Edited version of private advice

Authorisation Number: 1052366217076

Date of advice: 26 February 2025

Ruling

Subject: CGT - events

Question 1

Will CGT event E5 under section 104-75 of the Income Tax Assessment 1997 (ITAA 1997) apply upon the vesting of the Trust?

Answer

No.

Question 2

Will CGT event E1 under section 104-55 of the ITAA 1997 apply to the Proposal?

Answer

No.

Question 3

Will CGT event E7 under section 104-85 of the ITAA 1997 apply to the Proposal?

Answer

No.

Question 4

Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) if the Proposal is put into effect?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 202X

The scheme commenced on:

1 July 202W

Relevant facts and circumstances

1.  The Trust is a family discretionary trust that was established by deed (Deed). The Original Trustee resigned and Trustee Company was appointed as the trustee of the Trust in its place. The Deed has been amended.

2.  The only significant assets of the Trust are shares in Company A. The Trust has liabilities comprising unpaid entitlements and a loan from a related entity.

3.  Company A's activities are primarily the acquisition, holding and operation of commercial properties.

4.  Company A's business has been operated on the basis that most of the profits are retained in the company for reinvestment purposes.

5.  There are significant accrued capital gains on the shares in Company A.

6.  Individual A is the sole shareholder and director of the Trustee Company and the sole director of Company A.

7.  The Beneficiaries of the Trust are defined in the Deed, and include:

Any child or grandchild of [the parent A] born before the Vesting Day (hereinafter called the parent A) or the lawful husband widow or widower from time to time of any such child or grandchild.

...

8.  The parent A passed away over 10 years ago.

9.  Individual A is the child of the parent A.

10.  Individual A's siblings agreed to renounce their rights as beneficiaries of the Trust.

11.  Individual A has 2 children from a prior marriage, Individual B and Individual C who are over 18 years of age. Individual A also has two younger children from a second marriage.

12.  The Trust Fund is defined as:

(i)           The said sum of Fifty dollars ($X0-00) paid by the Settlor to the Original Trustee

(ii)           All moneys investments and property paid or transferred to and accepted by the Trustee as additions to the Trust Fund and

(iii)           The investments and property from time to time representing such money investments property and accumulations or any part or parts thereof.

13.  Under the Deed, the Vesting Day for the Trust is effectively 50 years after the execution of the Deed (which date will occur within the next ten years). However, under the Deed, after the expiration of the period of one year from the date of execution of the Deed, there is a power vested in the Trustee to appoint an earlier date to be the Vesting Day provided that the Trustee gives notice to the person entitled under clause X to appoint a new trustee of the intention or resolution to appoint the earlier date to be the Vesting Day.

14.  Under Clause X of the Deed (as amended), the power of appointing a new trustee in place of a trustee or in addition to an existing trustee and the power to remove a trustee was vested in the parent A and after their death their legal personal representative.

15.  Under the Deed (as amended), until the Vesting Day, the Trustee may pay the annual income of the Trust Fund to the beneficiaries and to any one or more of them to the exclusion of others and in such shares and proportions as the Trustee determines in its absolute discretion. In default of an effective appointment before 29 June of the income year, the income was to be paid to the parent A, their spouse and such of their children as are then living and if more than one in equal shares.

16.  Clause XX of the Deed provides that:

The Trustee shall subject to clauses 3 and 8 hereof stand possessed of the Trust Fund on the Vesting Day in trust to pay and transfer the same in the absolute discretion of the Trustee either to all of the beneficiaries referred to in sub-paragraphs (i), (ii) of paragraph (e) of clause 1 of this Deed as are then living in equal shares or to such one of more of them to the exclusion of the other or others and in such shares and proportions as the Trustee in his absolute discretion may determine on or within a period of 14 days before the Vesting Day and in default of any such determination or exercise of discretion as aforesaid shall stand possessed of the Trust Fund for such of the children of the parent A as shall then be living and if more than one as tenants in common in equal shares PROVIDED that should any child of the parent A have died before the Vesting Day leaving a child or children their surviving such child or children shall take if more than one as tenants in common in equal shares the share which his her or their parent would have taken if living at the Vesting Day.

17.  Under Clause Y of the Deed, the Trustee has the power to vary, revoke or amend the trusts or provisions in any manner whatsoever provided that no share or interest in the Trust Fund is acquired by the Trustee or Settlor and provided that the Trustee's discretion is subject to the rule against perpetuities. No variation may be made to prejudice or alter the beneficiaries' interest in income to which a beneficiary has become entitled.

18.  Pursuant to clause YY of the Deed, the law of New South Wales is the governing law of the settlement.

Reasons for the Proposal

19.  In the long-term, Individual A would like to effectively quarantine the assets of the Trust as a legacy for the children from their first marriage (Individuals B and C). Individual A intends to establish a secondary structure to build future wealth for the children from both their first and second marriage.

20.  The Applicant submits that clause Y of the Deed would not allow the vesting date to be extended without approval of the Supreme Court, which may be difficult to obtain.

21.  Individual A wishes to put their succession plan in place now rather than wait until the 50 year Vesting Day, because life is uncertain and they realise that if they were to die while the Trust was still discretionary, all the potential problems of a second generation trust could arise, including dissension between family members. Further, the law may change in future, making this proposal unachievable in its present form.

The Proposal

22.  Individual A, as sole director of Trustee Company acting as trustee of the Trust, proposes to take the following steps (in this order):

(a)          Provide notice to the legal personal representatives of the parent A of its intention to nominate an earlier vesting date than that specified in the Deed as the vesting date of the Trust.

(b)          Under the power vested in the Trustee in clause XX of the Deed, resolve to hold the Trust Fund for Individual A, Individual B and Individual C as the capital beneficiaries upon the vesting of the Trust, as tenants in common, with a 75% share to Individual A, 12.5% share to Individual B and 12.5% share to Individual C.

(c)          The Trustee will execute a deed to appoint the day after the date of execution of the deed as the Vesting Day for the Trust.

23.  After vesting, Trustee Company will remain the trustee of the Trust, continuing to hold the Company A shares.

24.  From the Vesting Day under the terms of the Deed:

•                     Individuals A, B and C will have an interest in the Trust Fund of the Trust that is vested in interest, as tenants in common.

•                     The income and capital of the Trust Fund must be held by the Trustee for Individual A, Individual B and Individual C in their respective shares (75%, 12.5% and 12.5%).

•                     Individuals A, B and C cannot call for particular assets in the Trust Fund to be transferred to them in satisfaction of their interest.

25.  Individual A does not have a fixed time in mind for winding up the Trust. In very general terms, the Trust would continue until Company A's business of property investment comes to an end with all the properties being sold and any capital gains tax being paid. The Trust would then be wound up in favour of whichever family member holds the fixed interest in the Trust at that time. The fixed interests of the Individuals A, B and C would pass to their estate if they were to die prior to winding up the Trust.

26.  The relevant facts and circumstances incorporate, and should be read with the following documents provided by the Applicants:

•                     the Deed

•                     the deed appointing Trustee Company as trustee

•                     the deeds of variation

•                     the proposed Notice of intention to nominate early vesting date

•                     the proposed Resolution of sole director of Trustee Company as trustee of the Trust

•                     the proposed Vesting Deed

•                     the most recent financial statements for the Trust at the time of application.

Assumptions

27.  The renunciation by Individual A's siblings of their rights as beneficiaries of the Trust was valid and legally effective.

Reasons for decision

Question 1

Will CGT event E5 under section 104-75 of the Income Tax Assessment 1997 (ITAA 1997)[1] apply upon the vesting of the Trust?

Summary

When the Trust vests, CGT event E5 under section 104-75 will not happen as the beneficiaries (Individuals A, B and C) are not absolutely entitled to CGT assets as against the Trustee.

Detailed reasoning

1.  Generally, when a discretionary trust vests, the trustee no longer has any discretionary power to appoint the income or capital of the trust, but rather it holds the trust property for the absolute benefit of those beneficiaries specified as the takers on vesting: paragraph 12 of Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting (TR 2018/6)

2.  Whether or not a CGT event happens on vesting requires consideration of the trust deed, including consideration of the effect of vesting on the beneficial interests in the trust, and the nature of the property held on trust (paragraph 15 of TR 2018/6).

3.  CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (subsection 104-75(1)).

4.  The trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base or a capital loss if that market value is less than the asset's reduced cost base (subsection 104-75(3).

5.  TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee:

10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction...

...

23. 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.

24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where:

•                    the assets are fungible;

•                    the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and

•                    there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets.

25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them.

6.  Assets are fungible if each asset matches the same description such that one asset can be replaced with another. Assets are fungible if they are of the same type (for example, shares in the same company and with the same characteristics): paragraph 93 of TR 2004/D25.

7.  Trust assets must be conveniently divisible in order for a trustee to satisfy a demand from a beneficiary that their share be satisfied by the transfer of an asset of the trust: paragraph 100 of TR 2004/D25.

8.  TR 2004/D25 provides an example of multiple beneficiaries with an interest in shares as tenants in common that have no absolute entitlement to the shares:

Example 8: multiple beneficiaries (no absolute entitlement)

169. Augustus settled shares in a listed public company on trust for his two daughters as tenants in common in equal shares.

170. Notwithstanding that the shares may be fungible and that each daughter may be able to demand that her interest be satisfied by a distribution in specie of one half of the number of shares to her, neither daughter is absolutely entitled. The reason is that under the trust it is clear that the settlor intends that each daughter has an interest in each share. Therefore, any capital gain or loss made by the trustee in respect of the shares will be included in the net income of the trust.

9.  More recent case law supports that a proportionate share of the trust fund as a whole is not sufficient to enable any beneficiary to be absolutely entitled to any particular asset of the trust fund.

10.  The Commissioner summarised the Tax Office view of the decision of Justice Lindgren in Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 in his Decision Impact Statement, as follows:

... To be absolutely entitled to an asset as against the trustee, the beneficiary must have both a vested and an indefeasible interest in the asset and be able to demand transfer of the asset by the trustee. It does not suffice for the beneficiary merely to have an entitlement under the deed to be paid a benefit. The beneficiary must have an immediate entitlement to demand transfer of the particular asset in circumstances where that entitlement cannot be defeated.

The decision of Justice Lindgren also confirms that any enquiry into the quality of a beneficiary's interest in an asset of the trust requires close and careful examination of the constituent document of the trust. This is consistent with the observation by the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) 2005 ATC 4925 where the High Court emphasised in the context of resolving the application of the particular statutory provision then in issue to the trust under examination that:

All depends, as Tamberlin and Hely JJ put it in Kent v SS ''Maria Luisa'' (No 2), upon the terms of the particular trust' (at paragraph 15 of the joint judgement).

In particular, the presence in the particular deed of a clause that gives the trustee power to sell and vary investments, will be inconsistent with the existence of absolute entitlement; as will be the presence of a clause stating that no beneficiary of the trust has a beneficial interest in any asset of the trust.

11.  Oswal v. Commissioner of Taxation [2013] FCA 745 (Oswal) considered the concept of absolute entitlement. Although it was not necessary for the Federal Court to consider whether CGT event E5 occurred, Edmond J found that the phrase 'absolutely entitled to a CGT asset of a trust... as against the trustee' requires a beneficiary to have a vested, indefeasible, and absolute entitlement to a trust asset and to be entitled to require the trustee to deal with the asset as the beneficiary directs.[2]

12.  In Oswal, the trustee's statutory right of sale of trust property meant that the beneficiaries' interests 'while absolute were defeasible'.[3] Edmond J also held that the trustee's right of indemnity was an impediment to absolute entitlement as against the trustee.[4]

Application to your circumstances

13.  In accordance with clause XX of the Deed, on the Vesting Day the Trustee will stand possessed of the Trust Fund for three individual beneficiaries (takers on vesting).

14.  While the Trust Fund includes some fungible assets, the Deed does not provide for any particular asset (fungible or otherwise), nor any number of assets, to be held for or allocated to any particular beneficiary. The takers on vesting will have a proportionate interest in the Trust Fund as a whole, and not in relation to any particular asset of the Trust Fund.

15.  The Trust Fund consists of company shares of the same class. In accordance with the proposed resolution of the Trustee, upon the Trust vesting the Trust Fund (comprising the shares) will be held on trust for Individual A, Individual B and Individual C as tenants in common with a 75% share to Individual A, 12.5% to Individual B and 12.5% to Individual C. The Trustee does not intend to allocate particular shares to particular beneficiaries on vesting and will continue to hold the entire Trust Fund for the beneficiaries in their respective shares.

16.  Similar to Example 8 in TR 2004/D25, notwithstanding that the shares may be fungible, none of the takers on vesting are absolutely entitled to a CGT asset as against the Trustee as each beneficiary has an interest in each and every share.

17.  Accordingly, CGT event E5 will not happen when the Trust vests.

Question 2

Will CGT event E1 under section 104-55 of the ITAA 1997 apply to the Proposal?

Summary

CGT event E1 under section 104-55 of the ITAA 1997 will not apply to the Proposal.

Detailed reasoning

18.  CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1)).

19.  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)

20.  Paragraph 14 of TR 2018/6 states that the consequences on vesting 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.

21.  Paragraph 18 of TR 2018/6 explains that circumstances might occur in which the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement so as to cause CGT event E1 to happen. An example is provided:

Example 4 - purported extension after vesting date

34. A discretionary trust holding several rental properties had a vesting date of 30 September 2016.

35. On 1 June 2017, the trustee became aware that the vesting date had passed and, with the acquiescence of the takers on vesting, continued to manage the trust as if the trust had not vested. On 29 June 2017, the trustee executed a deed of extension that purported to extend the trust's vesting date to 30 September 2057.

36. The subsequent execution of a deed of extension is void and ineffective to change a vesting date that has already passed. Any power of the trustee to extend the vesting date ceased on 30 September 2016.

Note: If, once it is realised that the deed of extension is ineffective to change the trust's vesting date, all of the takers on vesting agree that the trust assets should continue to be held on a new trust on the same terms as the original trust, and this was effective to create a new trust over the assets by declaration or settlement, CGT event E1 would happen in relation to trust assets.

Application to your circumstances

22.  In this case, the Trustee will decide under the power vested in the Trustee in clause XX of the Deed, to hold the Trust Fund for Individuals A, B and C upon the vesting of the Trust as tenants in common, with a 75% share to Individual A, 12.5% share to Individual B and 12.5% share to Individual C. From Vesting, the Individuals A, B and C will have fixed interests to the income and capital of the Trust in their respective shares (75%, 12.5% and 12.5%).

23.  The Trustee will not continue to manage the Trust as if the Trust had not vested or to hold the Trust Fund on any new or different terms.

24.  The Commissioner accepts that upon vesting of the Trust the property comprising the Trust Fund will continue to be held on the same trust as existed pre-vesting, albeit the nature of the trust relationship will have changed.

25.  Therefore, CGT Event E1 will not happen.

Question 3

Will CGT event E7 under section 104-85 of the ITAA 1997 apply to the Proposal?

Summary

CGT event E7 under section 104-85 of the ITAA 1997 will not apply to the Proposal as the Trustee is not disposing of a CGT asset to a beneficiary.

Detailed Reasoning

26.  Under subsection 104-85(1), CGT event E7 happens if the trustee of a trust (other than a unit trust or a trust to which Division 128 of the ITAA 1997 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest (or part of it) in the trust capital. The timing of the event is when the disposal occurs (subsection 104-85(2)).

27.  Subsection 995-1(1) states that you dispose of a CGT asset (in its capacity as a CGT asset) in the circumstances specified in section 104-10. Subsection 104-10(2) defines a disposal as:

You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Application to your circumstances

28.  When the Vesting Deed is executed, the Trustee will not dispose of any CGT asset of the Trust to any of the takers on vesting. No change of ownership will occur of any trust property from the trustee to the takers on vesting. Further, none of the takers on vesting will have any right to direct the Trustee to transfer particular assets of the Trust Fund to them to satisfy their vested interest.

29.  Therefore, CGT event E7 under section 104-85 will not happen.

Question 4

Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) if the Proposal is put into effect?

Summary

The Commissioner will not apply Part IVA of the ITAA 1936 (Part IVA) if the Proposal is put into effect.

Detailed Reasoning

GENERAL ANTI-AVOIDANCE

30.  Part IVA is a general anti-avoidance provision. Broadly, it gives the Commissioner the discretion to cancel a tax benefit obtained by a taxpayer in relation to a scheme where the sole or dominant purpose of a person entering into, or carrying out, the scheme was to obtain a tax benefit.

31.  If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

32.  In this case, all that is happening is the Trust is vesting on the Vesting Day. From the Vesting Day, the takers on vesting will have fixed interests to the income and capital of the Trust in their respective shares (75%, 12.5% and 12.5%). The scheme does not contain any elements of artificiality or contrivance.

33.  Having regard to the eight factors set out in subsection 177D(2), it cannot be concluded that the scheme is being entered into or carried out by any person for the dominant purpose of enabling a taxpayer to obtain a tax benefit.

[1] All references are to the Income Tax Assessment 1997 unless otherwise stated

[2] Oswal per Edmunds J at [69]

[3] Oswal per Edmunds J at [76]

[4] Oswal per Edmunds J at [91-92]