Edited version of private advice

Authorisation Number: 1052298851339

Date of advice: 17 September 2024

Ruling

Subject: CGT - trusts

Question 1

Will CGT event A1 under section 104-10, E1 under section 104-55, E2 under section 104-60 or H2 in section 104-55 under the Income Tax Assessment Act 1997 (ITAA 1997) happen in implementing the Proposed Arrangement?

Answer

No.

Question 2

Will any other CGT event listed under section 104-5 of the ITAA 1997 happen in implementing the Proposed Arrangement?

Answer

No.

Question 3

Will a new trust be created for the purposes of Division 6 of Part III of theIncome Tax Assessment Act 1936 (ITAA 1936) under the Proposed Arrangement?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Trust was established by trust deed (the Trust Deed) with XXXX as its trustee Original Trustee.

The sole director and shareholder of XXXX is an individual (Parent). Parent is also the sole Principal of the Trust. The Principal has the power of removing and appointing trustees and appointing new beneficiaries.

The Trust Deed gives the trustee the discretion to pay, apply or set aside the income and capital of the trust amongst the beneficiaries in such proportions and manner as they see fit.

The beneficiaries of the Trust include Parent, their partner, their children and grandchildren. The Parent has 2 children.

The Trust Deed gives the trustee the power to revoke, add or vary all the trusts or powers declared under the Trust Deed.

The trustee proposes to make variations to the Trust Deed by executing a Deed of Variation ("Deed of Variation") and a Deed of Appointment of New Trustee and New Principals ("Deed of Appointment").

The proposed variations are part of the Parent's broader succession plan to pass on control of the Trust to their 2 children (each a "sibling", individually referred to as "sibling 1" and "sibling 2"). The siblings will be responsible for the administration of the Trust, including the implementation of a proposed development (Proposed Development).

It is expected that the assets of the Trust will be distributed equally to the siblings and their respective family members.

The purpose of the variations is to insert new definitions and new clauses so that a group of assets can be set aside in 2 sub-trusts with a sub-trustee appointed to each sub-trust over these assets.

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

•         Trust Deed for the Trust,

•         Proposed Deed of Variation,

•         Proposed Deed of Appointment.

The Proposed Arrangement will involve:

(a)          incorporating a company, XXXX, which will be controlled by one of the siblings, sibling 1, who will be the sole director and shareholder of XXXX

(b)          dividing the trust fund into 2 equal parts (Parts) with each part comprising 50% of each of the assets forming part of the Trust Fund; these parts are referred to as Part 1 and Part 2

(c)          appointing XXXX to act as the new trustee of Part 1, with the right and power to distribute the income and capital of that Part of the Trust Fund, subject to certain limitations

(d)          changing the shareholding and board composition of XXXX such that the other sibling, (sibling 2) will become the sole director and shareholder of XXXX

(e)          appointing the XXXX to act as the trustee of Part 2, with the right and power to distribute income and capital of that Part of the Trust Fund, subject to certain limitations

(f)          appointing sibling 1 as the Principal of Part 1 and sibling 2 as Principal of Part 2

(g)          the Parent resigning as the Principal of the Family Trust and the Principals of Parts 1 and 2 becoming the joint Principal of the Family Trust

The Proposed Arrangement will result in the following:

(a)          The accounting and tax reporting for the Parts will be on a consolidated basis.

(b)          The trustees and Principals of both Parts are required to act together in respect of all decisions relating to the Family Trust an/or the Proposed Development, including:

a.            Selection of an accountant for the preparation of the Family Trust's tax return

b.            Carrying out the Proposed Development

c.            Disposing of the property subject to the Proposed Development (the Property)

d.            Incurring joint expenses, including those relating to the maintenance of the Property

e.            Amending the Trust Deed

f.            Determining an earlier Perpetuity Date for the Family Trust, and

g.            Appointing new Beneficiaries, or excluding any person from being a Beneficiary, of the Family Trust.

(c)          Each of the trustees of the Parts must take into account the losses incurred by the other Part of the Trust Fund and expenses of the Family Trust as a whole.

(d)          Both Parts are available to any trustee (including sub-trustees) to satisfy their rights of indemnity from the Trust.

(e)          None of the Parts will be made subject to a separate charter of rights and obligations.

(f)          No change in the range of beneficiaries that can benefit from the Trust.

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.

Reasons for decision

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

Question 1

Summary

Capital gains tax (CGT) events CGT event A1 under section 104-10, E1 under section 104-55, E2 under section 104-60 or H2 in section 104-55 of the ITAA 1997 do not occur in implementing the Proposed Arrangement.

Detailed reasoning

CGT Event E1

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

A question that can arise concerning the scope of CGT event E1 or E2 is whether amendment to the terms of a trust deed can change the trust in such a fundamental way such that a new trust has come into being. Even where a pre-existing trust does not terminate CGT event E1 or E2 can happen if the amendment results in a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset has been settled on terms of a distinct and different trust.

The transfer of assets in the Trust to the sub-trusts and appointment of sub-trustees is a kind of arrangement 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).

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 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 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, or carved out of, the original trust fund. The purpose of such arrangements is directed to separating the functional operation of the trust. Paragraph 47 of TD 2019/14 relevantly summarises factors that can lead to the conclusion that there is no longer one trust fund over all the assets, but rather 2 distinct trusts with are both administratively and legally separated. It summarises that the arrangement is put in place with the intention/effect of:

a.            separating those who control and can benefit from part of the trust corpus transferred to the new trustee from those who control and benefit from the remaining assets held by the original trustee

b.            removing the fiduciary obligations of the original trustee in relation to the assets transferred to the new trustee, resulting in each particular trustee's obligations and powers relating to particular assets only

c.            ensuring that each trustee's entitlement to be indemnified is limited to the assets in each trustee's control

d.            ensuring that the new trustee will have no fiduciary obligations in respect of the assets retained by the original trustee and will have no right to be indemnified from those assets, and

e.            In relation to the assets it holds, each trustee exercises its powers independently of the other and is solely responsible for the manner in which those powers are exercised

Example 2 in TD 2019/14 is illustrative of a scenario that the Commissioner does not conclude is a 'trust split' as described in the Determination. In the circumstances in that example, the arrangements are designed to enable one of the family members to take greater responsibility for part of the business of the trust and administration of that part of the fund; however:

•         the identity of those who controlled the existing trustee remains unchanged,

•         all beneficiaries are entitled and expected to benefit from the trust as whole,

•         the amended trust deed:

-        requires all trustees to act together in respect of decisions that requires agreement of all the trustees, including selecting an accountant to prepare the tax return, incurring joint expenses, amending the trust deed; and changing the vesting date,

-        when making decisions to distribute the net income of the fund, the trustees of each part are required to take account of the losses incurred by the other parts of the trust fund and expenses of the trust as a whole,

-        gives each trustee recourse to all of the trust assets where the assets held by that trustee are insufficient to fully satisfy its right to be indemnified,

•         each trustee keeps separate accounts in respect of the assets they hold, but the results are consolidated for the entire trust fund and a single tax return is prepared for the trust as a whole.

In this case, the question under consideration is not whether the Family Trust will come to an end, but whether the assets transferred to the sub-trusts are settled on a new trust fund that is separate and distinct from the existing trust.

The Proposed Arrangement is distinguishable from the trust splitting arrangements of the kind described in Example 1 in TD 2019/14. In this case, there is a change to the identity of the controllers of the Trust and there will be 2 new and distinct sub-trusts and sub-trustees added. Despite the identity and the class of beneficiaries remaining unchanged, the beneficiaries expected to actually benefit from the 2 sub-trusts will change.

However, the sub-trustees will be bound by the terms of the amended Trust Deed and Deed of Appointment that require:

•         the sub-trustees to act together in respect of:

o   selecting an accountant to prepare the tax return for the Family Trust

o   incurring expenses

o   disposing of the Property

o   amending the Trust Deed, and

o   changing the vesting date.

•         each sub-trustee to take 50% ownership in each asset of the Trust, rather than each having separately identifiable or particular assets

•         tax reporting and accounting of the Parts to be on a consolidated basis

•         each sub-trustee to take into account the losses incurred by the other Part and expenses of the Trust as a whole when making decisions to distribute the net income of the Trust

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

Considering all the elements of the arrangement, it cannot be concluded that the assets transferred to the sub-trusts have been subjected to new personal obligations and new rights annexed to that property. The Family Trust continues as one trust, albeit with 2 trustees, each separate trustee assuming primary responsibility in respect of a specified portion of the trust fund.

Consequently, the elements of subsection 104-55(1) will not be satisfied and CGT event E1 will not happen in implementing the Proposed Arrangement.

CGT Event A1

CGT Event A1 occurs when a taxpayer disposes of a CGT asset (section 104-10 of the ITAA 1997). In this case it is considered that Trust fund will continue to be held under the same trust, albeit under sub-trusts in respect of different parts of the Trust fund. Thus, there will be no disposal for tax purposes and CGT Event A1 will not happen.

CGT Event E2

CGT Event E2 occurs when there is a transfer of a CGT asset to an existing trust (section 104-60 of the ITAA 1997). As it is considered that the Trust fund will continue to be held under the same trust, there will be no transfer that could enliven CGT Event E2.

CGT Event H2

CGT event H2 occurs when no other CGT event applies and an act transaction or event occurs in relation to a CGT asset that does not result in an adjustment being made to the asset's cost base or reduced cost base. In this case the Trust will continue as one trust, albeit with 2 separate trustees in respect of 2 parts of the Trust fund. None of the parts will be made subject to a separate charter of rights and obligations. Therefore, we consider no relevant act, transaction or event has happened in relation to a CGT asset. Thus, CGT Event H2 will not happen under the Proposed Arrangement.

Question 2

We do not consider that any other CGT event listed under section 104-5 of the ITAA 1997 will happen in implementing the Proposed Arrangement.

Question 3

For the reasons explained under the detailed reasoning to Question 1, we do not consider that a new trust estate is created for the purposes of Division 6 of Part III of the ITAA 1936 in implementing the Proposed Arrangement.

Further consideration

In our view, if further changes were to happen in respect to the Parts of the Trust this may cause a CGT Event to occur. For example, a CGT Event may happen if the control over a part were to be altered in a way that is described in TD 2019/14. If such further changes were to occur, the facts would be materially different from the above facts, and this ruling could not be relied upon in relation to the changes.