Edited version of private advice

Authorisation Number: 7925163968800

Date of advice: 30 April 2024

Ruling

Subject: Trust and CGT Events

Question 1

Will the execution of the Deed of Variation and the subsequent execution of the Deed of Appointment of Distributors cause to happen:

1)            a CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997); or

2)            a CGT event E2 in section 104-60 of the ITAA 1997?

Answer

No

Question 2

Will the division of the Relevant Distributable Income and Relevant Distributable Capital into shares and the appointment of the Distributors to each share cause to happen:

1)            a CGT event E1 in section 104-55 of the ITAA 1997; or

2)            a CGT event E2 in section 104-60 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ending in 20xx

The scheme commenced on:

xx xxx 20xx

Relevant facts and circumstances

This Scheme that is subject of this Private Ruling is identified and described in the following:

•        The xxx Discretionary Trust Deeddated xx August 20xx;

•        Executed Deed of Change of Trusteedated xx October 20xx;

•        Unexecuted Deed of Variationreceived xx December 20xx;

•        Unexecuted Deed of Appointment of Distributorsreceived xx xxx 20xx.

The xxx Trust (the Trust) was settled by trust deed (the Trust Deed) on xx xxx 20xx.

The trustee of the Trust, from xx xxx 20xx, has been Company A (the Trustee). The directors of the Trustee are:

•        xxx (Person A)

•        xxx (Person B)

Person A is the primary beneficiary under the Trust Deed.

The Appointor under the Trust Deed is Person A.

Clause 10.1 of the Trust Deed provides the Trustee with a broad power to vary or resettle the Trust.

Executed Deed of Change of Trustee

The Deed of Change of Trustee was executed unconditionally as a deed on xx xxx 20xx. Person A, as the Appointor, appointed Company A as trustee of the Trust with immediate effect. Person A, as the outgoing trustee, declared that they wished to be released and discharged from all obligations, claims, demands, and liabilities in respect of the Trust arising after this deed came into effect.

Unexecuted Deed of Variation

The proposed Deed of Variation will:

•        revoke and replace the definition of 'Appointor' with a new definition of 'Appointor' or 'Appointors' in clause 1.1(a) of the Trust Deed

•        establish Person A and Person B, jointly, as Principal Appointors

•        revoke and replace clauses 7.1 to 7.8, which relate to the office of Appointer and its powers, and

•        insert 'Distributor Provisions' in a new clause 17.1.

The effect of the new clauses 1.1(a) and 7.1 to 7.8 will be to change:

•        how an Appointer exercises powers if there is more than one Appointor, and

•        outline what happens upon the death of Appointers.

The 'Distributor Provisions' will give the Appointors the power, from time to time, to:

•        direct the Trustee to divide the income of the Trust into two or more shares (which need not be equal)

•        appoint a person to be the Distributor in respect of those shares for the purposes of giving the Trustee certain directions, and

•        remove a Distributor from office.

If at any time that the Trustee determines to distribute income of the Trust (Relevant Distributable Income) and there is a Distributor in office, then the Trustee must:

•        divide the relevant distributable income into shares in accordance with the latest direction of the Appointors, and

•        distribute each share for any one or more beneficiaries of the Trust in such proportions as the relevant Distributor may direct (but if the Distributor does not give a direction to the Trustee, then the Trustee must deal with that share as if there was no Distributor in office).

Unexecuted Deed of Appointment of Distributors

The Deed of Appointment of Distributors will appoint the following as Distributors after the execution of the Deed of Variation:

•        xxx

•        xxx

•        xxx

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 104-55

Section 104-60

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

Question 1

Will the execution of the Deed of Variation and the subsequent execution of the Deed of Appointment of Distributors cause to happen:

1)            a CGT event E1 in section 104-55 of the 'ITAA 1997; or

2)            a CGT event E2 in section 104-60 of the ITAA 1997?

Question 2

Will the division of the Relevant Distributable Income and Relevant Distributable Capital into shares and the appointment of the Distributors to each share cause to happen:

1)            a CGT event E1 in section 104-55 of the ITAA 1997; or

2)            a CGT event E2 in section 104-60 of the ITAA 1997?

Summary

We have assumed the proposed Deed of Variation will involve a valid exercise by the Trustee of its powers. We have also assumed the appointment of Distributors under the proposed Deed of Appointment of Distributors will involve a valid exercise of power by the Appointor, Person A. The execution of those deeds will not cause the Trust to terminate or a new trust to be created because they will not cause any asset of the Trust to be subject to a separate charter of rights and obligations such as to give rise to a conclusion that trust assets have been settled on the terms of a different trust. Furthermore, the changes effected by those deeds will not cause any trust assets to be transferred to a separate, already existing, trust. Therefore, neither CGT event E1 in section 104-55 of the ITAA 1997, nor CGT event E2 in section 104-60 of the ITAA 1997, will happen as a result of the deeds being executed.

The division of the Relevant Distributable Income and the Relevant Distributable Capital into shares, and the appointment of Distributors in relation to those shares, will not alter the fact that the Trustee continues to hold the trust assets and continues to have obligations and indemnity rights in relation to those assets. The Trust will continue as one trust for the benefit of the same beneficiaries and will not split. Furthermore, the division (of the Relevant Distributable Income and Relevant Distributable Capital) and appointment (of the Distributors) will not cause any trust assets to be transferred to a separate, already existing trust. Therefore, neither CGT event E1 in section 104-55 of the ITAA 1997, nor CGT event E2 in section 104-60 of the ITAA 1997, will happen as a result of the division of the Relevant Distributable Income and the Relevant Distributable Capital into shares, and the appointment of Distributors in relation to those shares.

Relevant Law

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

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

For CGT event E1 to occur, a new trust must be created by way of declaration or settlement. For CGT event E2 to occur, there must be a transfer to an existing trust.

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 the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent documents, or varied with the approval of a relevant court? expresses the view that where 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, neither CGT event E1, nor CGT event E2, happens unless:

•        the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

•        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.

In Commissioner of Taxation v Commercial Nominees of Australia [2001] HCA 33the question before the Court went to whether an existing trust had come to an end such that the assets of the original trust were held on a different trust. The High Court observed:

Persons who were the members of the fund before the amendments remained the members of the fund after the amendments. The fund both before and after the amendments, was administered as a single fund, and treated in that way by the regulatory authority.

The ATO view about the potential capital gains tax implications of a 'trust split' is contained 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? For this determination, 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, or carved out of, the original trust fund. TD 2019/14 at paragraph 47 sets out that the purpose of such arrangements is directed to separating the functional operation of the trust. These trust split arrangements are put into place with the intention 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

(c) removing the entitlement of the original trustee to be indemnified out of the transferred assets for expenses incurred after the introduction of the new trustee, and

(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.

Application to your circumstances

Question 1 - the Deed of Variation and the subsequent execution of the Deed of Appointment of Distributors will not cause a new trust to arise or assets to be transferred to another trust.

This ruling adopts an assumption that the Trustee has the power to amend the Trust Deed in accordance with the proposed Deed of Variation and that the appointment of Distributors will involve a valid exercise of power by the Appointors.

The proposed variations and the subsequent appointment of Distributors will not cause the Trust to terminate and a new trust to arise for trust law purposes.

For CGT event E1 to occur, a new trust needs to be established by way of declaration or settlement. And for CGT event E2 to occur, an asset must be transferred to an existing, but separate, trust.

The proposed variations and appointments will not cause the existing trust to terminate and a new trust to be established. This is because after their execution:

•        the Trustee will continue to hold the trust fund for the benefit of the same beneficiaries;

•        the Trustee will remain obliged to distribute all trust capital and income among those beneficiaries, and

•        the trust fund will remain subject to the provisions of the original settlement, and no beneficial interest in any part of that fund, as held by the original beneficiaries, will have been completely exhausted.

By way of elaboration, the Deed of Variation will not lead to any asset being subject to a separate charter of rights and obligations. The Deed of Variation provides that the Distributor, when in office, will give the Trustee directions on distributions. The Distributor is responsible for giving the Trustee direction before the end of the income period to which the direction relates. Following the Deed of Variation, the Trustee must still exercise its discretion to distribute as it thinks appropriate where there is no Distributor in the office, and where the Distributor has not provided the Trustee with a direction.

The Deed of Variation, and the appointment of Distributors, will not cause any trust assets to be transferred to a separate trust. The beneficiaries remain unchanged. The trust fund is administered under a single trust and treated that way by the Trustee.

Question 2 - the division of the relevant distributable income and relevant distributable capital into shares and the appointment of the Distributors to each share will not cause a new trust to arise or assets to be transferred to another trust.

The Trustee is still responsible for the relevant distributable income and relevant distributable capital even after it has been divided into shares. That division will not cause a new trust to arise, or assets to be transferred to another trust. The Trustee may be directed by the Appointors and Distributors, but the Trustee continues to hold the trust assets and holds them for the benefit of the same beneficiaries.

We do not think this scheme involves a trust split. A trust split is defined in TD 2019/14 as achieving a functional separation in the operation of a trust. The intent is that those who control and can benefit from part of the trust fund that is transferred to the new trustee will be different from those who control and benefit from the remaining assets held by the original trustee.

Considering the list of characteristics of a trust split, and applying those to the scheme here, we observe that the division into shares will not have the effect of introducing a new trustee, and the Trustee will still hold the same assets, and its obligations and indemnity rights will encompass all those assets. There is continuity of property and beneficiaries of the Trust. The Trust will continue as one trust and will not split.

The Trust assets will not be settled on a new trust; nor will they commence to be held on a new or different trust. Therefore, neither CGT event E1 nor CGT event E2 will happen.