Edited version of private advice

Authorisation Number: 1052073914820

Date of advice: 22 December 2022

Ruling

Subject: Vesting of a trust

Question 1

Will the amendments proposed in the draft deed of amendment for the trust (proposed amending deed) and the vesting of the trust proposed in the draft resolution of the trustee (proposed resolution) trigger CGT event E1?

Answer

No.

Question 2

Will the vesting of the trust result in the beneficiaries becoming absolutely entitled as against the trustee to the CGT assets of the trust so as to trigger CGT event E5?

Answer

No.

This ruling applies for the following period:

year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In early 20XX a deed of settlement creating the trust was entered into between Person 1 as settlor and Company 1 (trust deed).

In early 20XX, Person 1 and Person 2 (in their capacity as appointors of the trust) removed Company 1 as trustee of the trust and appointed Company 2 in its place.

The original members of the appointed class of the trust were Person 3 and Person 4.

The discretionary beneficiaries included Person 2 as a beneficiary of the trust.

Person 2, Person 3 and Person 4 remain beneficiaries of the trust.

Person 2 is the sole director of the trustee.

The trust currently owns an interest in a property.

A specific clause of the trust deed in the definition of "vesting day" sets out the trustees' powers on the vesting day.

The proposed amending deed proposes the insertion of a new clause which has the effect of the trust being a fixed trust on the vesting day.

The proposed resolution will nominate a vesting date and will resolve that all income and capital are to be distributed to Person 2, Person 3 and Person 4.

Upon vesting, the trustee will continue to hold the property for Person 2, Person 3 and Person 4.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 subsection 104-55(1)

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 106-50

Reasons for decision

CGT event E1 of the ITAA 1997

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

However, subsection 104-55(5) of the ITAA 1997 states that CGT event E1 will not happen if you are the sole beneficiary of the trust and:

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

•         The trust is not a unit trust.

Paragraph 17 of Taxation Ruling TR 2018/6 explains:

'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.'

As per paragraph 10 of Taxation Ruling TR 2018/6, 'CGT event E1 does not happen by amending the vesting date through the valid exercise of a power in a trust deed or on approval of a relevant court'.

As the trustee will continue to hold the trust property for the benefit of the beneficiaries, the trust has not come to an end. The proposed amending deed does not contemplate the creation of a new trust but amends existing rights under the trust deed in accordance with existing powers in the trust deed. Therefore, the amendments proposed in the proposed amending deed do not amount to a resettlement or creation of a new trust which would trigger CGT event E1.

In the present circumstances, no separate trust has been created, there has merely been a rearrangement of the parties' rights and obligations in accordance with the terms of the trust deed. On this basis, and for the reasons stated, the vesting of the trust proposed in the proposed resolution does not amount to a resettlement or creation of a new trust which would trigger CGT event E1.

CGT event E5 of the ITAA 1997

Section 106-50 of the Income Tax Assessment Act 1997 provides that an act done by a trustee in relation to an asset is taken to have been done by a beneficiary that is absolutely entitled to the asset.

Paragraph 8 of Taxation Ruling TR 2018/6 states 'Specifically, once the trust has vested, the interests in the trust property become fixed at law.'

Paragraph 20 of Taxation Ruling TR 2018/6 states:

'The vesting of a trust may result in the takers on vesting becoming absolutely entitled as against the trustee to CGT assets of the trust, depending on the particular interests of the takers on vesting.'

Paragraphs 23 and 24 of Taxation Ruling TR 2004/D25 discusses when there is more than one beneficiary with interests in a trust asset and if/when they can be considered absolutely entitled to the asset/s.

Paragraph 23 of Taxation Ruling TR 2004/D25 states:

'If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset.'

In this case, the three beneficiaries who are entitled to the property of the trust are Person 2, Person 3 and Person 4. The property of the trust (being land) is not a fungible asset therefore this is not a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes as outlined at Paragraph 24 of Taxation Ruling TR 2004/D25.