1 Are the Land Trusts eligible to be subsidiary members of the Head Co tax consolidated group pursuant to paragraph 703-15(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 Will CGT event E1 contained in section 104-55 or CGT event E2 contained in section 104-60 of the ITAA 1997 happen to either of the Land Trusts upon the proposed amendments to the Trust Deeds? Answer No. Question 3 Will section 109D of the Income Tax Assessment Act 1936 (ITAA 1936) apply if XX (Finance Co) provides loans to the Land Trusts after the Land Trusts join the Head Co tax consolidated group? Answer No. This ruling applies for the following periods : Year ending 30 June 20YY Year ending 30 June 20YY The scheme commenced on: 1 July 20YY
1. Xx xx (Head Co) is the head company of the tax consolidated group (Head Co tax consolidated group) in accordance with section 703-15 of the ITAA 1997. 2. Xx xx Trust (formerly named Xx xx) (Land Trust 1) and Xx xx Trust (formerly named Xx xx) (Land Trust 2) (collectively the Land Trusts) wish to join the Head Co tax consolidated group. 3. The Land Trusts will seek to amend their trust deeds to limit the beneficiaries to being only those entities within the Head Co tax consolidated group and join the Head Co tax consolidated group (restructure). 4. The restructure is to allow the Land Trusts to borrow from one of the group's financiers XX (Finance Co), on commercial terms without the loans being subjected to the requirements of section 109N of the ITAA 1936. 5. The original trustee of the Land Trusts was A (ACN: xx xx xx) incorporated in Australia on xx xx xx. Subsequently this was changed to B for Land Trust 1 and C for Land Trust 2 (collectively, the Trustees).
6. Head Co owns 100% of the shares in a number of companies (Subsidiaries). This includes companies acting in their own capacity and companies acting as trustees of various trusts. Currently no trusts are wholly owned by Head Co. 7. The Subsidiaries are wholly owned subsidiaries of the Head Co. Accordingly, they are members of the Head Co tax consolidated group in accordance with section 703-15 of the ITAA 1997. 8. D Trust (D Trust) is the owner of 100% of the shares in Head Co. 9. The Land Trusts are neither of the following types of entities: a complying superannuation fund; a non-complying approved deposit fund; a non-complying superannuation fund. 10. The Land Trusts are not exempt from tax under Division 50 of the ITAA 1997. 11. Land Trust 1 was established by a deed dated DD MM 20YY (Trust Deed 1) and Land Trust 2 was also established by a deed dated DD MM 20YY (Trust Deed 2) (collectively referred to as the 'Trust Deeds'). 12. The Land Trusts and the D Trust have made a family trust election (FTE) with respect E as the test individual.
13. The class of beneficiaries, as contained in the Trust Deeds in its current form (subject to the proposed amendments), broadly provide the following persons are beneficiaries: • Primary Beneficiaries eligible under the Trust Deed include xx, ... (Schedule, Item x). • Beneficiaries eligible under the Trust Deed include: (a) ... (Clause xx). • The definition of Beneficiary also includes any other person nominated in writing by the Trustee with the written consent of the Appointor (Clause xx). • Certain entities are excluded from being a Beneficiary of the Trust as contained in Clause xx. The Trustee also has the power to declare in writing that a Beneficiary is not a Beneficiary without the requirement to amend the Trust Deed (Clause xx). 14. The existing beneficiary clauses are proposed to be retained. However, it is proposed that the Trust Deeds will be amended to limit the class of beneficiaries that can benefit under the trust to the Head Co tax consolidated group. Broadly, the deed of amendment proposed the following changes:
• Adding Head Co as a new Primary Beneficiary to the Schedule of each Trust Deed. • Pursuant to the Trustee's power under Clause xx, excluding an entity as a beneficiary of the Trust unless they are (at the relevant time): - Companies that are members of the tax consolidated group undersection 703-15 of the ITAA 1997, where Head Co is the head company of the group; and - Trustees acting in their capacity as trustee for a trust, where the trust qualifies to be a member of the same group under section 703-15 of the ITAA 1997. • Consistent with the above, inserting an additional exclusion at Clause xx excluding an entity or person from being or becoming a beneficiary unless they are (at the relevant time): - companies that are members of the tax consolidated group under section 703-15 of the ITAA 1997, where Head Co is the head company of the group; and - trustees acting in their capacity as trustee for a trust, where the trust qualifies to be a member of the same group under section 703-15 of the ITAA 1997.
15. Once the amendments are made, a Trustee acting in their personal capacity will not be a Beneficiary in its own capacity unless the Trustee is also a member of the tax consolidated group. 16. The Trustee of Land Trust 1 and the Trustee of Land Trust 2 are 100% owned by Head Co and therefore currently members of the Head Co tax consolidated group. 17. The Trust Deeds have an appropriate power to enable the proposed amendments to be made at clause 15. Under Clause 15, broadly the Trustee may by deed in writing, with written consent of the Appointer, revoke, add to or vary all or any of the powers or provisions of the Trust Deeds and the schedule to the Trust Deeds. 18. The Trustees will not seek to nominate or include any new beneficiaries outside of the Head Co tax consolidated group in the future. Furthermore, it is made on the basis that the amendments proposed will not be revoked in a future period. 19. The Land Trusts are also in the process of applying for a private ruling with the State Revenue Office ("SRO") to determine that the amendments to the Trust Deeds should not result in stamp duty implications. The proposed loan transactions
Both the Land Trusts currently do not own land but have entered into contracts to purchase land. 20. xx. 21. The DD MM 20YY trial balances for the Land Trusts, show that the only assets held by the Land Trusts relate to the deposits paid on the contracts to purchase land, inclusive of additional capitalised costs relating to those purchases. 22. The following table summarises the land to be purchased by each Trust and relevant details in respect of each purchase. 23. Table 24. In order to fund the deposits paid, the Land Trusts have borrowed the amounts from another trust within the group, namely the F Trust. The loans are interest-bearing under written loan agreements. The current loan balances are equal to the deposits paid plus interest. 25. The Land Trusts are looking to refinance the loans with Finance Co under commercial loan agreements. The refinancing will occur once the Land Trusts join the tax consolidated group. 26. While the Land Trusts exist, they will remain subsidiary members of the Head Co tax consolidated group for the duration of the period to which the ruling relates.
27. The Land Trusts are associates of the shareholder of Finance Co under section 318 of the ITAA 1936. 28. Following the inclusion of the Land Trusts in the Head Co tax consolidated group, the loans from Finance Co are intended to be treated as company to company loans for the purposes of section 109K of ITAA 1936. Assumption The Trust Deeds will be amended pursuant to a valid exercise of the variation powers contained within each Trust's constituent document.
Income Tax Assessment Act 1936 Division 6 of Part III Income Tax Assessment Act 1936 section 6 Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1936 section 95 Income Tax Assessment Act 1936 Division 7A Income Tax Assessment Act 1936 Subdivision D Income Tax Assessment Act 1936 section 109D Income Tax Assessment Act 1936 section 109K Income Tax Assessment Act 1936 section 109L Income Tax Assessment Act 1936 section 109M Income Tax Assessment Act 1936 section 109N Income Tax Assessment Act 1936 section 109NA Income Tax Assessment Act 1936 section 109NB Income Tax Assessment Act 1936 subsection 109T(1) Income Tax Assessment Act 1936 subsection 109W(1) Income Tax Assessment Act 1997 Division 50 Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 199
Question 1 Summary The Land Trusts are eligible to be subsidiary members of the Head Co tax consolidated group. Detailed reasoning Subsection 703-15(1) of the ITAA 1997 provides that an entity is a member of a tax consolidated group while the entity is the head company of the group or a subsidiary member of the group. "Entity" is defined in section 995-1 of the ITAA 1997 to have the meaning given by section 960-100 of the ITAA 1997 which includes a trust (paragraph 960-100(1)(f)). The Principles of the law of trusts , HAJ Ford and WA Lee, Law Book Company, at paragraph 1000 states: A trust may be defined as an obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes. The members of fixed and discretionary trusts (other than corporate unit trusts and public trading trusts) are the beneficiaries, unitholders or objects of the trust. The members of corporate unit trusts and public trading trusts are the unitholders (section 960-130 of the ITAA 1997: meaning of 'members of entities')
Discretionary trusts may be members of a consolidatable group, provided their objects are confined to members of the group. Relevantly, paragraph 703-15(2)(b) of the ITAA 1997 provides that at a particular time in an income year, an entity is a subsidiary member of a consolidated group or consolidatable group if all the requirements in item 2 of the table are met in relation to the entity. Those requirements in relation to a trust are: (a) the trust cannot be a trust covered by section 703-20 of the ITAA 1997; that is, it cannot be a complying superannuation entity, non-complying approved deposit fund, or a non-complying superannuation fund (Item 7 of the table, subsection 703-20(2) of the ITAA 1997). The trust also cannot be a subsidiary member of a group at a time if at that time the total ordinary income and statutory income of the trust is exempt from income tax under Division 50 of the ITAA 1997 (Item 1 of the table, subsection 703-20(2) of the ITAA 1997); and
(b) the trust must comply with section 703-25 of the ITAA 1997. In the case of a trust, except a unit trust or a public trading trust for the income year, the trust must be a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (Item 1 of the table, section 703-25 of the ITAA 1997); and (c) the trust must be a wholly-owned subsidiary of the head company of the consolidated group and, if there are interposed between them any entities, the set of requirements in section 703-45 of the ITAA 1997 or sections 701C-10 or 701C-15 of the Income Tax (Transitional Provisions) Act 1997 must be met. Section 703-45 provides this condition will be met only if each interposed entity is a subsidiary member of the relevant consolidated group. Application to your circumstances a) Entity type The Land Trusts are not covered by section 703-20 of the ITAA 1997 and their income is not exempt from income tax under Division 50 of the ITAA 1997. b) Residency
The statutory definition of 'Australian resident' in section 995-1 of the ITAA 1997 points to the definition of 'resident' or 'resident of Australia' in subsection 6(1) of the ITAA 1936. Under section 95 of the ITAA 1936, a trust estate shall be taken to be a resident trust estate in relation to a year of income if: (a) a trustee of the trust estate was a resident at any time during the year of income; or (b) the central management and control of the trust estate was in Australia at any time during the year of income. A trustee that is a company is a resident under section 6 of the ITAA 1936 if it is incorporated in Australia. As both Trustees of the Land Trusts were incorporated in Australia, this requirement is satisfied. c) Wholly owned subsidiary Section 995-1 of the ITAA 1997 states that a 'wholly-owned subsidiary' of the head company of a consolidated group is determined by section 703-30 of the ITAA 1997. Section 703-30 of the ITAA 1997 provides that: One entity (the subsidiary entity ) is a wholly-owned subsidiary of another entity (the holding entity ) if all the *membership interests in the subsidiary entity are beneficially owned by:
(a) the holding entity; or (b) one or more wholly-owned subsidiaries of the holding entity; or (c) the holding entity and one or more wholly-owned subsidiaries of the holding entity. Section 995-1 of the ITAA 1997 defines 'Membership interest' in an entity as having the meaning given by section 960-135 of the ITAA 1997. Section 960-135 of the ITAA 1997 provides that: If you are a member of an entity: (a) each interest, or set of interests, in the entity; or (b) each right, or set of rights, in relation to the entity; by virtue of which you are a member of the entity is a membership interest of yours in the entity. Note: ... Subdivision 960-G of the ITAA 1997 determines who are members of an entity for tax purposes. Subsection 960-130(1) of the ITAA 1997 provides: . Table 1: This table sets out who is a member of various entities Members Item Entity Member 1 Company a member of the company or a stockholder in the company 2 Partnership a partner in the partnership 3 trust (except a public trading trust) a beneficiary, unitholder or object of the trust 5 public trading trust a unitholder of the trust In your circumstances
To determine if the Land Trusts are eligible to be subsidiary members of the consolidated group, it is necessary to ascertain: • who are the members of the Trusts; • what are the membership interests of those members; • whether all of the membership interests are beneficially owned by Head Company, or any of its wholly-owned subsidiaries, and • whether any of the requirements in columns 2 or 3 of item 2 of paragraph 703-15(2)(b) preclude the trust from being a member of the consolidated group. Who are the members of the trust? Item 3 of section 960-135 of the ITAA 1997 includes in the definition of a member of a trust, a beneficiary, a unitholder or an object of the trust. In the case of a discretionary trust (at least prior to the exercise of the discretion in favour of a particular person) the relevant phrase in the definition is 'object of the trust'. In determining who is considered an object of a discretionary trust, it is important to distinguish between an object of the trust and an object of a power given to the trustee under the Trust Deed. In cases such as In re Beckett's Settlement [1940] Ch 279, and
Gartside v Inland Revenue Commissioners [1968] AC 553 the phrase 'objects of a discretionary trust' was used to refer to the class of persons in respect of whom the power to distribute income or capital could be exercised at any particular point in time. A similar approach was taken by the Commissioner in Taxation Determination TD 2003/28 In come tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to (a) a mere object; or (b) a default beneficiary? (TD 2003/28) in defining who were mere objects of a discretionary trust. It states (at paragraph 2) that: ... a mere object refers to a member of the class of beneficiaries of the trust who is an object of a power of appointment vested in the trustee (i.e. a discretionary beneficiary).
When you consider the phrase 'object of the trust' in the context of the entire definition of member of a trust (ie 'a beneficiary, unitholder or object of the trust') it seems clear that the definition is concerned with persons who are currently capable of benefiting from the trust, not with persons who might at some future date become capable of benefiting from the trust as a consequence of being appointed or nominated by the trustee under a separate power. While the trustee may have power under the deed to appoint or nominate persons as possible beneficiaries, it is the Commissioner's view that such persons are not objects of the trust but rather objects of a power under the terms of the trust. The objects of the trust are those persons in respect of whom the power to distribute income or capital can currently be exercised. To identify the objects of the Land Trusts, examination of the relevant clauses under the Trust Deeds needs to be undertaken; those detailing the Beneficiaries. Those clauses have been detailed in the relevant facts and circumstances.
Following the proposed amendment of the Trust Deeds, the only entities that will be capable of benefiting under the Land Trusts will be members of the Head Co tax consolidated group as described in section 703-15 of the ITAA 1997. This limits the members of the Land Trusts to both the Head Co and its wholly owned subsidiaries and no other entity is regarded as a member of the Land Trusts for the purposes of section 703-30 of the ITAA 1997. What are the membership interests of the members of the trust? Section 960-135 of the ITAA 1997 provides that, if you are a member of an entity, each interest or set of interests in the entity or each right, or set of rights, in relation to the entity, by virtue of which you are a member of the entity is a 'membership interest' of yours in the entity. As can be seen from this definition, the 'membership interests' in the consolidation provisions refer not only to interests in the trust fund, but also rights in relation to the entity. Thus, while a discretionary object may not have an interest in the trust, they are capable of having membership interests in the trust by virtue of the rights they hold in relation to the entity.
This wider scope of 'membership interest' in the consolidation regime is consistent with the recognition by the Courts that even though the discretionary object may not have an interest in the trust estate, they do have a number of rights enforceable against the trustee. These include the right to ensure the proper administration of the trust estate and to be considered by the trustee when they exercise certain discretionary powers under the trust. In the consolidation regime, it is these rights that amount to the membership interests in the trust. Accordingly, the Commissioner considers that the rights conferred on Head Co and members of the tax consolidated group under the Trust Deeds are sufficient to constitute a 'membership interest' for the purposes of paragraph 960-135(b) of the ITAA 1997. Are all of these membership interests 'beneficially owned' as required by section 703-30 of the ITAA 1997? For the purposes of ascertaining whether or not the Trusts would be a 'wholly-owned subsidiary'of Head Co all of the membership interests in the trust must be beneficially owned by: • Head Co, • one or more wholly-owned subsidiaries of Head Co; or
• Head Co and one or more of its wholly-owned subsidiaries. The term 'beneficially owned' is not defined so it takes its ordinary legal meaning. In broad terms it means ownership for one's own benefit. For the purposes of the consolidation provisions, the Commissioner is not looking for the beneficial owner of the trust property but rather the beneficial owner of the rights that the objects of the trust have. Accordingly, the Commissioner considers the rights held by Head Co and members of the tax consolidated group are beneficially owned and each of the Land Trusts are a wholly-owned subsidiaries of Head Co as determined under section 703-30 of the ITAA 1997. Do columns 2 or 3 of item 2 of paragraph 703-15(2)(b) of the ITAA 1997 preclude the Land Trusts from being a member of the consolidated group? The Land Trusts are each a resident trust estate and are not an entity described in items 2, 7 and 8 of subsection 703-20(2) of the ITAA 1997 or exempt from taxation pursuant to Division 50 of the ITAA 1997. Accordingly, the Land Trusts meet the requirements of column 2 and 3 of item 2 of paragraph 703-15(2)(b) of the ITAA 1997. Conclusion
The Land Trusts are eligible to be subsidiary members of the Head Co tax consolidated group under item 2 of the table in paragraph 703-15(2)(b) of the ITAA 1997. It is noted that the Trustees are currently members of the Head Co tax consolidated group (Head Co owns 100% of the shares in the trustee for Land Trust 1 and the trustee for Land Trust 2 and they (acting in their own capacity and companies acting as trustees of the relevant Land Trusts) are members of the Head Co tax consolidated group in accordance with section 703-15 of the ITAA 1997). Question 2 Summary In accordance with the assumptions, the amendments to the terms of the Trust Deeds are made in proper exercise of a power of amendment and are properly supported by that power. The proposed amendments to the Trust Deeds are being implemented to limit the class of beneficiaries that can benefit under the trusts to the Head Co tax consolidated group.
The Proposed Amendments to the Trust Deeds will not cause a termination of the Trusts (and the creation of a new trusts) nor are the Trusts' asset's being subject to a separate charter of rights and obligations. CGT events E1 and E2 will not happen with the amendment of the Trust Deeds. Detailed reasoning CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement - subsection 104-55(1) of the ITAA 1997. CGT event E2 happens if a CGT asset is transferred to an existing trust - subsection 104-60(1) of the ITAA 1997. Case law guidance on when amendments to an existing trust instrument may lead to the creation of a new trust by declaration or settlement can be found in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220 ( Commercial Nominees ) where the Full Federal Court stated: 55... in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus
that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust . 56. So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established , there will be identity of the 'taxpayer' for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself. [emphasis added] The court in Commissioner of Taxation v. XX Clark ; Commissioner of Taxation v. XX Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ) also adopted the decision in Commercial Nominees
as authority of the principle that assuming that there is some continuity of property and membership of the trust, an amendment to the trust made in proper exercise of a power of amendment pursuant to the trust deed will not result in a termination of the trust. 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) sets out the Commissioner's view on whether, as a result of changes made to an existing trust, a new trust comes into existence causing CGT event E1, or an asset is transferred to another trust causing CGT event E2, to happen. TD 2012/21 expresses the view that CGT event E1 or E2 does not happen if the terms of the 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, 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 the asset has been settled on terms of a different trust. Paragraph 21 of TD 2012/21, in part, notes that: ... as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees , as explained by Edmonds and Gordon JJ in Clark , is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power. Paragraph 24 of TD 2012/21 further explains that: Even though Clark and Commercial Nominees
were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening. It is noted in paragraph 27 of TD 2012/21 that:
Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust. TD 2012/21 provides a number of examples. Example 1 (paragraphs 2 to 5) reads as follows: Example 1: addition of new entities to, and exclusion of existing entities from, class of objects
2. The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists. 3. Having decided to get out of the flower industry, the Squirrel Family disposes of their interest in Oak Pty Ltd to an unrelated third party. 4. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries: a. the respective spouses of the children;
b. trusts and companies in which the family has a majority controlling interest; and c. a philanthropic charity unrelated to the Squirrel Family. 5. The making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event. Application to your circumstances As detailed in the facts, although subject to conditions, the Trust Deeds provide the Trustee of the Land Trusts with broad powers to revoke, add to or vary all or any of the provisions of the Trust Deeds at any time by deed. In this case, the Trustees are proposing to vary the Trust Deeds. In the current circumstances, it is considered that the proposed amendments are comparable to the situation described in Example 1 (in terms of the removal of a particular beneficiary under the Trust) of TD 2012/21 where the making of such resolutions were deemed a valid exercise of a power of amendment contained within the applicable trust deed. The proposed changes to the Trust Deeds are also considered to fall within the scope of the Trustee's power of amendment provided for in the Trust Deeds.
The Land Trusts' deed provides the trustees with the power of amendment to include Head Co as a Primary Beneficiary and to insert and exclusion of any entity that is not a member of the Head Co tax consolidated group. The amendments will be made pursuant to clause 15, clause 3.2(b) and clause 3.4 of the Trust Deeds and which are the relevant Trust Deeds' variation clauses (noting the assumption that amending the Trust Deeds to vary the beneficiaries of the Land Trusts in the manner proposed will be in accordance with the variation powers contained within each Trust's constituent document). As the proposed amendments are within the Trustee's powers contained in the Trust Deeds, the Commissioner considers that, following the execution of the proposed Deeds of Variation to amend the terms of the Trust Deeds, there will be continuity: • of the Trust property; • in the membership of the Trust (apart from the exclusion of various potential beneficiaries under the Trust Deed); and • in the operation of the Trust.
The underlying principles encapsulated in paragraphs 21 and 24 of TD 2012/21 provide that, assuming there is some continuity of property and membership of a trust, an amendment to the trust that is made in a proper exercise of a power of amendment contained under the trust deed will not result in a termination of the trust - regardless of the extent of the amendments, so long as the amendments are properly supported by the power. On this basis, as continuity in the membership, operation and property of the Land Trusts would be maintained following the execution of the proposed amendments to the Trust Deeds pursuant to a valid exercise of the amendment power in the Trust Deeds, such amendments would not result in a termination of the Trusts. This is consistent with the decisions in both the Commercial Nominees and Clark cases. Having regard to paragraph 27 of TD 2012/21, the Commissioner is also satisfied that the proposed amendments would not result in an asset of the Land Trusts being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the trusts would be settled on the terms of a different trust.
Therefore, in accordance with paragraph 1 of TD 2012/21, executing the proposed deeds of amendment to amend the Trust Deeds pursuant to a valid exercise of the amendment power in the Trust Deeds would not cause either CGT event E1 or CGT event E2 to happen. Qustion 3 Summary Section 109D of the ITAA 1936 will not apply when Finance Entity makes loans to the Land Trusts as determined by section 109T of the ITAA 1936. Detailed reasoning Subsection 109D(1) of the ITAA 1936 provides that a private company is taken to pay a dividend to a shareholder (or an associate of such a shareholder) at the end of a year of income if: (a) the private company makes a loan to the entity during the year of income; and (b) the loan is not fully repaid before the lodgement day for the current year; and (c) Subdivision D does not prevent the treatment of the loan as a dividend.
Subdivision D of Division 7A of the ITAA 1936 sets out circumstances for loans and payments that are not treated as dividends. One of the circumstances, pursuant to section 109K of the ITAA 1936, is that a private company is not taken to pay a dividend under section 109D where the private company makes a loan to another company. As ruled by the Commissioner in paragraph 4 of Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 , the single entity rule (SER) prescribed in section 701-1 of the ITAA 1997 operates for the purposes of working out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period (the core purposes), and include all matters relevant and incidental to those calculations. The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity.
A consequence of the SER is that while an entity is a subsidiary member of a consolidated group, actions and transactions of that member are treated as having been undertaken by the head company (paragraph 8 of TR 2004/11). Another consequence of the SER is that the liabilities of the subsidiary member are treated to be liabilities of the head company, as it is the only entity recognised for income tax purposes (paragraph 2.20 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Act (No.1) 2002). As section 109D of the ITAA 1936 may deem a loan received from a private company to be a dividend, it is a matter relevant to the calculation of the income tax liability of the recipient. Consequently, the SER will apply to the recipient. It follows that the loans deemed by subsection 109T(1) and 109W(1) of the ITAA 1936 to be made from Finance Entity to the Land Trusts will be taken to be received by Head Co (as the head company) pursuant to the SER. As Head Co is a company, section 109K of the ITAA 1936 will apply such that section 109D of the ITAA 1936 will not apply to treat Associated Company as having paid a dividend.
It should be noted that if the money that will be loaned is paid or loaned to an entity outside the consolidated group, the SER will not apply (on the basis that the SER only applies for the core purposes). Whether or not Division 7A of the ITAA 1936 applies to treat an entity outside of the consolidated group as receiving an assessable dividend is irrelevant for the core purposes. (a) the private company makes a loan to the entity during the year of income; and (b) the loan is not fully repaid before the lodgement day for the current year; and (c) Subdivision D does not prevent the treatment of the loan as a dividend. Subdivision D of Division 7A of the ITAA 1936 sets out circumstances for loans and payments that are not treated as dividends. One of the circumstances, pursuant to section 109K of the ITAA 1936, is that a private company is not taken to pay a dividend under section 109D where the private company makes a loan to another company. As ruled by the Commissioner in paragraph 4 of Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997
, the single entity rule (SER) prescribed in section 701-1 of the ITAA 1997 operates for the purposes of working out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period (the core purposes), and include all matters relevant and incidental to those calculations. The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity. A consequence of the SER is that while an entity is a subsidiary member of a consolidated group, actions and transactions of that member are treated as having been undertaken by the head company (paragraph 8 of TR 2004/11). Another consequence of the SER is that the liabilities of the subsidiary member are treated to be liabilities of the head company, as it is the only entity recognised for income tax purposes (paragraph 2.20 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Act (No.1) 2002).
As section 109D of the ITAA 1936 may deem a loan received from a private company to be a dividend, it is a matter relevant to the calculation of the income tax liability of the recipient. Consequently, the SER will apply to the recipient. It follows that the loans deemed by subsection 109T(1) and 109W(1) of the ITAA 1936 to be made from Finance Co to the Land Trusts will be taken to be received by Head Co (as the head company) pursuant to the SER. As Head Co is a company, section 109K of the ITAA 1936 will apply such that section 109D of the ITAA 1936 will not apply to treat Finance Co as having paid a dividend. It should be noted that if the money that will be loaned is paid or loaned to an entity outside the consolidated group, the SER will not apply (on the basis that the SER only applies for the core purposes). Whether or not Division 7A of the ITAA 1936 applies to treat an entity outside of the consolidated group as receiving an assessable dividend is irrelevant for the core purposes.