1 Will CGT event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of the Trustee's entry into the Deed of Determination?
No Question 2 Will CGT event E2 under section 104-60 of the ITAA 1997 happen as a result of the Trustee's entry into the Deed of Determination? Answer No Question 3 Will CGT event E4 under section 104-70 of the ITAA 1997 happen as a result of the Trustee's entry into the Deed of Determination? Answer No Question 4 Will CGT event E5 under section 104-75 of the ITAA 1997 happen as a result of the Trustee's entry into the Deed of Determination? Answer No Question 5 Will CGT event E6 under section 104-80 of the ITAA 1997 happen as a result of the Trustee's entry into the Deed of Determination? Answer No Question 6 Will CGT event E7 under section 104-85 of the ITAA 1997 happen as a result of the Trustee's entry into the Deed of Determination? Answer No This ruling applies for the following periods : Income year ending 30 June 2024 Income year ending 30 June 2025 Income year ending 30 June 2026 The scheme commenced on: 1 July 2023
Mr X was married and had four children (the Siblings). In 1971 Mr X established a family business and investment structure for the family, with the main entity being the Trustee for the Trust. The Trust is a discretionary trust, established by deed in 1971 (the Trust Deed) made between the Settlor and the Trustee. Mr X is the 'Primary appointer'. Mr X has been the director of the Trustee since its incorporation. A became a director of the Trustee in 1988 and B became director in 2005. Both A and B have been, and continue to be, actively involved with Mr X in the family business and investment structure. The Trust Deed has been varied by Deeds on various dates. The beneficiaries under the Trust Deed, referred to throughout as 'presumptive beneficiaries' and defined in clause 3, include each of the Siblings. Clause 4 of the Trust Deed defines the Trust Fund: For the purposes of this Deed the Trust Fund shall include the aforesaid amount of EIGHT THOUSAND DOLLARS
($8,000.00) and any further amount or other property which the Settlor may from time to time hereafter give transfer or make over to the Trustee to be held on the trusts herein contained and the expression "the Trust Fund" shall in addition include any investment from time to time acquired with or out of the said amount or amounts or other property and shall include any substituted investments and any accretions to capital and any investments acquired by the Trustee with any such accretions to capital. The Trust Deed provides the Trustee certain powers and discretions including (but not limited to) the following:
The Trustee may invest the Trust Fund or any part thereof in any investment whether or not authorised by law for the investment of Trust Funds and whether or not hereby specifically authorised and whether or not involving waste or subject to liability and whether or not of an income producing nature which the Trustee in its absolute discretion considers suitable for the investment of the Trust Fund as if the Trustee were the absolute owner of the Trust Fund with full power to vary any such investments at any time or from time to time as the Trustee in its absolute discretion considers fit or the Trustee may retain the Trust Fund or any part thereof in the same state as the Trustee received it AND the Trustee shall subject to the trusts herein contained have power to manage administer and deal with the Trust Fund as the Trustee in its absolute discretion see fit as if the Trustee were the absolute owner thereof. [clause 6]
To determine the amount of the income of the Trust Fund derived since the end of the last annual accounting period and for this purpose in its absolute discretion to determine whether any receipt of money or other property, whether actually received or receivable, or any outgoing or charge or profit or loss is to be treated as being on income or capital account: provided that if the Trustee fails to make a determination under this paragraph (xiii) prior to the expiration of any annual accounting period then the amount which under the provisions of the Income Tax Assessment Act 1936 (Cth) comprises the net income of the trust estate for that annual accounting period shall be treated as the amount of the income of the Trust Fund; [clause 10(xiii)]
In determining the entitlements of the presumptive beneficiaries to have regard to the income tax consequences of appointments made and in particular (in such fashion and proportion as it thinks fit) to determine that particular amounts of gross or net income (including net capital gains and franked and unfranked dividends within the meaning of Parts IIIAA and IIIA of the Income Tax Assessment Act 1936 (Cth)) taken into account in ascertaining the net income of the Trust Fund for the purposes of that Act shall be included in or apportioned among the amounts of net income appointed to particular presumptive beneficiaries pursuant to the terms of this Deed, and to declare that the amount so apportioned is to the extent of such determination attributable to particular amounts of gross or net income. [clause 10(xiiia)]
In any conditions or circumstances which the Trustee thinks expedient the Trustee may appoint either in respect of the whole of the Trust Fund or any part thereof a new Trustee in any part of the world and may transfer assign and set over the investments for the time being representing the Trust Fund or part thereof to any such new Trustee upon similar trusts and subject to similar terms and conditions to those declared in these presents and either subject to the control of the Trustee of these presents or to the exclusion of such control AND the Trustee of these presents shall be indemnified and held harmless against any loss which may arise from the exercise of this power. [clause 10(xiv)] To pay or apply trust assets comprising or representing the whole or any part or parts of the capital of the Trust Fund including, but without limiting the foregoing, any amount standing to the credit of an asset revaluation reserve, to or for the benefit of all or any one or more exclusive of the other or others of the presumptive beneficiaries and in such respective amounts if more than one and in such manner as the Trustee shall in its absolute discretion think fit; [clause 10(xx)]
The Trustee may appropriate any portion of the Trust Fund or any investment representing the same to or towards the share of any person or persons entitled under the Trusts herein contained whether the interest or interests of such person or persons is or are vested or contingent or liable to be divested and may charge any share or shares with such sum or sums of moneys by way of equality as the Trustee may think fit and for such purposes may fix the value of any real or personal property forming part of the Trust Fund as the Trustee may think fit and every such appropriation charge and valuation shall be binding on all persons who may at any time be entitled hereunder to any interest in the Trust Fund. [clause 11]
The Trustee may pay out of the Trust Fund any stamp duty settlement duty gift duty or any other impost of any such nature in respect of these presents or the settlement hereby effected and whether under the laws of the Commonwealth of Australia or any of the States or Territories thereof or of any other country or State and the Trustee may pay out of the Trust Fund any legal or accountancy fees or costs arising out of the establishment creation or administration of this Trust or in connection with this Deed as the Trustee thinks fit. [clause 13]
In the execution of the trusts powers and discretions hereof no Trustee (other than a Trustee charging remuneration for so acting) shall be liable for any loss to the Trust Fund arising by reason of any investment made in good faith or the negligence or fraud of any person or agent employed by that Trustee or by any other Trustee hereof although the employment of such person or agent was not strictly necessary or expedient or by reason or any mistake or omission made in good faith by any Trustee hereof or by reason of any other matter or thing except wilful and intentional default or wrong doing on the part of the Trustee who is sought to be made liable. [clause 17]
The Trustee may take and act upon the opinion of Counsel of five years' standing practising in any country where the Trust Fund or any part thereof may for the time being be invested in relation to the interpretation of these presents or any other document or statute or as to the administration of the trusts hereof without being liable to any of the persons beneficially interested in respect of any act done by the Trustee in accordance with such opinion BUT nothing in this provision shall prohibit or impede the Trustee from applying to any Court if the Trustee shall think fit or prohibit or impede any of the beneficiaries from so doing. [clause 18]
The power of appointing a new Trustee in the place of a Trustee or in addition to any existing Trustee and the power to remove any Trustee shall be vested in the said [Mr X] during his lifetime and after his death the power of appointing a new Trustee or additional Trustee shall vest in the Trustee of these presents at the time and if a Company such power may be exercised by a Resolution of the Directors of such Company duly passed in accordance with the Articles of Association of the Company from time to time in force. The Settlor shall not be capable at any time of being appointed Trustee hereof. [clause 20)] Relevantly, clause 2 of the Trust Deed states: (a) Subject to paragraph (b) of this Clause the expression "the Distribution Date" shall mean the earlier of the two dates respectively specified in sub-paragraphs (i) and (ii) of this paragraph - (i) the Thirtieth day of June in the year Two thousand and fifty; (ii) the date of the twentieth anniversary of the death of the last survivor of the children now living of Her Majesty Queen Elizabeth II;
(b) Notwithstanding anything in paragraph (a) of this Clause the Trustee shall have an absolute discretion to determine that the Distribution Date shall be a date which occurs at any time after the Thirtieth day of June in the year One thousand nine hundred and seventy one but before the Distribution Date ascertained in accordance with paragraph (a) of this Clause. Clause 8 of the Trust Deed provides the income arising from the Trust Fund in each annual accounting period shall be paid or applied in any proportion by the Trustee, in its absolute discretion, for the benefit of any presumptive beneficiary. Clause 9 of the Trust Deed states: On and from the Distribution Date the Trustee shall hold pay or transfer the Trust Fund for or to the presumptive beneficiaries in such proportions whether varying or uniform as the Trustee in its absolute discretion determines or for or to such one or more of them in such proportions as the Trustee in its absolute discretion determines so that the Trustee in its absolute discretion may exclude any one or more but not all of the presumptive beneficiaries provided that:
(i) no such presumptive beneficiaries for whom the Trust Fund is held shall have any interest in or entitlement to any particular asset of the Trust Fund. (ii) any determination made under this Clause 9 must be made on or before the Distribution Date and subject to sub-paragraph (iii) of this Clause 9 may if made before the distribution date be revocable or irrevocable and (iii) no determination may be revoked after the death of the survivor of the Primary Appointor and the Secondary Appointor. Clause 9A. of the Trust Deed states that in connection with the exercise of its discretion to pay, apply or transfer the whole or any part of the Trust Fund, the Trustee may, in its absolute discretion:
(a) separately identify and record in the books of account and records of the Trust hereby constituted any identifiable item, type, amount or class of capital or income, or any net amount or net financial benefit referrable to or arising from the whole or any part of any such capital or income having any unique or individual characteristic (including, without limitation, any item, type, amount or class of capital or income from a particular source, or to which an identifiable tax benefit or tax consequence attaches or does not attach, or to which a franking credit or foreign tax offset attaches or does not attach, or a (b) allocate and deduct any expenses or outgoings of the Trust hereby constituted against and from any part of such Trust Fund or income thereof having any such separately identifiable characteristics; and
(c) pay or apply or transfer the whole of any part of such Trust Fund or the income thereof having any such separately identifiable characteristic specifically to or for all or such one or more to the exclusion of the others or other of the presumptive beneficiaries to whom such amounts can be paid or applied or transferred under the terms of this Deed, and the amount so paid or applied or transferred shall retain its identifiable character in each such presumptive beneficiary's hands. Clause 22 of the Trust Deed contains a variation power on the following terms:
Subject to Clause 26 at any time during the joint lives of the Primary Appointor and the Secondary Appointor and the life of the survivor of them and prior to the Distribution Date the Trustee may from time to time in its absolute unfettered discretion notwithstanding anything to the contrary herein contained but provided that three (3) months' notice of its intention to vary the trusts as hereinafter provided shall have been given to the Primary Appointor or if he shall not then be living the Secondary Appointor (or the Primary Appointor or if he shall not then be living the Secondary Appointor shall have in writing agreed to dispense with such notice) by Resolution of its Directors or by Instrument in writing vary the trusts. hereinbefore declared of and concerning the Trust Fund or any part or parts thereof in any manner whatsoever PROVIDED
that the Trustee shall not have power to vary any of the trusts hereof so as to itself acquire or so far as any money or property given to the Trustee by the Settlor or any other person to be held on the trust hereof is concerned for the Settlor or such person to acquire a beneficial interest in the Trust Fund or any part thereof or any of the income thereof or so that the Settlor or any such person as aforesaid may acquire a beneficial Interest in the Trust Fund or any part thereof or any of the income thereof or any part thereof whether by way of resulting trust or otherwise AND PROVIDED FURTHER that any such power may be exercised so as not to contravene the rule of law known as the rule against perpetuities and subject to the provisions of Section 31 of the Conveyancing Act 1919 (as amended) AND that any such power may be exercised by the Trustee in its absolute discretion PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY DECLARED that any such variation shall in no way affect or be considered to affect the rights or remedies of any encumbrancer of any of the investments or property for the time being constituting or forming the Trust Fund.
Clause 26 of the Trust Deed (referred to in clause 22) provides: Whilst any monies are owing by the Trustee to the Bankor any charge or security upon assets of the Trust Fund exists in favour of the Bank:- (i) No further variation of the Original Deed shall be made, and (ii) No determination revocation addition appropriation or advancement shall be exercised, and (iii) No Trustee shall retire nor shall any substitute or additional Trustee be appointed, and (iv) (deleted) (v) No resettlement of the Trust Fund or any part of it shall be made, and (vi) No capital distribution shall be made, except with the written consent of the Bank. Any purported exercise of any power except as herein provided shall be void and of no effect. Assets of the Trust include real property, shares in subsidiary companies, and units in unit trusts. The assets generate income including rental and dividend income. Expenses incurred by the Trustee include administration and other related expenses, and operating expenses including interest on monies owing to the Bank.
Mr X has commenced communicating to his children his wishes regarding the family structure, including the Trust. In that regard, Mr X wishes to see that prior to his passing each of the Siblings' branch of the family have the continuing benefit of an ascertainable portion of any net benefits generated by the Trust. In pursuance of Mr X's wishes, the Trustee, and Mr X are anticipating entering into the Deed of Determination of Distribution Date (Deed of Determination). It is proposed that the resolution by the Trustee to execute and enter into the Deed of Determination will be made by Mr X as director of the Trustee. The other directors, A and B, will abstain from deciding and voting in relation to the Deed of Determination. Under the Deed of Determination, the Trustee wishes to make 2 determinations concurrently and simultaneously: 1. an irrevocable determination pursuant to clause 2(b) of the Trust Deed that the Distribution Date of the Trust will be the execution date of the Deed of Determination; and
2. a determination pursuant to clause 9 of the Trust Deed that on and from the Distribution Date the Trustee will hold, pay or transfer the Trust Fund for each of the Siblings in the following proportions: Presumptive Beneficiary Share of Trust Fund A NN% B NN% C NN% D NN% If the Trustee and Mr X enter into the Deed of Determination, any distributable income of the Trust Fund (after payment of administration expenses) in respect of a 30 June annual accounting period and any capital of the Trust Fund will be held by the Trustee for the Siblings in the proportions specified in the Deed of Determination. While the Siblings will be entitled to proportionate interests in the Trust Fund as a whole, none of them will obtain any interest in or entitlement to any particular asset of the Trust Fund. As the power to vary the Trust Deed under clause 22 is expressed to be exercisable prior to the Distribution Date, the Trustee will no longer have the power under that clause to vary any of the trusts concerning the Trust Fund on and from the execution date of the Deed of Determination, including the trusts in clauses 5, 8 and 9 of the Trust Deed.
Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 subsection 104-55(1) Income Tax Assessment Act 1997 subsection 104-55(2) Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 subsection 104-60(1) Income Tax Assessment Act 1997 section 104-70 Income Tax Assessment Act 1997 subsection 104-70(1) Income Tax Assessment Act 1997 section 104-75 Income Tax Assessment Act 1997 subsection 104-75(1) Income Tax Assessment Act 1997 section 104-80 Income Tax Assessment Act 1997 subsection 104-80(1) Income Tax Assessment Act 1997 section 104-85 Income Tax Assessment Act 1997 subsection 104-85(1)
All subsequent legislative references are to the ITAA 1997. Question 1 Summary CGT event E1 will not happen when the Trustee executes the Deed of Determination as it does not result in the creation of a trust over a CGT asset by declaration or settlement. Detailed reasoning CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement (subsection 104-55(1)). The time of the event is when the trust over the asset is created (subsection 104-55(2)). Circumstances might occur in which the parties to a trust relationship subsequently act in a manner that results in a new trust being created by declaration or settlement. CGT event E1 may happen when there is a trust resettlement, that is when one trust estate has ended and another has replaced it. When a trust deed is varied or amended, there is a risk that this may cause a resettlement of the trust. However, taxation legislation does not contain a test for determining when a resettlement has occurred. As a result, we must look to the established cases. Commercial Nominees The High Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd
[2001] HCA 33; (2001) 75 ALJR 1172; ATR 220; ATC 4336 ( Commercial Nominees ) considered whether a superannuation fund was entitled to utilise prior year losses following amendments to its trust deed (including the appointment of a new trustee, the fund adopting a new set of rules and a change in the nature of benefits from defined to accumulations). The High Court addressed the issue of whether the changes to the deed resulted in a resettlement of the trust. The High Court confirmed that the question is one of continuity and that [at paragraph 36]: ..The three main indicia of continuity [for the purposes of the former taxing regime for superannuation funds] are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity. (emphasis added) The High Court held that resettlement did not arise because: • the trusts under which the fund operated were constituted by the original trust deed as varied;
• the amendments were authorised by the trust deed; • the trust property and the fund members did not change; and • the fund before and after the amendment was administered as a single fund. Clark The High Court's decision in Commercial Nominees was followed in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ). Clark considered whether a unit trust was able to utilise carry forward capital losses where the trust deed had undergone significant changes between incurring those losses and seeking to apply them. Edmonds and Gordon JJ in the Full Federal Court held that there was continuity and no resettlement of the trust. Their Honours were of the view [at paragraphs 78 and 79] that the High Court in Commercial Nominees had endorsed the Full Federal Court's reasoning in Commercial Nominees
(1999) 167 ALR 147 that so long as any amendments to the trust obligations are made in accordance with a power conferred by the trust instrument creating the obligations, and continuity of the property that is the subject of the trust obligations is established, then there will be identity of the taxpayer notwithstanding any amendment of the trust obligation and any change in the property itself. Their Honours concluded [at paragraph 87] that: ...When the High Court in Commercial Nominees spoke about trust property and membership as providing two of the indicia for the continued existence of the... trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question... Following the decision in Clark , the ATO published its view of the decision in a Decision Impact Statement (DIS). In the DIS, the Commissioner considers that: Clark
does not change the basic proposition that, based on the authority in Commercial Nominees , the relevant focus is on whether continuity of the trust estate has been maintained. As decided by Commercial Nominees , the test to be applied looks to whether changes to one or more of the trust's constituent documents, the trust property, and the identity of those with a beneficial interest in the trust property are such as to terminate the existence of the trust. The principles set out in Clark have broader application. In particular, the case is relevant to the question of the circumstances in which CGT event E1 may happen by reason of a new trust coming into existence consequent on changes being made to an existing trust. In that context the ATO accepts that the reasoning of the court has the effect that a valid amendment to a trust, not resulting in a termination of the trust will not of itself result in the happening of CGT event E1. TD 2012/21 The ATO's approach to this matter is set out in Taxation Determination TD 2012/21 [1] . Paragraph 21 of TD 2012/21 explains that: ....as a general proposition, it would seem that the approach adopted by the Full Federal Court in
Commercial Nominees , as explained by Edmonds and Gordon JJ in Clark , is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power... Further, paragraph 24 of TD 2012/21 provides that: Even though Clark and Commercial Nominees
were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening. Paragraph 27 of TD 2012/21 cautions 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. Application to the circumstances The Trust Deed grants the Trustee the power to enter into a Deed of Determination pursuant to clause 9. The Deed of Determination provides that from the execution date of the Deed of Determination, being the Distribution Date, the Trustee shall hold, pay or transfer the Trust Fund for the specified presumptive beneficiaries. By means of the proposed Deed of Determination the Trustee in its absolute discretion wishes to irrevocably appoint the future net income of the Trust Fund and capital of the Trust Fund to the specified presumptive beneficiaries in the specified proportions (as stated in the Deed of Determination).
Relevantly, such proportions will be determined by reference to the whole of the Trust Fund, and not to any particular asset or assets of the Trust Fund. Clause 9(i) of the Trust Deed expressly states that "no presumptive beneficiaries for whom the Trust Fund is held shall have any interest in or entitlement to any particular asset of the Trust Fund". There is no expectation that the assets of the Trust will be transferred or otherwise disposed of on or around the time of the Distribution Date (or within a short period thereafter), or in connection with (or as a consequence of) the Deed of Determination. Rather, the Trustee will continue to hold the Trust Fund as a whole, and none of the presumptive beneficiaries will have an interest in or entitlement to any particular asset or assets of the Trust Fund. Further, each of the Siblings are currently objects of the Trust and, following the Deed of Determination, will continue to be objects of the Trust.
Finally, there is nothing in the Deed of Determination as drafted which cancels the Trust Deed, such that the Trust Deed will continue to govern the Trust after the Deed of Determination and will continue to govern the equitable relationship between the Trustee and each of the Siblings in respect of the Trust Fund. Whilst the execution of the Deed of Determination will give rise to certain changes in rights, powers and obligations under the Trust [2] , any such changes constitute the development of the Trust Fund under the Trust Deed, in a manner contemplated by the Trust Deed (in particular pursuant to clause 9).
The Trust and the Trust Fund will not cease and certain powers conferred on the Trustee by the Trust Deed will continue to be exercisable by the Trustee on and from the Distribution Date. These include powers on how the Trust Fund is managed, administered and dealt with in its absolute discretion, as if the Trustee were the absolute owner (clauses 6 and 10); the power to pay certain expenses from the Trust Fund (clause 13); the power to seek and act upon the opinion of Counsel on matters relating to the administration of the Trust Deed (clause 18); and the power to appoint a new trustee (clause 20). As the execution of the Deed for Determination is within the Trustee's powers contained in the Trust Deed, the Commissioner considers that, following the execution of the Deed of Determination, there will be continuity: • of the Trust Fund (the trust property); • in the membership of the Trust (apart from the removal of particular presumptive beneficiaries of the Trust); and • in the operation of the Trust.
As continuity in the membership, operation and property of the Trust would be maintained following the execution of the Deed of Determination pursuant to a valid exercise of the amendment power in clause 22 of the Trust Deed, such amendments would not result in a termination of the Trust. This is consistent with the decisions in both the Commercial Nominees and Clark cases. The Trust will therefore continue to be the same trust established in 1971 on and from the execution of the Deed of Determination; that is, the execution of the Deed of Determination will not result in the creation of any new or separate trust over any assets comprising the Trust Fund, whether by declaration or settlement, and will not cause CGT event E1 to happen. For completeness, it is noted that the vesting of a trust does not ordinarily cause the trust to come to an end and its property to settle on the terms of a new trust ( Clay & Ors v. James & Ors [2001] WASC 18 at [11]). Taxation Ruling TR 2018/6 [3] notes the income tax and CGT consequences of vesting, and states as follows at paragraphs 11 to 16:
11. Though it is common to speak of a trust's vesting, it is the interests of the beneficiaries in the property of the trust that vest on the vesting date. 12. On a trust's vesting date, the interests in the property of the trust become vested in interest and possession. In the case of a discretionary trust, from the time the trust vests the trustee no longer has any discretionary power to appoint the income or capital of the trust. Rather it holds the trust property for the absolute benefit of those beneficiaries specified as the takers on vesting. 13. The vesting of beneficial interests in a trust, even if described as a 'Termination Date', does not ordinarily cause the trust to come to an end, nor cause a new trust to arise. Vesting does not mean trust property must be transferred to the takers on vesting on the vesting date, or that the trust must be wound up either immediately or within a reasonable period (although the deed may require these events to occur after vesting). 14. Further, where a trustee continues to hold property for takers on vesting, the property is held on the same trust as existed pre-vesting; albeit the nature of the trust relationship changes.
CGT consequences of trust vesting 15. Determining whether or not a CGT event happens on vesting requires a close consideration of the deed. This will include consideration of the effect of vesting on the beneficial interests in the trust, and the nature of the property held on trust. 16. It may be the case that no CGT event happens by reason alone of the trust's vesting. But events occurring post-vesting may cause a CGT event to happen subsequently. Question 2 Summary CGT event E2 will not happen as a result of the Trustee's entry into the Deed of Determination. Detailed reasoning CGT event E2 under subsection 104-60(1) happens if you transfer a CGT asset to an existing trust. Taxation Determination TD 2012/21 confirms that CGT event E2 does not happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within a trust's constituent document unless the change causes an existing trust to terminate and a new trust to arise for trust law purposes, or the change results in 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.
The Deed of Determination does not require the Trustee to move, transfer or otherwise change ownership of any CGT asset to another person or persons. Nor is there an existing trust that is the transferee or recipient of a CGT asset from the Trust. Therefore CGT event E2 under section 104-60 will not happen upon the Trustee executing the Deed of Determination. Question 3 Summary CGT event E4 will not happen as a result of the Trustee's entry into the Deed of Determination because the Siblings are mere discretionary objects and do not have an 'interest in the trust' of the nature or character required by section 104-70. Detailed Reasonings Subsection 104-70(1) states that: CGT event E4 happens if: (a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and (b) some or all of the payment (the non-assessable part ) is not included in your assessable income. Taxation Determination TD 2003/28 [4]
sets out the Commissioner's view on how CGT event E4 applies to a discretionary trust and provides that a discretionary beneficiary, including a 'default beneficiary', under a discretionary trust does not hold an interest in a discretionary trust for the purposes of CGT event E4. Paragraphs 3 to 5 state: 3. CGT event E4 does not happen in the circumstances described in paragraph 1 [a non-assessable payment made by a trustee of a discretionary trust to a mere object or a default beneficiary under the trust] because a mere object or default beneficiary is not considered to have an 'interest in the trust' of the nature or character required in paragraph 104-70(1)(a). 4. The meaning to be given to the words 'interest in the trust' depends on the context in which they are used, see for example Leedale v. Lewis [1982] 3 All ER 808 and Gartside v. IRC [1968] AC 553. In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests.
5. The interest that a mere object has in a trust is not one in which another person can invest - such an interest, being a bare right of action, cannot be purchased or assigned. An interest of a default beneficiary has been held to constitute a vested, but defeasible, proprietary interest in a trust (see Queensland Trustees v. Commissioner of Stamp Duties (Queensland) (1952) 88 CLR 54 at page 63). 1 It can be assigned and be the subject of a testamentary disposition. However, it is not an interest potentially subject to CGT event E4 where it has not been acquired for consideration or by way of assignment. CGT event E4 only happens in respect of a unit or an interest in a trust, and not in respect of payments made by a discretionary trust to beneficiaries of that trust. This is because a discretionary beneficiary does not have an 'interest in the trust', as is required by section 104-70.
The Trust is a discretionary trust. Prior to the Trustee making a determination that the Siblings are the presumptive beneficiaries on the Distributions Date, the Siblings are mere discretionary objects and cannot demand payment of any part of the Trust Fund until the Trustee exercises its discretion in their favour. Therefore CGT event E4 under section 104-70 will not happen when the Trustee enters into the Deed of Determination. Question 4 Summary CGT event E5 will not happen when the Trustee executes the Deed of Determination as no beneficiary will be absolutely entitled to a CGT asset of the Trust. Detailed Reasoning CGT event E5 under subsection 104-75(1) happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or trust to which Division 128 applies) as against the trustee. Draft Taxation Ruling TR 2004/D25 [5] explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee. Paragraph 10 of TR 2004/D25 notes that:
[t]he core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. In the context of multiple beneficiaries with interests in a trust asset, paragraphs 23 to 25 of TR 2004/D25 note: 23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. 24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where: • the assets are fungible; • the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and
• there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. 25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. Assets are fungible if each asset matches the same description such that one asset can be replaced with another and if they are of the same type (for example, shares in the same company and with the same characteristics). Fungible assets form a separate class for the purpose of determining the number and type of assets to which each beneficiary is regarded as being absolutely entitled.
While the Trust Fund includes some fungible assets, the Deed of Determination does not provide for any particular asset (fungible or otherwise), nor number of assets to be held for, or allocated to, any particular presumptive beneficiary. The presumptive beneficiaries have a proportional interest in the Trust Fund as a whole, and not in relation to any particular asset of the Trust Fund. The Deed of Determination will therefore not cause a beneficiary to become absolutely entitled to one or more assets of the Trust Fund as against the Trustee and CGT event E5 will not happen when the Trustee enters into the Deed of Determination. Questions 5 and 6 Summary CGT events E6 and E7 will not happen at the time the Deed of Determination is executed by the Trustee. Detailed reasoning Subsection 104-80(1) states that: CGT event E6 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's right, or part of it, to receive ordinary income or statutory income from the trust. Subsection 104-85(1) states that: CGT event E7
happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. When the Deed of Determination is executed, the Trustee will not dispose of any CGT asset of the Trust to any of the Siblings, as presumptive beneficiaries. None of the presumptive beneficiaries will have dominion over any Trust Fund assets, nor will they be able to direct the Trustee to dispose of any assets of the Trust Fund, both prior to, and after the Trustee executes the Deed of Determination. Therefore, neither CGT event E6 under section 104-80 or CGT event E7 under section 104-85 will happen at the time the Deed of Determination is executed by the Trustee. > [1] 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 power contained within the trust's constituent document, or varied with the approval of a relevant court? [2]
For example, the trustee's broad discretionary powers under clause 8 to pay or apply income to any presumptive beneficiary in any amount will no longer be exercisable. [3] Income tax: trust vesting - consequences of a trust vesting . [4] Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to: (a) a mere object; or (b) a default beneficiary? [5] Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997