Edited version of private advice

Authorisation Number: 1052045186867

Date of advice: 13 October 2022

Ruling

Subject: CGT - trust deed

Question

Will the proposed variation to the trust deed for the trust cause any of capital gains tax (CGT) events E1 to E8 to occur?

Answer

No. The Commissioner has discussed CGT events E1 and E2 in 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 (ITAA 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?

The principles discussed in TD 2021/21 apply such that CGT events E1 and E2 will not occur in this case because there will be a valid amendment to the trust deed, pursuant to an existing power granted to the trustee by the deed.

Further, 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 ITAA 1997.

In this case, prior to the proposed conversion of the discretionary trust, the trustee has absolute discretion with regard to beneficiary entitlements of income or capital, in whole or in part, to the exclusion of other beneficiaries in such proportions as the trustee may determine. No beneficiary is absolutely entitled to any trust assets. Further, 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 128 applies) as against the trustee. Therefore, subsection 104-75(1) of the ITAA 1997 and the principles discussed in TR 2004/D25 apply such that CGT events E3 and E5 will not occur in this case.

Sections 104-70, 104-80, 104-85 and 104-90 of the ITAA 1997 are not applicable in this case, therefore CGT events E4, E6, E7 and E8 will not occur.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The trust was established in the 20XX financial year. The trust deed has not been varied since establishment.

A is the sole director and secretary of the corporate trustee. The trust is a discretionary trust and the named beneficiaries are only A and the trustee. There are various classes of other beneficiaries defined by reference to A and the corporate trustee.

Clause X of the trust deed gives the trustee an absolute discretion to pay the whole or any part of income or capital of the trust to any one or more of the beneficiaries.

Clauses Y and Z of the deed allow the trustee at any time to vary any of the provisions of the trust deed. The power granted to the trustee to vary the trust deed is subject to certain limitations not presently applicable.

The trust owns real property in State AA and may acquire more real property in State AA in the very near future.

The trustee proposes to vary the trust deed to convert the trust from a discretionary trust to a fixed unit trust. The proposal is such that A and the corporate trustee will become the only two unitholders, each holding 50 of a total of 100 units in the trust. The proposal removes the various classes of beneficiaries and fixes the interests of the named beneficiaries.

The reason for the proposal is to make the trust a fixed trust for State AA land tax purposes.

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