Edited version of private advice

Authorisation Number: 1052195739449

Date of advice: 6 December 2023

Ruling

Subject: Amendment of trust deed

Question

Will capital gains tax event E1 under section 104-55 of the Income Tax Assessment Act 1997 happen as a result of making the proposed variations to the Trust Deed and appointment of Sub-Trustees?

Answer

No.

This ruling applies for the following period:

1 July 20xx - 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

The Trust was established by a Trust Deed with Company A as its trustee (Trustee).

The controllers of the Trust are Mr and Mrs A.

The Trust was established for the benefits of Mr and Mrs A together with their two children (Children) and remoter issues.

The Trust Deed gives the Trustee the power to pay, apply or set aside the income and capital of the trust amongst the beneficiaries in such proportions and manner at the absolute discretion of the Trustee.

The Trust Deed gives the Trustee the power to revoke, add or vary all of the trusts, power or provision under the Trust Deed.

The Trustee proposes to make variations to the Trust Deed by executing a Deed of Variation and a Deed of Appointment.

The proposed variations are part of Mr and Mrs A's broader succession plan.

The purpose of the variations is to insert new definitions and new clauses so that a group of assets can be set aside in two Sub-Trusts with a Sub-Trustee appointed to each Sub-Trust over these assets (Asset).

Each of the Children will be appointed as Sub-Trustee for his Sub-Trust.

The scheme that is the subject of this Private Ruling is identified and described in the following:

•         Trust Deed for the Trust,

•         Unexecuted Deed of Variation,

•         Unexecuted Deed of Appointment.

Deed of Variation

The Deed of Variation will:

(a)  insert new definitions of "Asset", "Sub-Trust" and "Sub-Trustee",

(b)  provide that a Sub-Trustee:

•         has all the powers conferred on a Trustee under the Trust Deed but may only exercise those powers in relation to the Asset and the income derived from the Asset,

•         may exercise its power in relation to the Asset and the income derived from the Asset independently of the Trustee,

(c)  provide that the Trustee's approval is required for the sale of any of the Asset by the Sub-Trustee,

(d)  provide that the Trustee has the sole power to:

•         deal with the tax affairs of the Trust,

•         amend the Trust Deed,

•         determine an earlier vesting date,

(e)  provide that:

•         in making a determination about how to distribute the net income of the trust fund for a particular accounting period, each trustee of any separate parts of the trust fund must take into account the losses incurred by the other parts of the trust fund and expenses of the trust as a whole,

•         the Asset subject to each Sub-Trust are available to any Trustee (including Sub-Trustees) to satisfy the Trustee's or Sub-Trustee's right of indemnity from the Trust.

Deed of Appointment

The Trustee intends to execute the Deed of Appointment to appoint each of the Children as Sub-Trustee of his Sub-Trust.

The tax reporting and accounting for the Trust and the Sub-Trusts will be on a consolidated basis.

There is no change to the range of beneficiaries entitled to benefit from the Trust. There is no intention to vary the Trust Deed to change or narrow the classes of beneficiaries as described in the Trust Deed.

The Trustee has the power to amend the Trust Deed and the execution of the Deed of Variation and Deed of Appointment are within the amendment power of the Trustee and does not enliven any restrictions or limitations on the power of amendment under the Trust Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Capital gains tax (CGT) event E1 happens when a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1).

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in section 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) provides the Commissioner's view in relation to CGT event E1 and E2 and the creation of a trust over CGT assets. TD 2012/21 states that a change in the terms of the trust pursuant to exercise of an existing power of amendment will not result in a termination of a pre-existing trust. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with the principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective.

In this case the Trustee proposes to exercise the amendment power in the Trust Deed to make amendments to vary the Trust Deed by executing the Deed of Variation and Deed of Appointment to insert additional definitions and clauses. As these amendments can be validly made CGT event E1 in section 104-55 does not happen on the execution of the Deed of Variation and Deed of Appointment.

The transfer of Asset to the Sub-Trusts and appointment of Sub-Trustees is a kind of arrangements considered in 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).

The Commissioner's view on the potential capital gains tax implications of a 'trust split' is contained in TD 2019/14. A 'trust split is defined as an arrangement which generally involves the transfer of some of the assets of the original trust to a new trust fund that has been separated from the original trust fund.

Notwithstanding that an existing trust estate may not have come to an end and the entirety of the trust fund settled on terms of a new trust, it is possible for assets to be settled on a new trust estate that has been separated or carved out from the original trust fund. This may occur notwithstanding that the transactional documents executed to effect such a separation do not expressly speak of the asset having been settled on a new trust.

The question under consideration is not whether the original trust will come to an end, but whether the assets transferred to the new trust is settled on a new trust fund that is separate and distinct from the existing trust.

In this case, the proposed arrangement is distinguishable from the trust splitting arrangements of the kind described in TD 2019/14. Although there will be new and distinct Sub-Trusts and Sub-Trustees added, the Trustee retains the sole power to deal with the taxation affairs of the Trust, amend the Trust Deed and the vesting date. There is no change to the identity of the controllers of the Trust, nor to the identity or the class of beneficiaries. In addition, the Sub-Trustees will all be bound by the terms of the Trust Deed that:

•         require the Sub-Trustees to seek approval from the Trustee for the sale of any of the Asset,

•         require the trustee of each part, when making decisions to distribute the net income of the fund, to take into account the losses incurred by the other parts of the trust fund and expenses of the trust as a whole,

•         give each trustee recourse to all of the trust assets to fully satisfy each trustee's right to be indemnified.

Further, the tax reporting and accounting for the Trust and the Sub-Trusts will be on a consolidated basis.

Therefore, CGT event E1 in section 104-55 does not happen on the creation of the Sub-Trusts and appointment of Sub-Trustees.

Conclusion

CGT event E1 under section 104-55 does not happen as a result of making the proposed variations to the Trust Deed and appointment of Sub-Trustees for newly created Sub-Trusts.