Will the proposed amendments to the Trust Deed of the Trust and the appointment of an additional trustee and additional appointors in respect of a part of the trust fund, result in capital gains tax (CGT) Event E1 in section 104-55 of the Income Tax Assessment Act 1997 [1] or CGT Event E2 in section 104-60 happening?
No. This private ruling applies for the following period: Years ending 30 June 20YY and 30 June 20ZZ The scheme commence on: 1 July 20XX
1. The Trust was established by a trust deed (the Trust Deed). 2. Individual A is the initial trustee (the trustee) named in the Schedule to the Trust Deed and is the current trustee of the Trust. 3. The named beneficiaries of the Trust are A and their spouse. 4. The eligible beneficiaries are: • the parents of the named beneficiaries • the children of the named beneficiaries and their spouses • the grandchildren of the named beneficiaries and their spouses • the brothers and sisters of the named beneficiaries and their spouses • the nieces and nephews of the named beneficiaries and their spouses • the uncle and aunts of the named beneficiaries and their children • companies in which any of the other eligible beneficiaries is a shareholder or director or in which at least one share is owned by any of the beneficiaries • the trustees of any trusts in which any of the other eligible beneficiaries has any interest, including trustee and including an interest that is only expectant or prospective
• partners in any partnership in which any of the other beneficiaries is a partner • schools, universities, colleges and other educational bodies • charities nominated by the trustee • other legal entities nominated by the trustee. 5. Individuals B and C are the parents of A. 6. Individuals D, E and F are the siblings of A. 7. A and B are the initial appointors named in the Schedule and are the current joint appointors of the Trust (appointors). 8. The definition of trustee provides that if there is more than one trustee at any time, then trustee means trustees: Definitions in the Trust Deed. 9. The definition of appointor means the initial appointor (person or persons named in the Schedule) and any person appointed in accordance with the Deed: Definitions in the Trust Deed. 10. The vesting day for the Trust is the first to occur of the perpetuity period (80 years from the date of the Trust Deed) or such earlier date as the trustee determines with the consent of the appointor.
11. Clause X of the Trust Deed provides the trustee with the absolute discretion until the vesting day to decide to distribute any part of the income of the trust fund for a financial year, in any proportions the trustee decides, to any one or more of the persons who are named in the Schedule as beneficiaries or who are members of any of the classes of eligible beneficiaries described in the Schedule. 12. Clause Y of the Trust Deed provides the trustee with the discretion to accumulate income such that it becomes capital of the trust fund and is no longer available to be distributed by the trustee under clause 6 of the Trust Deed. 13. In the event the trustee has failed to exercise their discretion under clause X or Y of the Trust Deed, clause Z provides for the income to be held by the trustee on trust for the persons described in that clause. 14. Before the vesting day, the trustee has the discretion in clause XX of the Trust Deed to distribute any part of the trust fund to a named beneficiary, or a member of the eligible class, such that the amount ceases to be part of the trust fund that the trustee is able to distribute or advance.
15. Clause YY of the Trust Deed provides that before the vesting day the trustee has an absolute discretion to decide to distribute the trust fund in any proportion it decides to any one or more of the persons named in the Schedule as beneficiaries or who are members of the eligible classes. If the trustee fails to exercise the discretion before the vesting day, clause ZZ sets out that the unapplied or undistributed amounts will be held on trust successively for the persons nominated in the clause. 16. Clause XXX of the Trust Deed provides that the trustee has an absolute discretion whether to exercise a power under the deed and how a power is to be exercised. 17. Clause XXY of the Trust Deed provides: The trustee is entitled to an indemnity out of the assets of the trust in respect of any liability incurred in connection with acting as trustee of the trust. This does not apply if the liability arose from fraud, gross negligence or breach of trust on the part of the trustee. 18. This indemnity is in addition to any indemnity the trustee is entitled to by law: clause XYY. 19. The appointor is entitled to:
• remove and/or appoint an additional or replacement trustee in accordance with clauses YYY and YYZ of the Trust Deed • appoint and/or remove an additional or replacement appointor in accordance with clause YZZ and ZZZ of the Trust Deed. 20. Clause XXXX of the Trust Deed provides: The trustee may vary this deed at any time before the vesting day, even to the extent of revoking all the trusts it establishes, but only with the consent of the appointor. The trustee may do so by executing another deed. That deed may reserve this power of variation. Assets of the Trust 21. The main assets of the Trust are: • 1 ordinary unit in the No 1 Unit Trust (the No 1 Unit) • 1 ordinary unit in the No 2 Unit Trust. 22. The trustee of the No 1 Unit Trust owns real property. 23. The trustee of the No 2 Unit Trust owns real property. The proposed arrangements - succession planning
24. B and C have decided that now is an appropriate time for greater responsibility for the administration of the assets of the Trust to be placed on E and F. To this end, they would like partial control of the Trust to be provided to E and F to allow them to work together for the long-term benefit of the family. 25. To achieve the desired succession planning outcomes, the trustee and appointors propose to: • execute a Deed of Amendment amending the terms of the Trust Deed to allow for the appointment of additional trustees in respect of parts of the trust fund • incorporate an Australian proprietary limited company (NewCo) o B, C, E and F will be the directors of NewCo. o B and C will each hold 30 ordinary shares in NewCo. o E and F will each hold 20 ordinary shares in NewCo. • execute a Deed of Appointment of Additional Trustee appointing NewCo as an additional trustee over specific assets of the Trust, being the No 1 Unit • execute a Deed of Appointment of Additional Appointors appointing B and C as additional appointors over the part of the trust fund that NewCo is the trustee
• execute a Deed of Amendment No. 2 amending the Schedule to the Trust Deed so that: o A will be the sole appointor in respect of the part of the trust fund that he is the trustee o E and F will be successor appointors of B and C, in respect of the part of the trust fund that NewCo is the trustee. Proposed key amendments to the Trust Deed 26. It is proposed that a Deed of Amendment for the Trust be executed to vary the provisions of the Trust Deed as follows: (a) Immediately after clause 6, insert the following new clause 6A; "6A. In making a determination about how to distribute the income of the trust fund for a particular accounting period, each trustee of any part or parts of the trust fund must: • take into account the losses incurred by the other part of the trust fund; • ensure that the trustee's proportion of shared expenses of the whole trust fund are paid or accounted for; and • not distribute an amount that exceeds the total net income of the relevant part less losses incurred by each other part of the trust fund.
and for the avoidance of doubt each trustee of any part or parts of the trust fund may exercise the powers under clause 6 in respect of its part of the trust fund." (b) Delete clause 45 and replace with the following: "Removal of trustee 45. The appointor may remove a trustee at any time by signing a statement to that effect. Such power may be exercised by the appointor to completely remove the trustee or to only partially remove the trustee in respect of certain assets of the trust fund." (c) Immediately after clause 46, insert the following new clause 46A: "46A. The appointor may appoint an additional or replacement trustee (or trustees) to any part or parts of the trust fund." (d) Immediately after clause 46A, insert the following new clause 46B; "46B. If at any time trustees are appointed to separate portions of the trust fund, the funds to satisfy any right of indemnity the trustee seeks to rely on must first be drawn from the portion of the trust fund controlled by the trustee claiming the benefit of the right of indemnity." (e) Delete clause 50, and replace with the following: "Appointor may appoint appointor
50. The appointor may appoint a person as an additional or replacement appointor including in respect of parts of the trust fund held by different trustees. The appointor may do so by deed subject to any conditions. For the avoidance of doubt, if there is more than one appointor in respect of a part or parts of the trust fund, then each appointor may only exercise their powers under this deed in relation to their respective part or parts of the trust fund." (f) Delete clause 73, and replace with the following new clause 73: "Trustee to act reasonably 73. Each trustee must at all times act reasonably and use its best endeavours to do all things reasonably necessary to allow the other trustee to fully act as trustee for its relevant part of the trust fund." (g) Delete clause 74 and insert the following: "More than one trustee 74. While the trust fund will still exist as one fund, any trustee appointed as trustee for a separate part of the trust fund may act severally for that part of the trust fund held on trust by the Trustee, provided that for: • any actions specified in clause 75 of this deed, the prior written consent of all separate trustees must be obtained; and
• matters which one trustee reasonably considers the agreement of all trustees is required, including but not limited to: o selecting an accountant for preparation of the tax return for the trust; o incurring joint expenses of the trust; o amending this deed; o determining an earlier Vesting day for the Trust, all separate trustees must act together, and • if there are two or more trustees in respect of the trust fund, and there is any deadlock in reaching any decision, then despite any other provision of this deed or general law, the decision of the trustee which holds assets of the greatest value in the trust fund at the time of the deadlock prevails, and that trustee may implement their decision forthwith including but not limited to executing any documents for the trust, and the other trustee must take all necessary steps to give effect to that decision." (h) Delete Clause 75 and replace with the following: "Matters requiring Trustee Consent 75. The following actions of the trustee require the consent of all trustees of the trust: • Incurring a debt of over $100,000; • Granting security over any assets of the trust;
• Carrying on an active business." 27. Clause 6A of the Trust Deed is intended to allow each trustee to deal with the net income of their respective asset pool but in doing so they must have regard to joint expenses of the Trust and any losses incurred by the trustee of other parts of the trust fund. Proposed Deed of Appointment of Additional Trustee 28. The proposed Deed of Appointment of Additional Trustee appoints NewCo as an additional trustee over the No 1 Unit and removes A as trustee of the No 1 Unit. Proposed Deed of Amendment of Additional Appointors 29. The proposed Deed of Appointment of Additional Appointors will be executed by A and B in their capacity as joint appointors of the Trust. In this proposed deed, A and B will appoint B and C, jointly, as additional appointors in respect of the appointment of NewCo as additional trustee (or any successor to NewCo) and declare that A and B will separately remain the appointors of the Trust in respect of the assets that are held by A as trustee (or any successor to him). Proposed amendments to the Schedule of the Trust Deed
30. Following the above steps, it is proposed that a Deed of Amendment No 2 for the Trust be executed to vary the provisions of the Trust Deed as follows: (a) Delete the description of Appointor in the definitions section and replace with: "Appointor means successively the person or persons named, described or defined as such in the Schedule or as otherwise determined according to the provisions hereof." (b) Delete the description of "Name of the Appointors" in the Reference Schedule in its entirety and replace with the following new description: "Appointor: 1A. A, in respect of assets held by A as trustee for the trust (or a successor trustee). 1B. After the death of A, the Appointor shall be such person or succession of persons, if any, as A may nominate by deed or will in substitution for himself or as a successor to himself (whether for a limited or unlimited period of time), whether revocable or irrevocable, and in the absence of such nomination, then his legal personal representative, in respect of the assets previously held by A as trustee for the trust (or held by a successor trustee).
2A. B and C, jointly, in respect of assets held by [NewCo] as trustee for the Trust (or a successor trustee). 2B. After the death of the survivor of B and C, the Appointor shall be E and F, jointly in respect of assets held by [NewCo] as trustee for the trust (or a successor trustee). 2C. After the death of E or F, the Appointor shall be such person or succession of persons, if any, as E or F (as the case may be) may nominate by deed or will in substitution for herself or as a successor to herself (whether for a limited or unlimited period of time), whether revocable or irrevocable, and in the absence of such nomination, then the legal personal representative of the relevant deceased person, along with the other remaining survivor (if any) or their successors (as the case may be), jointly, in respect of the assets held by [NewCo] as trustee for the trust (or held by a successor trustee)." In the event that E or F or their successors (as the case may be), are unable to agree on a matter as appointors in respect of the assets held by [NewCo] as trustee for the trust (or a successor trustee), then the matter must be referred for determination to Lawyer."
Operation of the Trust after the changes 31. The proposed arrangements will only impact the administration of the Trust to facilitate orderly succession planning for the continued benefit of the whole family. 32. There is no desire to limit the potential beneficiaries who could benefit from the income or capital of the Trust, nor is there any intention to limit the definition of beneficiary class. 33. Following the amendments, it is intended that each trustee will be the sole trustee over their respective asset pool. Each trustee will be empowered to exercise their rights and discretions in respect of their asset pool under the Trust Deed. 34. The Trust Deed provides that trustees will need to come together for particular purposes to allow for the proper administration of the Trust. Consistent with this: • one set of accounts will be kept for the Trust • one tax return will be prepared for the Trust. 35. This scheme description incorporates, and should be read with the following documents provided by the Applicants: • the Trust Deed • the proposed Deed of Amendment
• the proposed Deed of Appointment of Additional Trustee • the proposed Deed of Appointment of Additional Appointors • the proposed Deed of Amendment No 2. A ssumptions 36. The execution of the proposed Deed of Amendment and the proposed Deed of Amendment No 2 are within the power conferred on the trustee by the Trust Deed. 37. There is no expectation that the existing trustee will exercise their powers in respect of the assets held by them to only benefit a subset of the beneficiaries to the exclusion of others. 38. There is no expectation that the new trustee will exercise its powers in respect of the assets held by it to only benefit a subset of beneficiaries to the exclusion of others. 39. There are no further steps in the proposed arrangement.
Issue 1 Question 1 Will the proposed amendments to the Trust Deed of the Trust and the appointment of an additional trustee and additional appointors in respect of a part of the trust fund, result in CGT Event E1 in section 104-55 or CGT Event E2 in section 104-60 happening? Summary The proposed amendments to the Trust Deed of the Trust and the appointment of an additional trustee and additional appointors in respect of a part of the trust fund, will not result in CGT Event E1 or CGT Event E2 happening. Detailed reasoning CGT Event E1 1. CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55). 2. In order for CGT event E1 to occur, it is required that there be both the creation of a trust and that this be done by way of declaration or settlement. [2] 3. The phrase "you create a trust over a CGT asset" is to be understood by reference to the general law of trusts. [3] 4. In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [4] Hope JA analysed the 'very nature of a trust' in terms of a personal obligation of a trustee annexed to property to hold the property for the benefit of another. [5]
5. In order to 'create' a trust, there must be a creation of both elements of a trust; that is, a creation of personal obligations and a creation of rights annexed to property. 6. 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 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 that asset has been settled on terms of a different trust. 7. Notwithstanding that an existing trust estate may not have come to an end and the entirety of the trust fund settled on terms of a new trust [6]
, as recognised in TD 2012/21, it is possible for assets to be settled on a new trust estate that has been separated from (or carved out of) the original trust fund. [7] This may occur even though that the transactional documents executed to affect such a separation do not expressly speak of the asset having been settled on a new trust. 8. The decision of the Supreme Court of South Australia in Dyda P/L & Anor v Commissioner of State Taxation [8] ( Dyda ), albeit concerned with a different legislative regime, is instructive in this context. 9. In Dyda the Supreme Court of South Australia considered whether a series of steps to transfer control of a real property to the Dyda group gave rise to a stamp duty liability. The land in question was held in a unit trust, the Woodville Property Trust. Units in this trust were held by two family trusts, the Meeuwissen Family Trust and the Young Family Trust.
10. The transfer of the control of the real property was affected through a series of steps. First, Dyda Pty Ltd was appointed as trustee of the part of the trust assets of the Woodville Property Trust which comprised the real property. This part of the trust was to be known as the Burleigh Avenue Trust. The trust deed was amended to allow for a new type of units, funding units, which could receive income in priority to all existing units. Dyda Nominees was appointed as trustee to part of the Meeuwissen Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 2. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 2. Similarly, Dyda Nominees was appointed as trustee to part of the Young Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 3. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 3.
11. The appellants argued that upon appointment of the new trustee, no rights were conferred in relation to the trust property. The rights remained as they were because the same persons remained objects and beneficiaries of the discretionary trusts. 12. Stanley J rejected the arguments of the appellants. At paragraphs [143] - [144] he concluded as follows: [9] 143. The appointment of Dyda Nominees as trustee of the Burleigh Avenue Trust No. 2 and No. 3, was in each case, effectively the resettlement of the units under a new trust rather than the appointment of a new trustee to existing trusts. The requisite continuity of the trust did not exist.
1.44 The continuity of trusts was broken because of the transfer of control of these two discretionary trusts to the Dyda group, which occurred on 8 March 2007. This was achieved by the appointment of Dyda Nominees as the trustee, and by the appointment of John Dyda as the appointor and guardian under the trusts. In his capacity as guardian, John Dyda could control the distributions of some income and of all of the capital of the trusts. A member of the class of potential beneficiaries of the trusts who was not a member of the Dyda group could not realistically expect ever again to receive any distributions under the trusts. This conclusion is reinforced by the granting of the indemnities. Accordingly, Dyda Nominees acquired an absolute interest in the ordinary units. 13. Dyda demonstrates that in particular circumstances the appointment of different trustees and appointors over specific trust assets can cause those assets to be settled on terms of a new trust.
14. The Commissioner's view on the potential capital gains tax implications of a 'trust split' is contained in TD 2019/14. For this determination, a trust split is defined as an arrangement which generally involves the transfer of some of the assets of the original trust to a new trust fund that has been separated, or carved out of, the original trust fund. [10] The purpose of such arrangements is directed to separating the functional operation of the trust. It is put into place with the intention of: • separating those who control and can benefit from part of the trust corpus transferred to the new trustee from those who control and benefit from the remaining assets held by the original trustee • removing the fiduciary obligations of the original trustee in relation to the assets transferred to the new trustee • removing the entitlement of the original trustee to be indemnified out of the transferred assets for expenses incurred after the introduction of the new trustee
• ensuring that the new trustee will have no fiduciary obligations in respect of the assets retained by the original trustee and will have no right to be indemnified from those assets. [11] 15. Example 2 in TD 2019/14 is illustrative of a scenario that the Commissioner does not conclude is a 'trust split' as described in the Determination. In the circumstances in that example, the arrangements are designed to enable one of the family members to take greater responsibility for part of the business of the trust and administration of that part of the fund, however: • the identity of those who controlled the existing trustee remains unchanged • all beneficiaries are entitled and expected to benefit from the trust as whole • the amended trust deed: o requires all trustees to act together in respect of decisions that one trustee reasonably believes requires agreement of all the trustees, including selecting an accountant to prepare the tax return, incurring joint expenses, amending the trust deed and changing the vesting date
o when making decisions to distribute the net income of the fund, the trustees of each part are required to take account of the losses incurred by the other parts of the trust fund and expenses of the trust as a whole o gives each trustee recourse to all of the trust assets where the assets held by that trustee are insufficient to fully satisfy its right to be indemnified • each trustee keeps separate accounts in respect of the assets they hold, but the results are consolidated for the entire trust fund and a single tax return is prepared for the trust as a whole. By declaration or settlement 16. The second element necessary for CGT event E1 to happen is that the creation of the trust is by declaration or settlement. 17. A trust is created by declaration within the meaning of subsection 104-55(1) when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property. [12] Transactional documentation that evidences an express intention to hold the transferred assets subject to the terms of the trust deed, may suffice to create a trust over those assets by declaration.
18. A trust is created by settlement when property is vested in a trustee for the benefit of others. [13] A transfer of existing trust property to, and the vesting of this property in, a new trustee for the benefit of others can satisfy the description of the creation of a trust by settlement. [14] Application to your circumstances 19. In order to determine whether CGT event E1 happens, it is necessary to consider whether the proposed steps would have the effect of creating a trust over a CGT asset by declaration or settlement (subsection 104-55(1)). 20. The question under consideration is not whether the Trust will come to an end, but whether the assets transferred to the new trustee is settled on a new trust fund that is separate and distinct from the existing Trust. 21. The proposed arrangements are distinguishable from the factual circumstances in Dyda and the trust splitting arrangements of the kind described in TD 2019/14.
22. Although part of the trust fund will have a new and distinct corporate trustee and one of the existing trustees will be removed as trustee over the remaining part, the new corporate trustee and the remaining existing trustee will be bound by the terms of the Trust Deed that: • requires all trustees to act together in respect of decisions that one trustee reasonably believes requires agreement of all the trustees, including: o selecting an accountant to prepare the tax return o incurring joint expenses o amending the trust deed o changing the vesting date • requires all trustees to consent to the following actions: o incurring a debt over $100,000 o granting security over any assets of the Trust o and carrying on an active business • requires the trustees of each part, when making decisions to distribute the net income of the fund, to take account of the losses incurred by the other parts of the trust fund and expenses of the trust as a whole • gives each trustee recourse to all of the trust assets where the assets held by that trustee are insufficient to fully satisfy its right to be indemnified.
23. Further, the tax reporting and accounting for the parts will be on a consolidated basis. 24. There is no intention to limit the potential beneficiaries who could benefit from the income or capital of the Trust, nor is there any intention to limit the definition of beneficiary class. 25. Furthermore, in accordance with the assumptions, there is no expectation that the remaining original trustee or the new trustee will exercise their powers in respect of the assets held by them to only benefit a subset of the beneficiaries to the exclusion of others. 26. Considering these elements together with the other elements of the proposed arrangement, it cannot be concluded that the assets to be transferred to the new trustee will have been subjected to a new charter of personal obligations and rights. The Trust will continue as one trust albeit with a new trustee in respect of part of the trust fund.
27. Consequently, the implementation of the proposed arrangement, as outlined in paragraphs 24 to 39 of the Ruling, and without any additional steps or transactions undertaken sometime in the future, will not result in a new trust being created. CGT event E1 will not occur and subsection 104-55(1) will not be satisfied. CGT Event E2 28. CGT event E2 happens if you transfer a CGT asset to an existing trust (section 104-60). 29. As concluded above, the assets will continue to be held under the same trust albeit that part of the trust fund will be held by a new trustee. There is no transfer of assets to an existing trust. 30. Therefore, CGT Event E2 will not happen. > [1] All future legislative references are to the Income Tax Assessment Act 1997 , unless otherwise stated. [2] The Commissioner's view on whether a 'trust split' arrangement will cause CGT event E1 to happen is set out in
Taxation Determination TD 2019/14 Income Tax: Will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? (TD 2019/14). [3] FC of T v Bamford [2010] HCA 10 at [36] [4] [1980] 1 NSWLR 510 at 518-519. [5] This analysis is similar to that expounded in Jacobs Law of Trusts . [6] A critical point underlining the decisions in FC of T v Commercial Nominees of Australia Ltd [1999] FCA 1455; [2001] HCA 3 and Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550. [7] See for example C of SR (Vic) v. Lam and Kym Pty Ltd (2004) 10 VR 420; Oswal v. FC of T [2013] FCA 745. [8] Dyda P/L & Anor v Commissioner of State Taxation [2013] SASC 156. [9] [2013] SASC 156 at paragraphs 143-144. [10]
Taxation Determination TD 2019/14 Income Tax: Will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? paragraph 36. See for example C of SR (Vic) v Lam and Kym Pty Ltd (2004) 10 VR 420; Oswal v FC of T [2013] FCA 745. [11] Taxation Determination TD 2019/14 Income Tax: Will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? paragraph 47 [12] Kafataris v. DC of T (2015) 243 FCR 291 at [26] ( Kafataris ). [13] Taras Nominees Pty Ltd v. FC of T (2015) 228 FCR 418 at [5]; Kafataris at [31]. [14] ibid, paragraphs 36 and 37.