Capital gains tax: CGT event E2 - settlor excluded from taking benefit

Does CGT event E2 in section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when an asset is transferred from one trust to another if the trust deeds are identically worded, including a clause in each which excludes the settlor of the trust from taking any benefit under the trust, but each trust has a different settlor?

Yes, CGT event E2 happens. The exception in paragraph 104-60(5)(b) of the ITAA 1997 does not apply because the beneficiaries and terms of the two trusts are not the same. Even though both trust deeds are worded identically, their meaning and effect in respect of the exclusion clause are not the same. Because each trust has a different settlor each trust deed effectively excludes a different entity from benefiting under the trust.

A trust (the first trust) was settled in 1995 by the father of the trust's primary beneficiaries (the father).

Another trust (the second trust) was settled in early 2006 by the mother of the trust's primary beneficiaries (the mother).

Both trusts have identically worded trust deeds, including a clause excluding the settlor of the trust from taking any benefit under the trust including by loan or any other indirect means.

In October 2006, a property owned by the first trust was transferred to the second trust. At that time, both the father and the mother were still alive.

The trustee of the first trust argues that the transfer of the asset attracts the application of the exception to CGT event E2 in paragraph 104-60(5)(b) of the ITAA 1997.

CGT event E2 happens when a CGT asset is transferred to an existing trust: subsection 104-60(1) of the ITAA 1997. However, that event does not happen if the asset is transferred to the trust from another trust and the beneficiaries and terms of both trusts are the same: paragraph 104-60(5)(b) of the ITAA 1997.

In order to satisfy the exception, both trust deeds must have exactly the same meaning and effect. This is not necessarily achieved by wording the deeds identically. See further Taxation Ruling TR 2006/4.

In this case, the trust deeds do not have the same meaning and effect. The father is excluded from benefiting under the first trust (but not the second). And the mother is excluded from benefiting under the second trust (but not the first). Therefore, each trust deed effectively excludes a different entity from benefiting under it. For that reason, the beneficiaries and terms of the two trusts are not the same and CGT event E2 happened when the asset was transferred.

Note: the outcome would have been different if, for example, the trust deed for the second trust had omitted the exclusion clause and added a clause excluding the father from taking any benefit under the trust including by loan or any other indirect means. In that case the beneficiaries and terms of both trusts would have been the same because the father would have been excluded from both and the mother from neither.