Issue
Will 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 discretionary trust to another discretionary trust?
Decision
The exception only applies if the beneficiaries and terms of both trusts are the same. The exception will not apply in this case because the trusts have different appointors.
Facts
Some of the assets of a discretionary trust (the original trust) will be transferred to another discretionary trust (the new trust) which is yet to be established.
The beneficiaries of the original trust will be the only beneficiaries of the new trust.
The establishment date, trustee and appointor for the new trust will be different to the original trust.
In all other respects, the trust deed for the new trust, including the vesting date, will be identical to the deed for the original trust and will have the same effect.
Both trusts will be governed by the same state laws.
Reasons for Decision
CGT event E2 happens when a CGT asset is transferred to an existing trust (subsection 104-60(1) and 104-60(2) of the ITAA 1997). CGT event E2 will happen in this case when the original trust transfers an asset to the new trust, 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. For it to apply in this case, the beneficiaries and terms of the original trust and the new trust would have to be the same.
The beneficiaries of the two trusts are the same. Also, the interests held by the beneficiaries of the new trust in the transferred assets will be the same as the interests they currently have in those assets under the original trust. The original and new trust will vest on the same day.
Except as discussed below, the trust deeds for the original and new trusts will be identical and will have the same effect. Also, because both trusts will be governed by the same state laws, powers granted to the trustees by relevant state trust legislation will be the same.
However, the new trust will have a different trustee, appointor and establishment date. While the establishment date and trustee do not have to be the same, the appointors must be the same.
The requirement is that the beneficiaries and terms of the two trusts be the same at the transfer time. When they were established, or commenced to be the same, is not relevant in determining whether the exception applies. The relevant time is the transfer time. While the dates on which the trusts are established do not have to be the same, their vesting dates do have to be the same.
As for the trustee, it is noted that the exception in paragraph 104-60(5)(b) of the ITAA 1997 essentially ensures that a transfer of assets between two trusts that have the same beneficiaries and terms is treated in the same way as a change of trustee of an existing trust. In that sense it complements paragraph 104-10(2)(b) of the ITAA 1997 which ensures CGT event A1 does not happen merely because of a change of trustee. Therefore, it is considered that the exception can apply if the trusts have different trustees.
An appointor has the power to appoint, and often to remove, a trustee. It is considered that the identity of the appointor of a trust, and their successors, is a term of the trust. They must therefore be the same as between the original and the new trust in order for the exception to apply.
As the terms of the original trust and the new trust are not the same, the exception in paragraph 104-60(5)(b) of the ITAA 1997 will not apply to the transfer of assets between the trusts. Therefore, CGT event E2 will happen when the assets are transferred from the original trust to the new trust.