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1 Did the amendment to the Trust Deed cause capital gains tax (CGT) event E1 or E2 in section 104-55 or section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to occur?

No. Question 2 Is the Commissioner satisfied that, at all times until the date of sale, the land is not taken to have stopped being a pre-CGT asset for the purposes of section 149-10 of the ITAA 1997? Answer Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX

The Trust was established pursuant to the terms of the trust deed dated pre-CGT (the Trust Deed). You provided us with the details of the current trustee and previous trustee. The Trust Deed was amended on post-CGT under the Trustee's powers to amend the Trust Deed. Beneficiaries The Trust Deed included the beneficiaries of the Trust. The Trust distributions, since the amendment of the Trust Deed, have only been made for the benefit of the members of Person A's family group, who are beneficiaries of the Trust under the Trust Deed. The Land The Trustee became the registered proprietor of pre-CGT land (the Land). You provided us with the address and purchase date of the Land. The Trustee lodged a plan of consolidation shortly after purchase of the Land. A restaurant was built on the Land, pre-CGT. The Land was sold by the Trustee during the ruling period. Amended Trust Deed Since the establishment of the Trust, there has been no change to the trustee, the only change has been the name of the trustee was updated. The Trust Deed was amended on a specified date, post-CGT. You provided us with a copy of the amended Trust Deed, which showed the clauses which were amended.

Income Tax Assessment Act 1936 section 160ZZS Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 subsection 104-55(1) Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 subsection 104-60(2) Income Tax Assessment Act 1997 subsection 108-5(1) Income Tax Assessment Act 1997 Division 149 Income Tax Assessment Act 1997 Subdivision 149-B Income Tax Assessment Act 1997 section 149-10 Income Tax Assessment Act 1997 subsection 149-15(1) Income Tax Assessment Act 1997 subsection 149-15(2) Income Tax Assessment Act 1997 subsection 149-15(3) Income Tax Assessment Act 1997 subsection 149-15(4) Income Tax Assessment Act 1997 subsection 149-15(5) Income Tax Assessment Act 1997 section 149-30 Income Tax Assessment Act 1997 subsection 149-30(1) Income Tax

Question 1 Did the amendment to the Trust Deed cause capital gains tax (CGT) event E1 or E2 in section 104-55 or section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to occur? Summary Neither CGT event E1 or CGT event E2 happened when the Trust Deed was amended. Detailed reasoning 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. Subsection 104-60(2) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust. In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 ( Clark ), it was established that a trust will not be terminated provided that any amendment to the trust is made in accordance with a power conferred by the trust instrument and there is some continuity of property and membership of the trust. Following Clark , the Commissioner issued 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? In TD 2012/21 the Commissioner expresses the view that in the circumstances 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 in sections 104-55 or 104-60 of the ITAA 1997 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 the asset has been settled on the terms of a different trust.

Paragraph 24 of TD 2012/21 explains that the Commissioner accepts that a change in the terms of a trust pursuant to an existing power (including an amendment to the deed of a trust) will not result in the termination of the trust. Paragraph 27 of TD 2012/21 states that even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust. The Commissioner accepts that general proposition that where there is some continuity of property and membership of the trust, changes to the terms of a trust that are made in proper exercise of a power of amendment will not terminate the trust where they are properly supported by that power. Accordingly, the scope of the amendment power and the validity of its exercise in a particular case will be critical. Application to your circumstances

The original Trust Deed gave the Trustee the powers to amend the deed provided the amendment does not increase in the commission payable to a Trustee, it is not for the benefit of the Trustee or gives beneficial interest in the capital or income of the Trust fund to either the Settlor or any person who is not a beneficiary of the Trust. The amendment did not make any change to the beneficiaries of the Trust. No changes were made to the Trust Deed that was for the benefit of the Trustee. The amendment did not breach the Trustee's amendment power. It is considered that the amendment to the Trust Deed will not breach the proviso limiting the Trustee's amendment power under the Trust Deed. As the amendments were made under an existing power in the Trust Deed, it is considered that the amendments did not cause the Trust to terminate and did not lead to the Land being subject to a separate charter of rights and obligations such that an asset would be settled on different trust terms. Conclusion It is considered that neither CGT event E1 or CGT event E2 happened as a result of the amendment to the Trust Deed. Question 2

Is the Commissioner satisfied that, at all times until the date of sale, the land is not taken to have stopped being a pre-CGT asset for the purposes of section 149-10 of the ITAA 1997? Summary Based on the information provided, the Commissioner is satisfied that the land has not stopped being a pre-CGT asset under section 149-10. Detailed reasoning Division 149 of the ITAA 1997 contains the provisions under which an asset acquired before 20 September 1985 is treated as having been acquired after that date, that is, the asset stops being a pre-CGT asset. Subdivision 149-B of the ITAA 1997 provides for when the asset of a non-public entity stops being a pre-CGT asset. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as any kind of property or a legal or equitable right that is not property. A CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having been acquired after that date. Section 149-10 of the ITAA 1997 provides as follows: A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a)     the entity last acquired the asset before 20 September 1985; and

(b)     the entity was not, immediately before the start of the 1998-99 income year, taken under: (i)     former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii)     Subdivision C of Division 20 of the former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c)     the asset has not stopped being a pre-CGT asset of the entity because of this Division. Section 149-30 of the ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interests in the assets were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Section 149-15(3) of the ITAA 1997 relevantly defines 'ultimate owner' to include an individual. It does not include companies that pay dividends to their members, or trusts. Subsection 149-15(2) of the ITAA 1997 defines an 'underlying interest' in a CGT asset as a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests. It requires ultimate owners to hold more than 50% beneficial interests (either directly or indirectly through one or more interposed companies, trusts or partnerships) in the CGT asset and in any ordinary income that may be derived from the asset. Subsections 149-15(4) and (5) of the ITAA 1997 provide that an ultimate owner has an indirect beneficial interest in a CGT asset of another entity if they would receive for their own benefit any capital or ordinary income distributed by the entity through interposed entities.

Under subsection 149-30(2) of the ITAA 1997, if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the asset have not changed up to a particular time, then subsections 149-30(1) and (1A) of the ITAA 1997 apply and the asset continues to be a pre-CGT asset. Simply put, subsection 149-30(2) of the ITAA 1997 requires that the Commissioner has to be satisfied that the majority underlying interests in the assets have not changed, otherwise the asset is deemed to have been acquired at the time that the change in majority underlying interests in that asset happened. In this case, as the Land acquired prior to 20 September 1985 is not held directly by individuals, the underlying interests in the Land need to be traced through intermediary entities to the ultimate owners for the whole period from and including 20 September 1985. Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date

adopts a pragmatic approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded Division 149 of the ITAA 1997. Among other things, IT 2340 deals with issues regarding the application of section 160ZZS of the ITAA 1936 'to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts'. Taxation Ruling IT 2340 reflects the position that section 160ZZS of the ITAA 1936 of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets. Likewise, a shareholder is treated for the purposes of section 160ZZS of the ITAA 1936 as having a beneficial interest in the company's assets. Under this approach the Commissioner can 'look through' an entity to determine who are the natural persons who hold beneficial interests in assets. Paragraph 2 of IT 2340 states:

2.     The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons whether directly or through one or more interposed companies, partnerships of trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chain of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets. IT 2340 sets out the Commissioner's approach in respect of 'looking through' discretionary family trusts to determine whether majority underlying interests have been maintained in the assets of the trust. Paragraphs 5 to 7 of IT 2340 state as follows:

5.     In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustee as in fact exercised. 6.     Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7.     In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. This is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in the underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act. However, if the trustee of a family discretionary trust appoints new beneficiaries who are not members of the particular family group, the Commissioner may consider that the underlying interests in the trust assets has changed. Paragraph 8 of IT 2340 states:

8.     On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect of a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of a persons who were formerly the object of such distributions - the section would have its intended application as described. Application to your circumstances Following this approach, the Commissioner would find it reasonable to assume that the majority underlying interests in your assets have not changed because: •        you are a discretionary trust, which has always been administered for the benefit of Person A's family •        the current beneficiaries are within Person A's family group •        the amendment to the Trust Deed on a specified date did not introduce any new beneficiaries or permitted distributions to entities who are not beneficiaries.

In these circumstances, the Commissioner is satisfied that the changes will not interrupt the continuity of the Trust as the Trustee of the Trust will continue to administer the Trust for the benefit of the Trust's family members. Conclusion Since the Commissioner would find it reasonable to assume that the majority underlying interests have been maintained, section 149-10 will not apply. The Land has not stopped being a pre-CGT asset.