Issue
Does the exception in paragraph 104-60(5)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the transfer of assets from a unit trust to a discretionary trust?
Decision
No. The beneficiaries and terms of the trusts are not the same. Therefore, the exception in paragraph 104-60(5)(b) of the ITAA 1997 does not apply.
Facts
The assets of a unit trust were transferred to a discretionary trust in February 2002. The assets were acquired by the unit trust after September 1985.
The terms of the trust deeds vary considerably. The unit trust deed has clauses relating to distributions to unit holders in proportion to the number of units held. The discretionary trust deed has clauses which allow the trustee to exercise a discretion as to which beneficiaries receive a distribution and the amount of each distribution.
The beneficiaries of the unit trust and the discretionary trust are not the same.
Reasons for Decision
CGT event E2 happens if you transfer a CGT asset to an existing trust: subsection 104-60(1) of the ITAA 1997. The event happens when the asset is transferred: subsection 104-60(2) of the ITAA 1997. As a unit trust has transferred an asset to a discretionary trust, CGT event E2 has happened unless the exception in paragraph 104-60(5)(b) of the ITAA 1997 applies.
The exception in paragraph 104-60(5)(b) of the ITAA 1997 applies if an asset is transferred to a trust from another trust and the beneficiaries and terms of both trusts are the same.
The principal feature of the unit trust is that the beneficiaries (referred to as 'unitholders') have a fixed interest in the property of the trust. According to the trust deed, the trustee of the unit trust is not conferred a discretion as to the selection of beneficiaries or the quantum of their interest. Each unit entitles the holder to an undivided share in the income of the trust and a fixed proportion of the trust property on dissolution. The extent of this interest is determined by the proportion of the total units held by the unit holder.
The discretionary trust deed says the trustee of that trust may exercise a discretion as to whether the trust income should be distributed and, if exercised, which beneficiaries should share in the distribution of the trust income. Hence, beneficiaries of the discretionary trust have no interest in the trust property until the trustee exercises the discretion in their favour.
Accordingly, as the beneficiaries and terms of the unit trust and the discretionary trust are not the same, the exception in paragraph 104-60(5)(b) of the ITAA 1997 does not apply.