1 Will the capital gain Trust - Fund A makes from the disposal of the X blocks of land be disregarded under subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 Yes. This ruling applies for the following periods : Year ending XX June 20XX Year ending XX June 20XX The scheme commenced on: XX July 20XX
The Trust was established by Deed of Settlement (Trust Deed) before XX September 19XX. The trustee, appointor and guardian were Company A. Relevant clauses of the Trust Deed include: Clause X - The trustee may at any time and from time to time, with the consent of the Guardian, revoke, add to or vary all or any of the trusts thereinbefore limited and may declare new or other trusts or powers concerning the Trust Fund or any part of parts thereof, Clause Y - The Appointor and if there is no appointor living the legal personal representatives of the last surviving appointor shall be entitled by instrument in writing at any time and from time to time: (a) In their absolute discretion to remove any trustee hereunder or of the Trust Fund; (b) Appoint any additional trustee or trustees hereunder or of the Trust Fund provided always that if and so long as the Appointor is a member of the class of secondary beneficiaries the Appointor shall be eligible to be appointed as trustee hereof. The Trust Deed Schedule includes: - Primary beneficiaries: each of the children of Individual A and Individual B - Secondary beneficiaries:
(a) The primary beneficiaries (b) Each of the children of Individual A and Individual B (c) Each of the children of the persons referred to in the fore going paragraphs (a) and (b) (d) The spouses of the persons referred to in the foregoing paragraphs (b) and (c) (e) The said Individual A (f) The said Individual B (g) Any company in which any one or more of the secondary beneficiaries referred to in the foregoing paragraphs (a), (b), (c), (d), (e) and (f) respectively holds or hold a share or shares (h) Any trust or trusts in existence at the vesting date or such other date on which a benefit passes under the provisions of the Deed under which any one or more of the persons described herein is a beneficiary whether present discretionary or contingent Provided however that the following persons, ......... The Trust acquired X titles of land before XX September 19XX. The Trust acquired Block A after XX September 19XX. Some time later a Deed of Variation was prepared to update the Trust Deed to modern standards. A Deed of Appointment of Separate Trustees ( Trust - FundB )
for separate parts of the trust fund was prepared. A Deed of Appointment of Successor Appointors and Guardians (Trust - Fund B) (Trust - Fund A) was prepared. In MM/YYYY the: • Deed of Variation • Deed of Appointment of Separate Trustees (Trust - Fund B) • Deed of Appointment of Successor Appointors and Guardians Fund B Fund A were assessed for nominal duty. Later, a Deed of Appointment of New Trustee of Trust - Fund B was prepared. A Deed of Declaration of Trust - Trust - Fund A was prepared. The Schedule within the Deed of Declaration of Trust - Trust - Fund A sets out the land which includes the X blocks of land acquired before XX September XXXX. The Trust has prepared financial statements incorporating both the Trust - Fund A and Trust - Fund B. No separate financial statements have been prepared. The changes to the relevant trust deeds were made by the Trustee who has the power to amend the clauses of the Trust Deed under the Trust Deed. The Amending Deeds are within the amendment powers of the Trust Deed and do not enliven any restrictions or limitations on the power of amendment under the Trust Deed Proposed disposal of the land
Trust - Fund A is selling the X titles of land acquired before XX September 19XX and will make a capital gain on their disposal.
Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 subsection 104-10(5) Income Tax Assessment Act 1997 paragraph 104-10(5)(a) Income Tax Assessment Act 1997 section 104-55 Does IVA apply to this private ruling? Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. We have not fully considered the application of Part IVA to the arrangement you asked us
Summary The previous changes and appointments to the Trust will not cause a trust resettlement, nor will they lead to the X blocks of land being settled on terms of a different trust. As such, CGT event E1 in section 104-55 of the ITAA 1997 has not happened in respect to the X blocks of land. CGT event A1 will happen the Trust disposes of the X blocks of land. As the land was acquired before 20 September 1985 the capital gain it will make on their disposal will be disregarded under subsection 104-10(5) of the ITAA 1997. Detailed reasoning Capital gains tax (CGT) event A1 CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997). You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2) of the ITAA 1997). A capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997). CGT event E1
CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997). The time of the event is when the trust over the asset is created (subsection 104-55(2) of the ITAA 1997). Therefore, in order for CGT event E1 to happen, it is required that there be both the creation of a trust and that this be done by way of declaration or settlement. The Commissioner published Taxation Determination TD 2012/21 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 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? (TD 2012/21) following the Court's decision in Commissioner of Taxation v Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark's case ). Whilst Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application.
TD 2012/21 provides that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or CGT event E2 happening 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. Creation of a trust 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. 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, 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. This may occur notwithstanding that the transactional documents executed to effect such a separation do not expressly speak of the asset having been settled on a new trust.
By declaration or settlement The second element necessary for CGT event E1 to happen is that the creation of the trust is by declaration or settlement. 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. 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. A trust is created by way of settlement when property is vested in a trustee for the benefit of others. 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. Trust splitting arrangements The trust splitting arrangements considered 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) stand in contrast with the issues raised by the matters before the Courts in Clark's case and Commissioner of Taxation v Commercial Nominees of Australia Limited [2001] HCA 33. The question posed by a trust split is not whether the original trust has come to an end. Rather, the question is whether the assets transferred to the new trustee are settled on a new trust fund that has been separated from (or carved out of) the original trust fund.
There are many forms of arrangement that can be described as a trust split. For the purposes of TD 2019/14, 'trust split' refers to an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled by and held for the benefit of a subset of beneficiaries, and other trust assets are controlled and held for the benefit of others. A trust split usually involves a discretionary trust that is part of a family group. A common reason given for 'splitting' the trust is to allow different parts of the family group to have autonomous control of their own part of the assets held on trust (that is, their own part of the trust fund). A trust split in this sense will exhibit all or most of the following features: • the trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets • control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries
• a different appointor is appointed in respect of the part of the fund held by the new trustee, the control of the new appointor aligned with the control of the new trustee • the rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee • the expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit one subset of beneficiaries to the exclusion of others. The original trustee is also expected to exercise its powers in respect of the assets held by it independently of the new trustee to benefit instead a different subset again to the exclusion of others. This is so whether the range of beneficiaries that can benefit from particular assets is expressly limited • the rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed • the original trustee and new trustee keep separate books of account
• the new trustee may also seek to apply for a new tax file number and/or Australian business number, and commence to lodge a separate return in respect of the income derived from the assets it holds. A trust split as described in TD 2019/14 will result in the creation of a trust by declaration or settlement as the trustee has new personal obligations and new rights have been annexed to property. This will cause CGT event E1 in subsection 104-55(1) of the ITAA 1997 to happen to the assets transferred to the new trustee. Application to your circumstances The amendment to the Trust Deed in the Deed of Variation to enable the Appointor to appoint a separate trustee for any part of the Trust Fund does not in itself result in a new trust relationship arising. It is a necessary step to enable the future appointment of separate trustees for any part of the Trust Fund, the assets allocated to which are held by those separately appointed trustees. However, the amendment, without more, merely allows for the future appointment of separate trustees, it does not demand that such separate appointments will be made.
In the absence of an exercise of the power to appoint separate trustees, this amendment to the Trust Deed did not, in and on of itself, create new personal obligations or new rights annexed to property. Consequently, the mere amending of the Trust Deed did not cause CGT event E1 in section 104-55 of the ITAA 1997 to happen. The X blocks of land that are being sold and have always been retained in Trust - Fund A (formerly known as Trust A prior to the appointment of the Separate Trustees for Trust - Fund B). In addition, the other amendments to the Trust Deed, the appointment of new trustees, and successor Appointors and successor Guardians of Trust - Fund A are all valid powers under the Trust Deed. As such, these changes and appointments will not cause Trust - Fund A to terminate; nor will they lead to the X blocks of land being settled on terms of a different trust. As such, CGT event E1 in section 104-55 of the ITAA 1997 has not happened in respect to the X blocks of land.
CGT event A1 will happen when Trust - Fund A disposes of the X blocks of land. As the land was acquired before XX September 19XX the capital gain it will make on their disposal will be disregarded under subsection 104-10(5) of the ITAA 1997.