1 If the Proposed Amendments to the Constitution of the Trust ( the Constitution ) are made, will the Trust be a "fixed trust" (as that term is defined in section 272-65 of Schedule 2F to the Income Tax Assessment Act 1936 ( ITAA 1936 ))?
1 No. Question 2 If the answer to Question 1 is "No" and the Proposed Amendments to the Constitution are made, will the Commissioner exercise their discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the beneficiaries to have fixed entitlement to the income and capital of the Trust? Answer 2 Yes. Question 3 Will the Proposed Amendments to the Constitution, if made, effect a resettlement of the Trust such that CGT Event E1 (section 104-55 of the Income Tax Assessment Act 1997 ( ITAA 1997 )) happens? Answer 3 No. Question 4 Will a reclassification of the existing class of units in the Trust ( the Reclassification ) result in CGT event A1 (section 104-10 of the ITAA 1997) happening? Answer 4 No. Question 5 Will the Reclassification end the ownership of an intangible CGT asset for the purposes of CGT event C2 (section 104-25 of the ITAA 1997)? Answer 5 No. Question 6 Will the Reclassification result in CGT event D1 (section 104-35 of the ITAA 1997) happening to the Trustee of the Trust? Answer 6 No. Question 7 If the answer to Question 6 above, is "Yes", will the Trustee of the Trust make a capital gain or capital loss? Answer 7
Not applicable as the answer to Question 6 is "No". This ruling applies for the following period : 1 July 20xx to 30 June 20xx The scheme commenced on: 1 July 20xx
1. The Trustee is the responsible entity and trustee of theTrust. 2. The Trust is constituted by a trust deed (the Constitution). 3. The Trust is a registered managed investment scheme for the purposes of section 601EB of Chapter 5C of the Corporations Act 2001 (Corporations Act). 4. The Trust is a "resident trust estate" for the purposes of subsection 95(2) of the ITAA 1936. 5. The Trust is a "resident trust for CGT purposes" for the purposes of subsection 995-1 of the ITAA 1997. 6. The Trust is a "managed investment trust" (MIT) for the purposes of section 275-10 of the ITAA 1997. 7. A choice under section 275-115 of the ITAA 1997 covering the Trust is in force. 8. While a MIT capital account election is in force, the Trust does not qualify at the present time as a withholding MIT for the purposes of Subdivision 12-H of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953). 9. The assets of the Trust vest in the Trustee on trust for the unitholders for the term of the Trust. The Trustee manages the Trust's assets.
10. The beneficial interest in the Trust is dividend into Units. 11. The Trustee creates and issues Units at a price referred to as the "Issue Price". 12. Units offered in the same class have the same subscription price and the amount of units offered is proportionate to their unit value. 13. The interest conferred by Units does not confer any interest in any particular part of the Trust or in any of its assets. 14. The Trust currently has only one class of units. 15. The Trustee collects all income of the Trust. The Trustee decides whether an item is income or capital. It pays the expenses and distributes income to unitholders. 16. All units rank for distribution equally. 17. The definition of "Unit Value" will be amended under the Proposed Amendments to distinguish valuation methods for when there is more than one class, where, if there is more than one class, dividing Class Net Asset Value for that Class rather than the Trust's Current Value.
18. Paragraph 601GC(1)(a) of the Corporations Act provides that the constitution of the registered scheme may be modified or repealed and replaced by a new constitution by a special resolution of the members of the managed investment scheme (Special Resolution). The proposed amendments 19. The Trustee has proposed that the Constitution be amended (the Proposed Amendments), which are in the form of a supplemental deed poll. 20. The Proposed Amendments are set to become effective in accordance with a Special Resolution pursuant to paragraph 601GC(1)(a) of the Corporations Act. 21. If the Special Resolution is passed, the Trustee will execute a deed substantially in the form of a Supplemental Deed Poll to give effect to the Special Resolution and make the Proposed Amendments to the Constitution. 22. Broadly, the Proposed Amendments are intended to enable the Trustee to: a. Reclassify existing units in the Trust to another class of units in the Trust for the purpose of imposing differential management fees; b. Make an attribution MIT (AMIT) election for the purposes of the ITAA 1997;
c. Facilitate classes of units to be listed in the future, as well as other changes of an administrative nature; d. Engage in market making activities to sell Class 2 Units, being units that are officially quoted for trading on a stock exchange or other market that is a member of the World Federation of Exchanges ( Recognised Market ). 23. The Trust may elect to become an AMIT if it is eligible to make the AMIT election after considering all the relevant facts and circumstances. 24. Subject to the law or regulatory intervention, the Trustee can, in its absolute discretion, agree at the price at which it offers or agrees to buy Class 2 Units on market. 25. The Class 2 Units that are officially quoted to be traded on market can be used to participate in CHESS. 26. Class 2 Unitholders may request redemption. 27. Unitholders may exchange their units to other trusts where the Trustee may be able to determine if unitholders have elected for the exchange.
28. Under the Proposed Amendments, the current value or class net asset value of the Trust's assets will be market value, unless otherwise determined. 29. The Trustee may terminate a class of units. The Reclassification 30. The reclassification process will broadly involve the following steps to be taken by the registrar: a. The registrar will record the Reclassification in its registry system as a "switch" from the existing class of units to the new class of units comprising: i. a "switch out" of the existing class of units; and ii. a "switch in" to the new class of units b. the total dollar amount of money invested by the unitholder would not change following the reclassification c. a switch transaction confirmation statement showing the "switch out" and "switch in" will be issued to the unitholder, and d. the register of unitholder will be updated to reflect the classes of units on issue following a reclassification. 31. If the Proposed Amendments are made and the Trustee exercises its power to reclassify units from one class of units:
a. No consideration, compensation or new property will be provided by the unitholders to the Trustee; b. No consideration, compensation or new property will be provided by the Trustee to the unitholders; c. The unitholders will not incur any incidental costs; and d. The Trustee will incur nil or minimal incidental costs, on the reclassification of units. 32. The Reclassification will not result in any change in the current rights or entitlements of the units held by the existing unitholders, apart from the differential management fees imposed by the Trustee. 33. The reclassification will not cause a legal and beneficial change in ownership of the units being held by the taxpayer. 34. If the Proposed Amendments are made, and the Trustee exercises its reclassification power pursuant to the Amended Constitution, under that clause, the Trustee must be requested or seek the unitholder's consent to re-classify units of one class to another. This reclassification must be recorded in the register. Other
35. The defeasible powers contained in the Constitution have not been exercised to defease any of the requisite interests of the unitholders. 36. The Trustee has not and will not exercise these powers under the Deed to defeat a unitholder's interest in the income or capital of the Trust. 37. The Trustee will ensure that units will only be transferred for market value. 38. Units have been and will only be redeemed at the request of a unitholder. 39. Units have been and will only be reclassified at the request or with the consent of the unitholder. 40. Units will be issued, redeemed, transferred or transmitted for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 - i.e. on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16. 41. The Trustee and unitholders are dealing on an arm's length basis.
42. No arrangements have been or will be entered into that would result in section 272-35 in Schedule 2F to the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion.
Income Tax Assessment Act 1936, Schedule 2F, section 272-65 Income Tax Assessment Act 1936, Schedule 2F, section 272-35 Income Tax Assessment Act 1936, Schedule 2F, section 272-5 Income Tax Assessment Act 1997, section 995-1 Income Tax Assessment Act 1997, section 108-5 Income Tax Assessment Act 1997, section 104-55 Income Tax Assessment Act 1997, section 104-35 Income Tax Assessment Act 1997, section 104-25 Income Tax Assessment Act 1997, section 104-10 Income Tax Assessment Act 1997, section 100-20
Question 1 If the Proposed Amendments to the Constitution are made, will the Trust be a 'fixed trust' as defined in section 272-65 of Schedule 2F to the ITAA 1936?? Summary The Trust will not be a fixed trust as defined in section 272-65 of Schedule F to the ITAA 1936. Detailed reasoning A 'fixed trust' is defined in subsection 995-1(1) of the ITAA 1997, and section 272-65 of Schedule F to the ITAA 1936. That definition provides that: A trust is a fixed trust if persons have fixed entitlements to all of the income and capital of the trust. The definition of 'fixed entitlement' in subsection 995-1(1) of the ITAA 1997 provides that 'an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936 .' Subsection 272-5(1) of the ITAA 1997 provides that: If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.
Meaning of the words 'vested and indefeasible' The terms 'vested and indefeasible' are not defined in the ITAA 1936 or ITAA 1997. The Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 (EM) discusses the nature of a 'vested interest': 13.4 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a 'contingent' interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead 'contingent' upon the event occurring.
13.5 In traditional legal analysis, a person can be said to be either 'vested in possession' or 'vested in interest'. A present interest, i.e. one that is being enjoyed, is said to be 'vested in possession'; a future interest, i.e. one which gives its holder a present right to a future enjoyment, is said to be a 'vested interest'. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, 'vested' includes both vested in possession and vested in interest. 13.6 Because vested interests include future interests, a person can have a vested interest in a thing even though the person's actual possession and enjoyment of the thing is delayed until some time in the future. This is reflected in paragraph 13 of the Practical Compliance Guideline PCG 2016/16 Fixed entitlements and fixed trusts (PCG 2016/16). The term 'indefeasible' is not defined in the tax legislation, however, broadly speaking, an interest is generally indefeasible where it 'cannot be terminated, invalidated or annulled' (see Colonial First State Investments Limited v Commissioner of Taxation
[2011] FCA 16, paragraph [97]). The EM also addresses when a vested interest is indefeasible: 13.7 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiary's vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement. PCG 2016/16 further explains where a vested interest may become defeasible at paragraphs 15 and 16. 'Vested and indefeasible', for the purposes of Schedule 2F to the ITAA 1936, has not been judicially considered, other than in the limited context of amending the constitution of a registered MIS under section 601GC of the Corporations Act: see Colonial First State Investments Ltd v. Commissioner of Taxation [2011] FCA 16; (2011) 192 FCR 298; 81 ATR 772; ATC 20-235. Application to the Trust
The Proposed Amendments involve the unitholders agreeing to amendments of the Trust's Constitution, a registered MIS, under section 601GC of the Corporations Act. Vested interests 'Trust instrument' It is an essential element of subsection 272-5(1) of that, in order to have a fixed entitlement to a share of income or capital, there must be a vested or indefeasible interest 'under a trust instrument'. The determining factor in deciding whether fixed entitlements exist will be the terms of the trust instrument under which the trust is constituted. Neither the form of the trust nor the labels that are attached to it can determine this question. For the purposes of subsection 272-5(1), the Commissioner accepts that a 'trust instrument' includes: ...a deed or constitution as supported by documentation such as a Product Disclosure Statement, Investment Memorandum or other document that modifies or supplements the terms of the trust set out in the deed or constitution. For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument is the Trust's Constitution (as amended by the Proposed Amendments).
For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, it is accepted that the Constitution (as amended by the Proposed Amendments) provides beneficiaries with a vested interest in the income and capital of the trust. Power to amend without unanimous beneficiary approval For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the fact that a power held by the Trustee has not yet been exercised is not relevant when determining if the power results in an interest being defeasible: see Colonial First State Investments Ltd v Commissioner of Taxation [2011]. The key question is whether the power, if exercised, would result in a defeasance of some or all of a beneficiary's rights to the income and/or capital of the trust. The power to amend a trust deed without unanimous beneficiary approval is a defeasible power ( Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16 at [97] and [105] - [106]).
Therefore, the power to amend by special resolution, which is able to be exercised in relation to the Trust because of paragraph 601GC(1)(a) of the Corporations Act, to implement the Proposed Amendments means the Trust is not a "fixed trust" for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936 as the interests of beneficiaries in income and capital of the trust are defeasible. Question 2 If the answer to Question 1 is "No" and the Proposed Amendments to the Constitution are made, will the Commissioner exercise their discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to deem the beneficiaries to have fixed entitlement to the income and capital of the Trust? Summary The Commissioner will exercise their discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat all the beneficiaries of the Trust as having fixed entitlement for the purposes of the trust loss provisions. Detailed reasoning
Paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 stipulates that the Commissioner may treat a beneficiary as having a fixed entitlement (in cases where in fact beneficiaries do not have a fixed entitlement) by having regard to key matters that the Commissioner takes into account in deciding whether to exercise the discretion. That provision states: (3) If: (a) a beneficiary with an interest in a share of income that the trust derives from time to time, or of the capital of a trust, does not have a fixed entitlement to the share; and (b) the Commissioner considers that the beneficiary should be treated as having the fixed entitlement, having regard to: (i) the circumstances in which the entitlement is capable of not vesting or the defeasance can happen; and (ii) the likelihood of the entitlement not vesting or the defeasance happening; and (iii) the nature of the trust; the beneficiary has the fixed entitlement. PCG 2016/16 provides factors favourable and unfavourable for when exercising the discretion at paragraphs 55 and 56. Application to the Trust Paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936:
The Constitution provides the unitholders with vested interests in a share of the income that the Trust derives from time to time and a share of the capital of the Trust. Each unitholder of the Trust does not, however, have a fixed entitlement to the share of income and capital in the Trust. As a result, paragraph 272-5(3)(a) of Schedule 2F to the ITAA 1936 is satisfied. Subparagraph 272-5(3)(b)(i) of Schedule 2F to the ITAA 1936: PCG 2016/16 explains what circumstances to consider when applying this subparagraph at paragraphs 29 and 30. In relation to the circumstances in which the entitlement is capable of not vesting or the defeasance happening, the following factors are relevant: • Issue of units:
The Trustee may issue more than one class of units under the Proposed Amendments. The units will only be issued for a price determined on the basis of the Net Asset Value (or Class Net Asset Value) of the Trust at the time of issue. As such, the saving rule in paragraph 272-5(2)(d) would be satisfied. Unitholders would have the same rights to receive the income and capital of the trust in their respective class (apart from the difference in management fees). We considered that if all the Proposed Amendments took effect, no unitholders would be deprived of their proportionate share of the income or capital of the Trust. The Trust has not issued any units with a discretionary entitlement to income or capital. • Redemption of units: During the Ruling period, Units have been or will only be redeemed at the request of a unitholder. The redemption price has been or will be determined on the basis of the Net Asset Value (according to Australian accounting principles) of the Trust at the time of redemption. • Transfer of units:
The Trustee may make an offer to redeem or transfer unitholders for the issue or transfer of units in another trust (or interests of whatever nature in or in relation to another entity or scheme). The Trustee may determine when the offer is to be accepted or deemed to be accepted. The Trustee has stated that units have been and will only be redeemed at the request of a unitholder or with the consent of the unitholder. The Trustee will ensure that units will only be transferred for market value. The Commissioner accepts that relevant facts and circumstances confirm that, while the Trustee has stated that it would not act to defeat its beneficiary's interests, there are circumstances in which the beneficiaries' interests in the income and capital of the Trust can be defeated, however there are limitations. Subparagraph 272-5(3)(b)(ii) of Schedule 2F to the ITAA 1936: When considering the likelihood
of the interest not vesting or being defeated, the Commissioner must form a view as to the probability that the contingency or defeasance will happen. Where the likelihood of the contingency happening is high or the action or event of defeasance occurring is low, this will weigh towards a favourable exercise of the discretion. Where the trustee or manager of the trust has a particular power to defeat a beneficiary's interest, it is relevant to consider how often, if at all, they have exercised that power over a relevant period. Any preconditions or caveats that affect the likelihood of a beneficiary's interest not vesting or being defeated are also relevant. In relation to the likelihood of the entitlement not vesting, or the defeasance happening, the following factors are relevant:
• The Trustee's behaviour from the time the Trust was settled to the date of this ruling application is relevant. It is noted that defeasible powers contained in the Constitution have not been exercised to defease any of the requisite interests of the unitholders. The Trustee has stated that it will not exercise its powers to defease such requisite interests. The Trustee also deals with the beneficiaries on an arm's length basis. • In respect of the Ruling period, having regard to the relevant facts and circumstances, the Trustee has exercised or may exercise its powers under the Constitution such that: o There may be more than one class of units that will be issued, for example, Class 2.
o Units may be reclassified. The amendment to give the Trustee the power to reclassify units from one class to another class (so as to charge different management fees) should be considered in light of the discretion. However, under the Proposed Amendments, the Responsible Entity may only do so at the request of, or with the consent of, a Member. If unit holders request, or consent to, the reclassification, of their units, they can choose to subject themselves to adverse consequences. o Units will only be transferred or redeemed at the request of a unitholder, except where the Trustee will deem an offer to be accepted with the Class 2. o Units will be issued or redeemed for a price determined on a basis that satisfies the 'savings rule' in subsection 272-5(2) of Schedule 2F to the ITAA 1936 - i.e. on the basis of the Trust's net asset value, according to Australian accounting principles, at the time of the issue or redemption having regard to paragraph 19 of the PCG 2016/16.
The Trustee has never exercised these powers under the Deed, and will not to do so for the Ruling period to defeat a unitholder's interest in the income or capital of the Trust. Consequently, the Commissioner would accept that the likelihood of the beneficiaries' interests in the income and capital of the Trust being defeated would be low. Subparagraph 272-5(3)(b)(iii) of Schedule 2F to the ITAA 1936: The nature of the trust refers to its basic legal characteristics and its economic function, both actual and intended. Under paragraph 34 of PCG 2016/16, the ability of the trustee or manager of the trust to adversely affect the interests of beneficiaries could be limited where: • additional responsibilities are placed on the trustee by legislation, most commonly as a registered managed investment scheme under Chapter 5C of the Corporations Act 2001 ; • contractual restrictions limit the trust manager's access to trust assets;
• the trust is subject to industry regulations, licensing or registration requirements, which are legally enforceable, such as the Australian Securities Exchange (ASX) Listing Rules which are enforceable against listed entities and their associates (sections 793C and 1101B of the Corporations Act 2001 ); • commitments are made in a product disclosure statement, investment memorandum or other document to exercise powers in a particular (restrictive and/or non-adverse) way; • the trust deed restricts the ability of the trustee to issue and redeem units at anything other than market value or other values approximating net asset value, or • the unanimous (100%) approval of the beneficiaries is required prior to the exercise of a power capable of defeating a beneficiary's interest by the trustee or manager. In relation to the nature of the trust, the following factors are relevant:
• The Trust is a unitised trust; however, the Units could be publicly listed on an approved stock exchange and the Trust is a registered managed investment scheme. Therefore, the circumstances and likelihood in which each unitholder's entitlement is capable of not vesting or the defeasance happening is reduced in this Trust. • The purpose of establishing the Trust is to allow the unitholders to derive income/profits from the investments made by the Trust. • The Trustee is required to hold an Australian Financial Services Licence in order to act as Trustee of this Trust and therefore subject to Australian financial services regulations. • The Trustee has stated that units have been and will only be redeemed at the request of a unitholder or with the consent of the unitholder. • Under the Proposed Amendments, the current value or class net asset value of the Trust's assets will be market value, unless otherwise determined.
The Commissioner accepts that in these circumstances the ability of the Trustee to adversely affect the interests of beneficiaries is limited as the parties are dealing on an arm's length basis and for the circumstances listed above. The nature of the Trust, combined with regulatory and operational safeguards, significantly limits the Trustee's ability to adversely affect beneficiary interests. Schedule 2F to the ITAA 1936 and tax losses It is noted that the concept of a 'fixed entitlement' was originally introduced in the context of the trust loss measures and should primarily be interpreted in that context (in the absence of any express provision or explanatory guidance that indicates a different context is relevant). The trust loss measures are an important integrity measure, removing a structural flaw in the tax system. The concept of a 'fixed entitlement' is fundamental to the structure and effectiveness of the trust loss measures. The EM to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1997 states (at paragraph 13.13) in respect of the Commissioner's power in subsection 272-5(3) of Schedule 2F to the ITAA 1936 that:
This provision is intended to provide for special circumstances where there is a low likelihood of a beneficiary's vested interest being taken away or defeated and, having regard to the scheme of the trust loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiary's interest as not constituting a fixed entitlement. This indicates that when looking at the facts of a case, in the context of the criteria listed in subsection 272-5(3) of Schedule 2F to the ITAA 1936, unless the context of the provision for which fixed entitlement is required provides otherwise, the Commissioner should have regard to whether the absence of a fixed entitlement, in these circumstances, could result in the trafficking (or transfer) of the tax benefit of any tax losses.
In relation to the circumstances pertaining to the existence of a tax loss, it is noted that the Trustee has stated that no arrangements have been or will be entered into that would result in section 272-35 in Schedule 2F to the ITAA 1936 having application, in the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or in fraud or evasion. Conclusion Examining the entire Constitution of the Trust (and its Proposed Amendments), there are reasonable grounds for the Commissioner to favourably exercise the discretion in subsection 272-5(3) to treat all the units in the Trust as conferring a fixed entitlement to the share of the income and capital of the Trust for the relevant income years. Question 3 Will the Proposed Amendments to the Constitution, if made, effect a resettlement of the Trust such that CGT Event E1 (section 104-55 of ITAA 1997) happens? Summary The Proposed Amendments will not effect a resettlement of the Trust and CGT Event E1 (section 104-55 of the ITAA 1997) does not happen. Detailed reasoning CGT Generally Part 3-1 of the ITAA 1997 contains the general CGT provisions of the income tax law.
Section 100-20 of the ITAA 1997 provides that you can make a capital gain or capital loss if and only if a CGT event happens. The capital gain or loss is made at the time of the CGT event (section 102-20 of the ITAA 1997). CGT events are detailed in Division 104 of the ITAA 1997. Most CGT events involve a CGT asset. A 'CGT asset' is defined in section 108-5 of the ITAA 1997 and includes any kind of property. Note 1 to section 108-5 gives examples of CGT assets, which specifically include units in a unit trust. In the context of the reclassification under the proposed scheme, the relevant 'CGT asset' is the beneficiaries' units in the Trust, rather than any interest the unit holder has in the underlying property of the unit trust. This is consistent with Taxation Determination TD 2000/32 Income tax: capital gains: for capital gains purposes is the unit held by a unit holder in a unit trust the relevant CGT asset? (TD 2000/32) CGT Event E1 CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).
A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue as a result of various CGT events. The Commissioner has released Taxation Determination TD 2012/21, which was published as a result of the court case Federal 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, the principles set out in Clark's case have broader application as is accepted in 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).
TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 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. Application to Proposed Amendments to the Trust • The Proposed Amendments will not cause the Trust to end or give rise to a particular asset of the Trust being settled on terms of a different trust. • The Proposed Amendments are within the powers of the trustee to make as contained in the Trust Constitution and will be done in accordance with those powers. • After the Proposed Amendments, the beneficiary (unitholder) of the trust will still be the unitholder of the Trust as before the Proposed Amendments.
• After the Proposed Amendments, the unitholder will still have fixed entitlements to a share of the income and capital of the Trust in proportion to their unitholding. Therefore, the continuity of the Trust will be maintained, and if the Proposed Amendments are made, this will not result in the happening of CGT event E1 in section 104-55 of the ITAA 1997. Question 4 Will the Reclassification result in CGT event A1 (section 104-10 of the ITAA 1997) happening? Summary No, the reclassification of existing units will not result in CGT event A1 happening. Detailed reasoning CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). A taxpayer disposes of a CGT asset for the purposes of CGT event A1 if there is a change in ownership of the asset from the taxpayer to another entity (subsection 104-10(2) of the ITAA 1997). At the time units are reclassified, the price of the units will not change nor will the rights and entitlements. The only change is the different management fee and the new Class 2 of shares being created.
The Commissioner has provided their opinion on whether a variation of rights attaching to shares will result in a disposal of shares in Taxation Ruling TR 94/30 Income tax: capital gains tax implications of varying rights attaching to shares (TR 94/30). This ruling concerns Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936). Part IIIA which dealt with capital gains and losses has since been repealed and rewritten into the ITAA 1997. In particular, disposals of an asset formerly covered under subsection 160M(1) of the ITAA 1936 are now captured by CGT event A1 under the ITAA 1997. Similarly, paragraph 108-5(2)(a) of the ITAA 1997, which replaces former section 160R of the ITAA 1936, ensures that part disposals of a CGT asset are also captured under CGT event A1. In respect of former subsection 160M(1) of the ITAA 1936, paragraph 8 of TR 94/30 states:
8. A variation in rights attaching to a share... does not result in a full disposal of an asset for the purposes of Part IIIA unless there is a cancellation or redemption of the share. In determining whether a disposal has occurred under Part IIIA, it is not relevant to consider whether the variation is slight (such as a small change to the nominal value of shares) or more significant (such as disposing of the preference to receive dividends). As stated in the relevant facts and circumstances , under the scheme, a new class of unit (Class 2) will be created and these units will have the same rights, obligations and restriction as the ordinary class units, with the exception being the different classification for the purposes of imposing differential management fees. For the similar reasons as to why CGT event E1 will not happen, there is a continuance of the Trust and the Reclassification will not result in a disposal of existing units such that CGT event A1 does not happen. Question 5 Will the Reclassification end the ownership of an intangible CGT asset for the purposes of CGT event C2 (section 104-25 of the ITAA 1997)? Summary
The Reclassification will not end the ownership of an intangible CGT asset for the purposes of CGT event C2 under section 104-25. Detailed reasoning Section 104-25 provides the circumstances in which CGT event C2 happens. CGT event C2 happens if the ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited (subsection 104-25(1)). The time of the event is when a taxpayer enters into the contract that results in the asset ending. If there is no contract, the time of the event is when the asset ends (subsection 104-25(2) of the ITAA 1997). As explained in paragraphs 16 and 17 of Taxation Ruling 94/30: • the ordinary meaning of the term 'cancel' is to cross out, to make void, annul or to render invalid for re-use, and the cancellation of a share means that it ceases to exist (and is to be distinguished from the mere cancellation of a share certificate); and • the relevant Macquarie Dictionary meaning of the term 'redeem' is 'to buy back or pay off'.
The same CGT assets will remain on issue, and continue to be held by the same unitholders, before and after the Reclassification. The units will therefore not be cancelled or redeemed in any way as part of the Reclassification, nor will the units end in any other way contemplated by subsection 104-25(1). As such, the Reclassification will not end the ownership of an intangible CGT asset, the unitholders' units, for the purposes of CGT event C2 under section 104-25. Question 6 Will the Reclassification result in CGT event D1 (section 104-35 of the ITAA 1997) happening to the Trustee of the Trust? Summary The Reclassification will not result in CGT event D1 happening to the Trustee of the Trust. Detailed reasoning CGT event D1 happens if 'you create a contractual right or other legal or equitable right in another entity'. Subsection 104-35(2) provides that the 'time of the event is when you enter the contract or create the other right'. Subsection 104-35(3) explains that a capital gain is made if the capital proceeds from creating the right are more than the incidental costs incurred that relate to the event. A capital loss is made if those proceeds are less.
The Reclassification will not result in a change to the rights or obligations in the Trust. The Reclassification will have no consequences other than the change in charging different management fees and creating a new class of units as well as other minor definitional and administrative changes. The right of the Trustee to a management fee remains in existence both before and after the Reclassification. The Reclassification impacts the calculation of the management fee. As such, no contractual or other legal or equitable right is created in favour of the Trustee or another entity. Therefore, CGT event D1 does not happen as a result of the Reclassification under section 104-35. Question 7 If the answer to Question 6, above, is "Yes", will the Trustee of the Trust make a capital gain or capital loss? Summary As the answer to question 6 is 'No', it is not necessary to answer this question.