, CGT event E9 may happen if a trust is created over future property.

In this case, CGT events E6, E7, E8 or E9 will not happen.

No other CGT events in Division 104 of the ITAA 1997 will occur on the proposed amendment of the trust deed.