Edited version of private advice

Authorisation Number: 1052096130037

Date of advice: 9 March 2023

Ruling

Subject: Implications of shareholders deed for corporate trustee

Question 1

Will CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of executing the Shareholders Deed?

Answer

No.

Question 2

Will CGT event E2 in section 104-60 of the ITAA 1997 happen as a result of executing the Shareholders Deed?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust

The Trust was established by a Trust Deed in Australia on XXXX. The Trust is an Australian resident discretionary trust.

The Trust was established with the intention to benefit the family consisting of Mum, Dad and their children.

Mum and Dad are General Beneficiaries of the Trust. General Beneficiaries also include the Primary Beneficiaries of the Trust, who are any children of Mum and Dad.

Child A and Child B are currently the Guardians and Appointers of the Trust.

The Trust holds (as its main investment) shares in a company, a successful business run by Child A and Child B.

The company was incorporated in Australia on XXXX.

Current powers

The Shareholders Deed that is the subject of this ruling, as outlined further below, effects the exercise of the current powers of the Trustee.

The Trustee has the power to:

• Allocate the net income of the Trust in the Trustee's absolute discretion to General Beneficiaries in such proportions as the Trustee determines
• To accumulate the net income of the Trust
• To allocate the capital of the Trust in the Trustee's absolute discretion to General Beneficiaries in such proportions as the Trustee determines prior to the Vesting Day
• Exercise its powers by a resolution to one or more members of its Board of Directors or similar for that purpose

In the absence of allocation by the Trustee, the Trust Deed provides that the Primary Beneficiaries shall be deemed to be presently entitled to the income of the Trust in equal shares.

The Corporate Trustee

The trustee of the Trust is the Corporate Trustee.

The Corporate Trustee was incorporated in Australia pre capital gains tax.

Child A and Child B are the Directors of the Corporate Trustee, both appointed in XXXX.

The current shareholdings in the Corporate Trustee are ordinary shares held by Mum, Dad, Child A and Child B.

It is intended that Mum and Dad's shares in the Corporate Trustee will be split between all of their children equally upon their passing (including those that are not currently shareholders).

To further Mum and Dad's estate planning objectives, the shareholders of the Corporate Trustee entered into a Shareholders Deed on XXXX.

Shareholders Deed

The Shareholders Deed was prepared by your lawyer and a copy of the executed deed has been provided to us.

The Trustee of the Trust exercised its powers under the Trust Deed to vary the Trust Deed with the addition of the Shareholders Deed.

The intention of the Shareholders Deed is for it to be read together with the Trust Deed. To the extent of any inconsistency, the Shareholders Deed prevails.

The Shareholders Deed has the following effects:

•         Provides for future distributions of distributable income and capital to be split between the shareholders in the Corporate Trustee in proportion to their shareholdings, unless prior to the last day in the income year:

o   the Board of Directors agree to distribute in another manner, and

o   the shareholders in the Corporate Trustee unanimously agree.

• Requires unanimous resolution by the shareholders for the issue of shares in the Corporate Trustee.
• Ensures only shareholders holding X% or more interests in the Corporate Trustee can appoint a Director to the Board.
• Provides that a special resolution of shareholders (a minimum consent of X%) can remove a Director from the Board.
• Provides directions for where, when and how to conduct Board meetings.
• Ensures that Board decisions require the consent of more than X% of Directors
• Requires unanimous Board approval for: the issue of shares in the Corporate Trustee; the accumulation of income of the Trust; changes to beneficiaries of the Trust; and the decision to vest the Trust.
• Requires shareholders in the Corporate Trustee to be beneficiaries of the Trust.
• Requires unanimous shareholder consent for the transfer of shares in the Corporate Trustee, depending on the circumstances.

There are no changes, whether or not expressly provided for in the Shareholders Deed, such that a subset of beneficiaries will benefit from certain Trust assets over other beneficiaries.

Assumptions

Our ruling is provided on the assumption that the Trustee has the power to amend the clauses of the Trust Deed as proposed, and enter into the Shareholders Deed, pursuant to the powers contained in the Trust Deed.

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

Reasons for decision

Question 1

Summary

The execution of the Shareholders Deed will not result in CGT event E1 happening.

Detailed reasoning

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

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? (TD 2012/21) explains the Commissioner's view at Paragraph 1, that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen unless:

1. The change causes the existing trust to terminate and a new trust to arise for trust law purposes, or
2. 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.

For the purposes of this ruling, we have assumed that the execution of the Shareholders Deed will constitute a proper exercise of the powers of amendment contained in the Trust Deed. Our analysis of conditions (1) and (2) are outlined below.

1)    Trust termination

In the explanation and Appendix to TD 2012/21, Paragraph 21 states:

Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark, is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power.

Several amendments are proposed to be made under the Shareholders Deed. There are minor amendments that do not disturb the fundamental operations of the Trust. For example, providing directions for when, where and how Board meetings are to be undertaken.

Operationally the substantive changes, as a result of the Shareholders Deed amendments, are:

• Providing a default position for the allocation of the income and capital of the Trust, where before 30 June of each year, the Board of Directors and the shareholders of the Corporate Trustee do not reach unanimous agreement to distribute otherwise.
• The default income and capital distributions will be made to the shareholders of the Corporate Trustee in proportion to their shareholdings.
• Providing for which decisions of the Corporate Trustee must be:
  • made unanimously or made by a minimum consent, and
  • made by either the Board of Directors and/or the shareholders of the Corporate Trustee.

These operational changes have the effect of ensuring that all children will benefit from the Trust, proportionately to their Corporate Trustee shareholdings, unless unanimous decision is reached (ie. provides a new "default" clause for the allocation of income and capital of the Trust). Nonetheless, all beneficiaries will continue to be capable of consideration for allocation of the income or capital of the Trust by the Corporate Trustee, in its absolute discretion. Further, the default distribution clause can itself can be changed by unanimous consent of all shareholders.

In addition, none of the proposed amendments have the effect of changing the continuity of the property of the Trust, including how that property is shared amongst beneficiaries of that Trust property. No particular asset of the Trust could be said to be subject to a charter of rights and obligations that is separate to the rights and obligations of other Trust assets.

Despite the operational changes, there remains continuity of the membership of the Trust and continuity of the property of the Trust. It is also an assumption of this ruling that the execution of the Shareholders Deed will constitute a proper exercise of the powers of amendment contained in the Trust Deed. Accordingly, it is our view that the Trust will not terminate as a result of the execution of the Shareholders Deed.

2)            Property settled on new trust

In the explanation and Appendix to TD 2012/21 Paragraph 27 states:

Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

TD 2012/21 further provides at Paragraph 29:

...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

The amendments as contained in the Shareholders Deed do not disturb the continuity of the property of the Trust. None of the amendments have the effect of disturbing the rights or obligations with respect to the assets of the Trust such that they could be said to be now held separately. Accordingly, it is our view that the Trust assets have not been settled upon a new Trust, subject to the consideration of whether or not the amendments could be considered to be in the nature of a "Trust split", which is discussed below.

Trust split

Taxation Determination TD 2019/14 Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? (TD 2019/14) further explains the Commissioner's view of the application of CGT event E1 in the case of a 'trust split'.

While there are many forms of arrangement that can be described as a trust split, TD 2019/14's reference to a trust split 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 a subset of beneficiaries, and other trust assets are controlled and held for the benefit of others. A common reason given for 'splitting' the trust is to allow different parts of the family group to have autonomous control of their own part of the assets held on trust.

A trust split in this sense will exhibit all or most of the following features, as outlined by Paragraph 2 of TD 2019/14:

a)    The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets.

b)    Control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries.

c)    A different appointor is appointed in respect of the part of the fund held by the new trustee, the control of the new appointor aligned with the control of the new trustee.

d)    The rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee.

e)    The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit one subset of beneficiaries to the exclusion of others. The original trustee is also expected to exercise its powers in respect of the assets held by it independently of the new trustee to benefit instead a different subset again to the exclusion of others. This is so whether the range of beneficiaries that can benefit from particular assets is expressly limited.

f)     The rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed.

g)    The original trustee and new trustee keep separate books of account.

h)    The new trustee may also seek to apply for a new tax file number and/or Australian business number, and commence to lodge a separate return in respect of the income derived from the assets it holds.

The proposed Trust Deed amendments contained in the Shareholders Deed are distinguishable from the trust splitting arrangements of the kind described above in Paragraph 2. Specifically, this arrangement is distinguished because:

• There are no express changes to the assets of the Trust such that a subset of beneficiaries can benefit from certain assets to the exclusion of others.
• There are also no expected changes, whether or not express, such that a subset of beneficiaries will benefit from certain assets over others. Trust assets are not intended to be separated. The Trust property remains available to be deployed for the Trust's original purposes and continues to be governed by the terms of the original Trust Deed, as amended by the Shareholders Deed.
• The range of potential beneficiaries entitled to benefit from the Trust as a whole does not change.
• Clause X of the Shareholders Deed merely provides a default clause to allocate income and capital of the Trust by the Trustee, where unanimous decisions cannot be reached by the children. This effectively replaces the existing default clause for the distribution of income in the Trust Deed.
• There is no change to the Corporate Trustee's indemnity from the Trust assets.

Accordingly, in our view, the Shareholders Deed does not result in a "trust split".

Conclusion

Our advice is based on the assumption that the execution of the Shareholders Deed will be a valid exercise of the Corporate Trustee's power. Consequently, the elements of subsection 104-55(1) of the ITAA 1997 will not be satisfied and CGT event E1 will not happen upon execution of the Shareholders Deed.

Question 2

Summary

The execution of the Shareholders Deed will not result in CGT event E2 happening.

Detailed reasoning

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

The Commissioner's approach to whether CGT event E2 happens in relation to the variation of a trust deed is contained in TD 2012/21 which is outlined in the detailed reasoning in Question 1 above. In short, the amendments do not have the effect of transferring the assets of the Trust to a new or existing trust.

Accordingly, based on the assumption that the execution of the Shareholders Deed will be a valid exercise of the Corporate Trustee's power, the elements of subsection 104-60(1) of the ITAA 1997 will not be satisfied and CGT event E2 will not happen on execution of the Shareholders Deed.