Edited version of private advice

Authorisation Number: 1052199483828

Date of advice: 5 December 2023

Ruling

Subject: CGT - trust vesting

Question 1

Will capital gains tax (CGT) events A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), E1 in section 104-55, E5 in section 104-75 or H2 in section 104-155 happen to the Trustee in relation to the Property if the Trust vests in favour of Individual A on the Vesting Date?

Answer

No.

Question 2

Will CGT events A1 in section 104-10 of the ITAA 1997, E1 in section 104-55, E5 in section 104-75 or H2 in section 104-155 happen to Individual A if the Trust vests in their favour on the Vesting Date?

Answer

No.

Question 3

Will section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply upon the vesting of the Trust?

Answer

No.

This private ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commences on:

year ended 30 June 20YY.

Relevant facts and circumstances

The Trustee is the sole trustee of the Trust.

The Trustee was incorporated in State A.

The Trust was established by a deed of settlement executed on a particular date (the Deed). In a later year, the Trustee made a determination to exclude foreign beneficiaries from the class of beneficiaries. The Deed forms part of, and should be read together with this description of, the facts.

The Trust is a resident trust estate for the purposes of the ITAA 1936 and a resident trust for CGT purposes as defined in the ITAA 1997.

A family trust election has been made for the Trust. Individual A is the specified individual.

Key terms of the Deed are summarised as follows:

•        Vesting Date: defined as the earliest of the following dates namely:

the day preceding the eightieth (80th) anniversary of the date of this Deed provided that if the choice of that day as the Vesting Date would offend any applicable rule against perpetuities in relation to this Deed then the date on which expires the period of twenty (20) years calculated from and after the death of the last survivor of the lineal issue of his late Majesty King George V of England living on the date of the execution of this Deed, or such prior date as the Trustee may in its discretion determine before the date first mentioned in this paragraph.

•        Trust Fund: defined to mean:

the sum of $20 paid to the Trustee as aforesaid, all money and property paid or transferred to and accepted by the Trustee as an addition hereto and all other additions and accretions thereto in the nature of corpus or which the Trustee determines to be corpus and the property from time to time representing the same.

•        Trusts for disposal of income and capital: clause x provides that:

...the Trustee does hold and stand possessed of the Trust Fund upon the trusts and with and subject to the powers, authorities, duties and discretions herein set forth at its discretion to retain the same in its existing form of investment or to sell or realise the same or any part or parts thereof and to invest or apply the net proceeds of sale or realisation and any sum of money or any property paid given or coming to the Trustee and forming part of the Trust Fund in or upon any kind of investment or for any purposes hereinafter authorised with power at any time and from time to time to vary such investments or purposes for other or others hereby authorised...

o  Power to pay income: clause x(1) permits the Trustee until the Vesting Date, to pay the income of the Trust Fund in each year, subject to a discretion to accumulate income and subject to clause y, to any one or more of the Eligible Classes (as defined) to the exclusion of others and in such proportions and manner and upon such terms and at such times as the Trustee determines in its absolute discretion. If the Trustee does not exercises its discretion on or prior to 30 June of each year in relation to the whole or any part of the income, clause x(1) sets out to whom the Trustee shall pay that part of the income. The Trustee may satisfy such determination by placing the amount to the credit of the beneficiary in the books of account or by paying the amount over to the beneficiary.

o  Capital:clause x(2) provides that the Trustee shall hold the Trust Fund and any accumulated income of the Trust Fund, upon Trust to pay or transfer the Trust Fund and any accumulated income, or any part of the Trust Fund or accumulated income, at any time on or prior to the Vesting Date to or among any one or more of the Eligible Classes (as defined) to the exclusion of others and in such proportions and manner and upon such terms as the Trustee determines in its absolute discretion and subject to the exercise of any powers and provisions in clause 5.

o  Vesting:clause x(2)(a) provides that if the Trustee does not exercise is discretion to appoint the Trust Fund to a beneficiary prior to the Vesting Date, the trustee shall pay or transfer the Trust Fund for the sole benefit of Individual A if they are alive at the Vesting Date and not an Excluded Person. The following paragraphs of clause x(2) provide for the circumstances when Individual A shall not benefit.

•        Trustees powers: clause z provides the Trustee with wide powers with respect to the Trust Fund including the same powers, authorities and discretions as an absolute beneficial owner, and without limitation, powers conferred on trustees by the law of the settlement and in addition and expansion, those listed in clause z, and may in its absolute discretion exercise all or any of the powers at any time and from time to time in such manner and to such extent as appears desirable. The powers listed in clause z include:

o   a power to dispose of the whole or any part of the Trust Fund: clause z(8)

•        Governing law: pursuant to clause xx, the law of State A is the governing law.

•        Power to vary, resettle and make family trust elections: clause y permits the Trustee to add to, delete, vary and resettle or revoke the trusts created by the Deed or any of the powers, authorities and discretions conferred so long as it does not cause the Trust Fund or income to vest after the Vesting Date. Further,

o   the Trustee may alter the definition of Eligible Classes;

o   the Trustee may before the Vesting Date renounce or release any power or powers conferred on them under the Deed and upon being renounced or released the power shall be at an end.

The Trustee currently owns real estate in State A (the Property).

The Trustee proposes to redevelop the Property and will incur significant costs associated with the redevelopment as well as enter contracts with third party suppliers such as architects and builders and otherwise deal with all aspects of the redevelopment.

The Trustee has not accumulated any income or gains.

The Trustee proposes to nominate a date in the year ended 30 June 20YY as the Vesting Date.

Assumption

The Trustee will hold the Property at the Vesting Date.

Notwithstanding the vesting of the Trust, the Trustee (in its capacity as trustee of the Trust) will continue as the registered proprietor of the Property.

The Trust will remain a resident trust estate and a resident trust for CGT purposes up to and beyond the Vesting Date.

The Trustee will not accumulate any future income or gains.

There will be no unpaid present entitlements at the Vesting Date.

The Trustee will not make a determination prior to the Vesting Date to appoint or pay or apply the capital of the Trust Fund in favour of a beneficiary or to resettle it.

The Deed will not be amended prior to the Vesting Date to allow any beneficiary to be absolutely entitled to any of the assets of the Trust.

The Trustee will not release and revoke any power or powers conferred on it under the Deed.

Individual A has not been and will not be appointed as sole trustee of the Trust during the period to which this Ruling applies.

Question 1

Will capital gains tax (CGT) events A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), E1 in section 104-55, E5 in section 104-75 or H2 in section 104-155 happen to the Trustee in relation to the Property if the Trust vests in favour of Individual A on the Vesting Date?

Summary

CGT events A1, E1, E5 or H2 will not happen to the Trustee in relation to the Property if the Trust vests in favour of Individual A on the Vesting Date.

Detailed reasoning

Overview of the relevant legislation

CGT event A1 happens if you dispose of a CGT asset to someone else (section 104-10 of the ITAA 1997). CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55). CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee (subsection 104-75(1)). However, none of these events happen merely because of a change of trustee.

CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (section 104-155 of the ITAA 1997).

If more than one CGT event can happen, then you use the one that is the most specific to your situation (subsection 102-25(1) of the ITAA 1997).

Trusts vesting

Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting (TR 2018/6) expresses the Commissioner's view on the immediate income tax consequences of a trust vesting.

Paragraph 5 of TR 2018/6 states:

A trust deed will nearly always specify a date on which the interests in the trust vest and contain a clause which specifies the consequence of that date being reached (for example, that the property is to be held from that date for the takers on vesting in equal shares absolutely). This is to ensure that the rule against perpetuities is not breached. The date is commonly labelled in the deed as the 'Vesting Date' or 'Termination Date'.

Paragraph 4 of TR 2018/6 defines 'takers on vesting' to mean:

those beneficiaries that, under the deed, hold a fixed interest in the capital (and income thereon) after the trust vests. 'Takers on vesting' are sometimes called 'capital beneficiaries' but that term is also used in a different sense to describe beneficiaries who are entitled to receive distributions of capital pre-vesting.

Paragraph 13 of TR 2018/6 states:

The vesting of beneficial interests in a trust, even if described as a 'Termination Date', does not ordinarily cause the trust to come to an end, nor cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, or that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting). (citations omitted)

Rather, paragraph 14 of TR 2018/6 states that the consequences are as follows:

where a trustee continues to hold property for takers on vesting, the property is held on the same trust as existed pre-vesting; albeit the nature of the trust relationship changes.

Application to your circumstances

Reading the Deed as a whole, we accept that the Trust continues following the Vesting Date consistent with the observations in TR 2018/6.

In this case, the taker on vesting, provided they are alive on the Vesting Date, will be Individual A.

As there will be no distributions of capital prior to the Vesting Date, the Trustee will continue to hold the Trust Fund for the taker on vesting on, and after, the Vesting Date.

We accept that certain powers in the Deed will continue to operate following the Vesting Date. For example, clause z, and in particular subclause z(8), would remain relevant.

CGT event A1 - section 104-10 of the ITAA 1997

Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Application to your circumstances

In this case, on the Vesting Date the Trustee will continue to hold the Trust Fund for the taker on vesting on the same trust as existed pre-vesting (albeit the nature of the trust relationship will change).

As there will be no change of ownership of the Property on the Vesting Date, CGT event A1 will not happen in respect of the Trustee.

CGT event E1 - section 104-55 of the ITAA 1997

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.

Paragraph 17 of TR 2018/6 explains that:

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.

Application to your circumstances

In this case CGT event E1 will not happen as the same trust as existed pre-vesting will continue (albeit the nature of the trust relationship will change).

CGT event E5 of the ITAA 1997

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 as against the trustee.

Application to your circumstances

Having regard to the clauses in the Deed, including clause z(8), which provides the Trustee with the power to dispose of trust property without beneficiary consent, the powers retained by the Trustee following the Vesting Date are inconsistent with the taker on default becoming absolutely entitled to an asset of the Trust as against the Trustee.[1]

CGT event H2 of the ITAA 1997

Section 104-155 of the ITAA 1997 provides that CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base.

Application to your circumstances

The Property held by the Trustee will not be made subject to a separate charter of rights and obligations. In these circumstances it is considered that no such relevant act, transaction or event occurs in relation to the Property for the purposes of paragraph 104-155(1)(a) of the ITAA 1997, and therefore, CGT event H2 will not happen.

Question 2

Will CGT events A1 in section 104-10 of the ITAA 1997, E1 in section 104-55, E5 in section 104-75 or H2 in section 104-155 happen to Individual A if the Trust vests in their favour on the Vesting Date?

Summary

CGT events A1, E1, E5 or H2 will not happen to Individual A if the Trust vests in their favour on the Vesting Date.

Detailed reasoning

The relevant CGT Events have been discussed under Question 1.

CGT events A1, E1, E5 and H2 will not happen to Individual A as a result of the vesting of the Trust in respect of the Property as:

•         the Trustee will continue to hold the Trust Fund (including the Property) on the same trust with no transfer of ownership occurring; and

•         Individual A, as the taker on vesting, will not be absolutely entitled to the Property as against the Trustee (as discussed above under 'CGT event E5' at Question 1).

Question 3

Will section 99B of the ITAA 1936 apply upon the vesting of the Trust?

Summary

Section 99B of the ITAA 1936 will not apply upon the vesting of the Trust.

Detailed reasoning

Subject to subsection 99B(2) of the ITAA 1936, subsection 99B(1) requires a beneficiary to include in their assessable income an amount of trust property that is paid to, or applied for their benefit, provided the beneficiary was resident at any time during the income year in which the payment or application was made.

Section 99C of the ITAA 1936 provides further detail on the meaning of 'applied for the benefit of a beneficiary of a trust estate' for the purpose of section 99B.

Subsection 99B(2) of the ITAA 1936 excludes certain amounts from the scope of subsection 99B(1). Most relevantly:

•         paragraph 99B(2)(a) excludes an amount representing corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by 'a taxpayer being a resident', would have been included in the assessable income of that taxpayer for a year of income; and

•         paragraph 99B(2)(b) excludes an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income.

Application to your circumstances

In this case, all that will happen upon vesting (the passing of the Vesting Date) is that the interests in the trust property become fixed at law. Without more, no amount of trust property will be paid to, or applied, for the benefit of Individual A. Consequently, no amount will be included in the assessable income of Individual A, the taker on vesting, under subsection 99B(1) of the ITAA 1936.

[1] Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242