1 Will your conversion from a discretionary trust to a unit trust trigger CGT event E1 or CGT event E2 under section 104-55, or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Question 2 Will your conversion from a discretionary trust to a unit trust trigger CGT event E3 under section 104-65 of the ITAA 1997? Answer No. This ruling applies for the following period : Year ended 30 June 2026 The scheme commenced on: 1 July 2025
The Trust is a discretionary family trust established for business and investment purposes. A copy of the Trust Deed has been provided. There have been no changes to the Trust Deed. The Trust provides engineering consulting services. The Trust has an annual turnover of approximately $X million. The distribution of profits over the past five income years has been made in accordance with trust distribution resolutions primarily to: • The founders (who are listed as primary beneficiaries under the Deed), and • Related party companies and trusts (which are tertiary beneficiaries as defined under the Deed), as follows: No beneficiary has been made absolutely entitled to any specific trust asset. The Trust's assets currently consist of: • The operating business • Cash, receivables and working capital • Business goodwill and intellectual property, and • Minor plant, equipment and office assets. The Trust has no segregated or separately settled assets.
Around XXX 20XX, the Trust completed the acquisition of X, an engineering consultancy, as part of its strategic growth plan. The transaction was negotiated on the basis of an equity-swap arrangement, under which the principals of X would receive equity interests in the Trust group in exchange for their business interests. The acquisition was completed with a commercial clause requiring the Trust to be amended to a unit trust to give effect to real, legally recognisable equity interests. Proposed amendments The Trust proposes to convert from a discretionary trust to a unit trust structure for a number of commercial considerations including future equity participation, talent retention, business succession, investment attraction and operational efficiency. The conversion will be executed pursuant to Clause X of the Trust Deed. The amendments will: • Replace discretionary distribution powers with fixed unit entitlements. • Establish a unit register, unit pricing mechanism and define unitholder rights (voting, income, capital). • Maintain the same trustee, trust fund and ABN.
• Preserve existing beneficiaries by converting discretionary interests into equivalent unit holding (including the Employee Unit Trust). • Maintain the same trust property and business operations. There will be: • No transfer or disposal of trust assets • No change in legal ownership of assets (assets remain held by the same trustee), and • No change to the terms under which assets are held. Fixed unit entitlements will apply uniformly to all trust property. At the time of conversion, no units will be offered to unrelated third parties. Any future issue of units would occur in the context of investment or acquisition activity and would not involve a change in the trust property or trustee. Assumptions The proposed amendments are made pursuant to a valid exercise of the power contained in the Trust Deed. The Trustee will not, immediately just prior to the proposed amendments, make any determination that causes any beneficiary of the Trust to become absolutely entitled to any CGT asset of the Trust.
Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 section 104-65
Question 1 CGT event E1 and CGT event E2 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 CGT events occurring including E1. 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. Subsection 104-60 (1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust. Taxation Determination 2012/21 (TD 2012/21) asks the question: 'does CGT event E1 or E2 in section 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 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 varies with the approval of a relevant court?' TD 2012/21 concludes that if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent documents, neither CGT event E1 nor E2 happens unless:
• the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or • the effect of the change 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 had been settled on terms of a different trust. Therefore, to conclude that CGT event E1 or E2 have not occurred, three requirements must be met: 1. the terms of the trust are changed pursuant to a valid exercise of a power contained in the trust's constituent documents 2. the change does not cause the existing trust to terminate and new trust to arise for trust law purposes 3. the effect of the change is not that a particular asset is made subject to a separate charter of rights and obligations which gives rise to the conclusion that the asset was settled on terms of a different trust Requirement 1: valid exercise of power
Paragraph 26 of TD 2012/21 explains that whether a change to the terms of a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective. Requirement 2: no termination of existing trust and creation of a new trust Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark [2011 FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ) considered the circumstances in which the nature of a trust changed in such a way that it might be concluded that the trust that originally incurred capital losses is not the same trust for income tax purposes as the trust which derived gains against which the losses are sought to be applied. In Clark, Gordon JJ explained the approach adopted by the Full Federal Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42
(Commercial Nominees) , that an amendment to a trust that is made in proper exercise of a power of amendment contained under the deed will not have the effect of terminating the trust if there is some continuity of property and membership of the trust, irrespective of the extent of the amendments. Specifically, the Full Federal Court in Commercial Nominees stated that: 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. Requirement 3: no asset settled on the terms of a different trust Paragraph 27 of TD 2012/21 states 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 [...] such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust. Paragraph 28 of TD 2012/21 provides a case example: 'In Commissioner of State Revenue v. Lam & Kym Pty Ltd
[2004] VSCA 204; 2004 ATC 5058; (2004) 58 ATR 60 the Supreme Court of Victoria considered a scenario in which by deed of settlement a trustee stood possessed of a fund on discretionary trust for two classes of objects (the Primary Beneficiaries and the Discretionary Beneficiaries). By deed poll the trust was amended giving the trustee the power to transfer the whole or any portion of the fund to or for the advancement of any of the Discretionary Beneficiaries. The trustee subsequently executed an instrument in which it declared that it 'hereafter held separately in trust' particular real estate for certain beneficiaries. Nettle JA (with whom Vincent JA and Hansen AJA agreed) held that the exercise of the power of appointment had the result of the real estate being held on separate trust.' Application to your circumstances In this case the Trustee of the Trust proposes to use its power under a relevant clause of the Deed to vary the Trust from a discretionary trust to a unit trust. For the purposes of the ruling decision, it is assumed that the proposed amendments constitute a valid exercise of the Trustee's amendment power.
Based on the information provided, it is accepted that the proposed amendments will not cause the Trust to terminate and a new trust to arise for trust law purposes. The effect of the proposed amendments will not give rise to a conclusion that any asset of the Trust has been settled on terms of a different trust. Therefore, in accordance with the views expressed in TD 2012/21, neither CGT event E1 or E2 will happen by reason of the variation of the trust instrument converting the Trust to a unit trust. Question 2 Subsection 104-65(1) of the ITAA 1997 provides that CGT event E3 happens if a trust (that is not a unit trust) over a CGT asset is converted to a unit trust and just before the conversion, a beneficiary under the trust was absolutely entitled to the asset as against the trustee. Draft Taxation Ruling TR 2004/D25 Income Tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) sets out the Commissioner's view on when a beneficiary may become absolutely entitled to an asset.
Paragraph 13 of TR 2004/D25 states that an object of a discretionary trust cannot be absolutely entitled to one or more trust's assets prior to an exercise of the trustee's discretion in their favour. Application to your circumstances Provided that the Trustee does not make any determination that causes any beneficiary to become absolutely entitled to any CGT asset of the Trust just prior to the proposed amendments, no beneficiary will become absolutely entitled to any CGT assets of the Trust. Accordingly, CGT event E3 will not happen with respect to the proposed amendments.