CGT - trust

1 Will CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of executing the proposed documents in relation to a trust?

1 No. Question 2 Will CGT event E2 in section 104-60 of the ITAA 1997 happen as a result of executing the proposed documents in relation to a trust? Answer 2 No. Question 3 Will CGT event E3 in section 104-65 of the ITAA 1997 happen as a result of executing the proposed documents in relation to a trust? Answer 3 No. This ruling applies for the following period: 1 July 20XX to 30 June 20XX The scheme commenced on: DD MM 20XX

Trust X was established by a Deed made on DD MM 19XX in Australia. The Trust is an Australian resident discretionary trust. Individual A is the sole specified beneficiary of Trust X. Other eligible beneficiaries of Trust X include the spouse of Individual A (Individual B) and their children. The Appointer of Trust X is Individual A and Individual B jointly. The Trustee of Trust X is Company A (the Trustee) and has been the Trustee since the Trust was established. Individual A and Individual B are the directors of the Trustee and hold 50% each of the beneficial ownership of the shares on issue in the Trustee. Trust X is an investment entity holding passive investments for the benefit of the beneficiaries. The Trust has a family trust election in place which was made in 20XX. Clause XX of the Trust Deed gives the Trustee general power to amend the Trust Deed. Current powers The Trustee has the power to: •                     Determine the net income of the Trust •                     Allocate the net income of the Trust in the Trustee's absolute discretion to Eligible Beneficiaries in such proportions as the Trustee determines

•                     To accumulate the net income of the Trust •                     To allocate the capital of the Trust in the Trustee's absolute discretion to Eligible Beneficiaries in such proportions as the Trustee determines prior to the Vesting Day •                     Exercise its powers by a resolution of Directors of a sole corporate Trustee and where there is more than one Trustee, decisions are referred to a voting majority The Appointer has the power to: •                     Appoint a new or additional Trustee or remove any Trustee •                     Change the Appointer of the Trust Proposed Action The Trustee proposes to exercise its power to vary the Trust Deed. Subsequent to the execution of the document to vary the Trust Deed, the Trustee proposes to execute another document directing the Trustee and appointing distributors in relation to Trust X. Proposed Documents The purpose of executing the proposed documents is to provide for the succession of Individual A and Individual B by their children. The intention of the amendments is to:

•                     pass the ultimate control of the Trust to the children after their passing or upon the time of 'mental incapacity'; •                     implement strategies in the event of disagreement between the children after their passing or upon the time of 'mental incapacity'; and •                     to divide the decision making for allocations of the income and capital of the trust, to each of the children separately in equal proportions, such that each child will determine which of the Eligible Beneficiaries will be allocated their share. Specifically, the proposed document to vary the Trust Deed has the following effects: •                     Insert new definitions •                     Upon their death or mental incapacity, replacing Individual A and Individual B as the current Appointer of the Trust, with their children. •                     Providing that the children, as the Appointer of the Trust, must act jointly and unanimously in exercising their powers. •                     In the event of a disagreement and deadlock of decision making, matters will be referred to arbitration pursuant to the arbitration law in force in the relevant State.

•                     Providing for further succession of the Appointer role from the children in due course, for example, by allowing the Appointer to be replaced by way of will or deed. •                     The Appointer will have the additional power to direct the Trustee to divide the relevant income or capital into two or more shares (which need not be equal). •                     The Appointer will also have the additional power to appoint (and remove) a person to be the 'Distributor' in respect of a share of the relevant income or capital. •                     Succession of the Distributor role is also provided for, for example, a Distributor can appoint its successor (subject to the Appointer's overriding powers). •                     Where there is no Appointer in office, the Distributors may exercise the powers that would otherwise have vested in the Appointer. •                     The Distributor will have the power to give directions to the Trustee about their share of the relevant income and/or capital. The Distributor has the power to direct the Trustee to distribute its relevant share to such Eligible Beneficiaries in such proportions as the Distributor directs.

•                     Where no such direction is provided, the Trustee continues to have the power to deal with that share as usual. •                     If the Trustee wishes to amend the provisions included in the Deed of Variation in accordance with the general power to amend in Clause XX, it cannot affect the powers of the Distributor then in office unless the consent of both the Appointer and that Distributor is obtained. Following on from, and subject to, the proposed amendments contained in the document varying the Trust Deed, the other proposed document has the following effects: •                     The current Appointer will direct that, on the relevant date, which is the date Individual A and Individual B have either died or suffered mental incapacity, the relevant income and capital will each be divided into X equal shares. •                     On the relevant date, Individual A and individual B appoint their children as the distributors in respect of the X equal shares of relevant income and capital Effect of the Proposed Documents

There are no express changes to the assets of the Trust such that a subset of beneficiaries can benefit from certain assets to the exclusion of others. There are also no expected changes, whether or not express, such that a subset of beneficiaries will benefit from certain assets over others. Trust assets are not intended to be separated. The Trust property remains available to be deployed for the Trust's original purposes and continues to be governed by the terms of the original Trust Deed, as amended. The range of potential beneficiaries entitled to benefit from the Trust (Eligible Beneficiaries) as a whole does not change. The Distributor amendments merely shift the responsibility to allocate income and capital of the Trust from the Trustee to each child separately and equally. The Distributor amendments do not change the indemnity given to the Trustee by the trust. Assumptions The ruling is provided on the assumption that the Trustee has the power to amend the clauses of the Trust Deed as proposed and execute the proposed documents pursuant to the powers contained in the Trust Deed and that these valid changes will be made in the relevant income year.

Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 section 104-65 Further issues for you to consider We have limited our private ruling to the questions raised in your application regarding the tax outcomes related to the proposed amendment to the trust deed. In the day to day management of the trust there may be related issues that you should consider, including: •                     Trust splitting. A '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. Depending on any future

Issue Question 1 Summary The execution of the proposed documents will not result in CGT event E1 happening. Detailed reasoning Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. 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) explains the Commissioner's view at Paragraph 1, that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen 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. For the purposes of this ruling, we have assumed that the execution of the proposed documents will constitute a proper exercise of the powers of amendment contained in the Trust Deed. Trust termination In the explanation and Appendix to TD 2012/21, Paragraph 21 states: Furthermore, 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.

A number of amendments are proposed to be made under the proposed documents. There are a number of minor amendments that do not disturb the fundamental operations of the Trust. For example, providing for the succession of Individual A and Individual B by their children in the Appointer role, allowable under Clauses XX and Clause XX of the Trust Deed. Or, for example, by providing for methods of arbitration in the event that the children cannot reach unanimous agreement in their Appointer role. Operationally, the substantive changes as a result of the proposed amendments are: •                     Individual A and Individual B will direct the Trustee to divide the relevant income or capital (as determined by the Trustee in each successive income year) into XX equal shares. •                     Individual A and Individual B will nominate their children to be a Distributor of each share of the relevant income or capital, as determined by the Trustee in each successive income year. •                     Each child will have control over their share and can direct the Trustee to distribute that share to such Eligible Beneficiaries and in such proportions as that child directs.

These operational changes will have the effect of removing the Trustee's current discretion, to allocate the income and capital of the Trust to Eligible Beneficiaries, and dividing this power of allocation between each of the children equally. Nonetheless, all Eligible Beneficiaries will continue to be capable of consideration for allocation of the income or capital of the Trust by the children, in their absolute discretion. In addition, none of the proposed amendments have the effect of changing the continuity of the property of the Trust, including how that property is shared amongst Eligible Beneficiaries of that Trust property. Despite the operational changes, there remains continuity of the membership of the Trust and continuity of the property of the Trust. It is also an assumption of this ruling that the execution of the proposed documents will constitute a proper exercise of the powers of amendment contained in the Trust Deed. Accordingly, it is our view that the Trust will not terminate upon execution of the proposed documents. Property settled on new trust In the explanation and Appendix to TD 2012/21 Paragraph 27 states:

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. TD 2012/21 further provides at Paragraph 29: ...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

The proposed amendments as contained in the proposed documents do not disturb the continuity of the property of the Trust. None of the amendments have the effect of disturbing the rights or obligations with respect to the assets of the Trust such that they could be said to be now held separately. Accordingly, it is our view that assets have not been settled upon a new Trust, subject to the consideration of whether or not the amendments could be considered to be in the nature of a 'Trust split', which is discussed below. Trust split 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) further explains the Commissioner's view of the application of CGT event E1 in the case of a 'trust split'.

While there are many forms of arrangement that can be described as a trust split, TD 2019/14's reference to a 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 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. A trust split in this sense will exhibit all or most of the following features, as outlined by Paragraph 2 of TD 2019/14: •                     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. The proposed Trust Deed amendments are distinguishable from the trust splitting arrangements of the kind described above in Paragraph 2. Specifically, this arrangement is distinguished because: •                     There are no express changes to the assets of the Trust such that a subset of beneficiaries can benefit from certain assets to the exclusion of others. •                     There are also no expected changes, whether or not express, such that a subset of beneficiaries will benefit from certain assets over others. Trust assets are not intended to be separated. The Trust property remains available to be deployed for the Trust's original purposes and continues to be governed by the terms of the original Trust Deed, as amended. •                     The range of potential beneficiaries entitled to benefit from the Trust (Eligible Beneficiaries) as a whole does not change.

•                     The Distributor amendments merely shift the responsibility to allocate income and capital of the Trust from the Trustee to each child separately and equally. •                     The Distributor amendments do not change the indemnity given to the trustee by the trust. Accordingly, in our view, the execution of the proposed documents does not result in a 'trust split'. Conclusion Our advice is based on the assumption that the execution of the proposed documents will be a valid exercise of the Trustee's power. Consequently, the elements of subsection 104-55(1) of the ITAA 1997 will not be satisfied and CGT event E1 will not happen upon execution of the proposed documents. It is also based on the facts that no changes occur to the indemnity of the trustee. That is if one distributor gives a direction and the trustee implements this direction that the trustee is indemnified from the whole of the trust funds, just not the interest allocated to that distributor. Each is covered by the whole and thereby has not been severed or altered. Question 2 Summary The execution of the proposed documents will not result in CGT event E2 happening. Detailed reasoning

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust. The Commissioner's approach to whether CGT event E2 happens in relation to the variation of a trust deed is contained in TD 2012/21 which is outlined in the detailed reasoning in Question 1 above. In short, the amendments do not have the effect of transferring the assets of the Trust to a new or existing Trust. This is supported by the facts that show that there is no transfer of assets but a catering for how the income and capital can be managed in XX equal shares on a go forward basis as part of the whole. Accordingly, based on the assumption that the execution of the proposed documents will be a valid exercise of the Trustee's power, the elements of subsection 104-60(1) of the ITAA 1997 will not be satisfied and CGT event E2 will not happen upon execution of the proposed documents. Question 3 Summary The execution of the proposed documents will not result in CGT event E3 happening. Detailed reasoning Subsection 104-65(1) of the ITAA 1997 says that CGT event E3 happens if:

(a)           a trust (that is not a unit trust) over a CGT asset is converted to a unit trust; and (b)           just before the conversion, a beneficiary under the trust was absolutely entitled to the asset as against the trustee (disregarding any legal disability the beneficiary is under). The Trust is a discretionary trust. Any potential benefits to be received by the Eligible Beneficiaries is at the discretion of the Trustee and the Trust is not divided into units as discrete parcels of shares. None of the Proposed amendments contained in the proposed documents disturb the discretionary nature of the Trust or result in the Trust being divided into units. Therefore, the Trust is not a 'unit trust' and the proposed amendments will not cause the Trust to become a 'unit trust'. The proposed amendments and instructions contained in the proposed documents will not cause the Trust to become a 'unit trust'. Accordingly, CGT event E3 under subsection 104-65(1) of the ITAA 1997 will not happen upon execution of the proposed documents.