Capital gains tax

1 Will the proposed variation of the Trust Deed of the Person 1 Trust (the Trust) result in capital gains tax (CGT) events E1 in section 104-55 or E2 in section 104-60 of the Income Tax Assessment Act 1997 [1] happening?

1 No. Question 2 Will the proposed variation of the Trust Deed of the Trust result in CGT event E3 in section 104-65 happening? Answer 2 No. Question 3 Will the proposed variation of the Trust Deed of the Trust result in CGT event E4 in section 104-70 happening? Answer 3 No. Question 4 Will the proposed variation of the Trust Deed of the Trust result in CGT event E5 in section 104-75 happening? Answer 4 No. Question 5 Will the proposed variation of the Trust Deed of the Trust result in CGT events E6 and E7 in section 104-80 and 104-85 happening? Answer 5 No. Question 6 Will the proposed variation of the Trust Deed of the Trust result in CGT event E8 in section 104-90 happening? Answer 6 No. This ruling applies for the following period: 30 June 20XX The scheme commences on: 1 July 20xx

Background facts Person 1 is elderly and is in ill health. They have a number of ex-spouses and children. The Person 1 Trust (the Trust) In 20XX, the Person 1 Trust (the Trust) was settled. •                     The Appointor of the Trust is Person 1. •                     An identified child is the sole Director of the Trustee. Person 1 is the Specified Beneficiary of the Trust Deed Relevant clause of the Trust Deed, defines the General Beneficiaries as including: •                     the Specified Beneficiary •                     the parents, grandparents, uncles, aunts, siblings, spouse/s, widow, widower, children, grandchildren of the Specified Beneficiary •                     the spouse/s, widow, widower, children and grandchildren of the siblings, spouse/s, children, grandchildren, parents, grandparents of any spouse/s, uncle and aunt of the aforesaid •                     the trustee of any trust under which any beneficiary of the Trust has an interest •                     any corporation in which at least one beneficiary owns or holds any share, and •                     any charity.

Relevant clauses of the Trust Deed empower the Trustee at its absolute discretion to pay, apply or accumulate income and capital of the Trust for the benefit of one or more of the Beneficiaries to the exclusion of the others. Relevant clauses of the Trust Deed allow the Appointer to give directions to the Trustee as to the general policy to be followed by the Trustee and empower the Trustee to vary the Trust Deed with written approval of the Appointer. However, this power of variation does not permit the Settlor to become a beneficiary of the trust. There have been no variations made to the Trust Deed since its settlement. The Trust carries on a business. A few identified children of Person 1 have been heavily involved in the business for at least the last X years. Succession Plan In 20XX, the Succession Plan for the Trust was agreed to by Person 1 (as Appointor), and the identified children. The Succession Plan identified that the COVID-19 pandemic put the older generation of the family and management team under risk and, due to this, it was pertinent to bring forward a succession plan to ensure business continuity in the case of unforeseen circumstances.

The family communicated and understood the above purpose and agreed to implement the Succession Plan to address changing business and bank requirements as a result of the COVID-19 pandemic. Person 1 and the identified children unanimously agreed to amend the Trust to further involve the new generation in the business and to implement the succession plan, which includes executing a Deed of Variation. The intention of the Deed of Variation is to ensure continuity of the existing business of the Trust, avoid potential family dispute, appoint successor and backup Appointor(s), select beneficiaries to own majority control of the Trust and to expressly exclude any other beneficiaries from challenging any control of the Trust. The identified children will be the beneficiaries that will gain control of the Trust and will work together to ensure the business continuity of the Trust. Proposed arrangement It is proposed that the Trust be converted to a unit trust to limit the control of the existing businesses to those family members who are most capable and have a proven track record of navigating through the business disruptions, such as those caused by the COVID-19 pandemic.

•                     Person 1 has passed control of the business to an identified Child. •                     The identified children do most of the work in the business. The proposed conversion to a unit trust will also enable more units to be issued to those family members who are working harder than others, enabling targeted rewards to those family members. In accordance with the relevant clause of the Trust Deed, the Trustee proposes to vary the terms of the Deed to convert the Trust to a unit trust for the purposes of: •                     ensuring the continuity of the existing business of the Trust •                     avoiding potential family dispute •                     appointing Successor Appointor(s) and Backup Appointor(s) •                     allowing the identified children to gain majority control, and expressly exclude any other beneficiaries from challenging any control, of the Trust. To this end, clause X of the proposed Deed of Variation provides to insert the identified children into the Additional Members of the Class of General Beneficiaries in Item X of the Schedule of the Trust Deed.

Clause X of the proposed Deed of Variation provides that all persons or entities, other than those added in clause X, listed as a General Beneficiary in Clauses X to X of the Trust Deed be excluded from the class of General Beneficiaries Amended provisions for the resignation and appointment of Appointors is included in clause X of the proposed Deed of Variation. Clause X of the proposed Deed of Variation appoints Child A as Successor Appointor and the identified children as Backup Appointors. Additionally, clause X of the proposed Deed of Variation declares clauses X to X of the Trust Deed to be null and void. Clause X of the Trust Deed, which deals with the Trustees discretion at termination of the Trust to distribute the assets of the Trust to the beneficiaries, will be deleted by clause X of the proposed Deed of Variation and replaced with that the Trustee shall distribute the assets to the Beneficiaries or Unit Holders in proportion to the number of Units held by them at vesting date. Clause X of the proposed Deed of Variation will insert the definition of X new terms, including the mean of the terms 'Unit', 'Ordinary Unit' and 'Unit Holders'.

Clause X of the proposed Deed of Variation inserts clauses X to X to the Trust Deed, which provide: •                     that the identified children will automatically be issued with X ordinary Unit in the Trust Fund (clause X) •                     the Trust Fund will be divided into Units and vested in the Unit Holders (clause X) •                     the Trustee with the power, subject to approval of at least XX% of the Unit Holders, to issue additional Units (clause X) •                     how units are priced, acquired and paid for (clauses X and X) •                     how the units are recorded (clause X) •                     how units are transferred and cancelled (clauses X and X) •                     that the Net Income of the Trust Fund will be paid, applied or set aside for the Unit Holders in proportion to their number of Units held (clause X) •                     that the Trustee may pay the capital to the Unit Holders in proportion to their unit holding (clause X), and •                     for the issuance of Par Units (clause X).

Following the execution of the proposed Deed of Variation, no beneficiary will become absolutely entitled to any particular asset of the Trust as against the Trustee. Nor do the variations contemplate a transfer of any asset. Assumptions The written consent of the Appointor will be provided before any amendments of the Trust Deed and a deed or resolution are made in writing to amend the Trust. The proposed amendments to the Trust Deed are valid and effective in accordance with the law of the relevant state. The proposed amendments will not cause the Trust to terminate and a new trust to arise for trust law purposes. That is, it will not lead to any asset of the Trust 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.

Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 section 104-65 Income Tax Assessment Act 1997 section 104-70 Income Tax Assessment Act 1997 section 104-75 Income Tax Assessment Act 1997 section 104-80 Income Tax Assessment Act 1997 section 104-85 Income Tax Assessment Act 1997 section 104-90

Question 1 Will the proposed variation of the Trust Deed of the Trust result in CGT events E1 in section 104-55 or E2 in section 104-60 happening? Detailed reasoning Explanation of the legislation Creating a trust over a CGT asset: CGT event E1 Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens when a trust is created over a CGT asset by declaration or settlement. Pursuant to subsection 104-55(2), the CGT event happens at the point in time the trust is created. Therefore, in order for CGT event E1 to occur, it is required that there be both the creation of a trust and that this be done by way of declaration or settlement. Creation of a trust The phrase 'you create a trust over a CGT asset' is to be understood by reference to the general law of trusts. [2] In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [3] Hope JA analysed the 'very nature of a trust' in terms of a personal obligation of a trustee annexed to property to hold the property for the benefit of another. [4] In order to 'create' a trust, there must be a creation of both elements of a trust; that is, a creation of personal obligations and a creation of rights annexed to property.

Notwithstanding that an existing trust estate may not have come to an end and the entirety of the trust fund settled on terms of a new trust, [5] it is possible for assets to be settled on a new trust estate that has been separated from (or carved out of) the original trust fund. [6] This may occur notwithstanding that the transactional documents executed to effect such a separation do not expressly speak of the asset having been settled on a new trust. By declaration or settlement The second element necessary for CGT event E1 to happen is that the creation of the trust is by declaration or settlement. A trust is created by declaration within the meaning of subsection 104-55(1) when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property. [7] Transactional documentation that evidences an express intention to hold the transferred assets subject to the terms of the trust deed, may suffice to create a trust over those assets by declaration. A trust is created by settlement when property is vested in a trustee for the benefit of others. [8]

A transfer of existing trust property to, and the vesting of this property in, a new trustee for the benefit of others can satisfy the description of the creation of a trust by settlement. [9] Transferring a CGT asset to a trust: CGT event E2 Subsection 104-60(1) provides that CGT event will occur when an asset is transferred to an existing trust. The timing of the event is at the time that the asset is transferred, as provided by subsection 104-60(2). Guidance on the Commissioner's view on whether CGT event E1 or E2 happens is found in Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 105-60 of the Income Tax Assessment Act 1997 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? (TD 2012/21). Paragraph 1 of TD 2012/21 provides that CGT events E1 and E2 do not happen if the terms of a trust are changed pursuant to a valid exercise of power 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. This view was developed in light of the decisions by the Full Federal Court in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [10] and Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd , [11] where it was held that amendments to a trust that are made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, assuming there is some continuity of property and membership of the trust. Whilst these cases concerned whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying losses, the Commissioner accepts that the same principles can be applied in determining whether CGT event E1 or E2 has happened (see paragraph 24 of TD 2012/21).

TD 2012/21 further explains that the scope of the relevant power is determined by the construction of the words of the trust deed, the surrounding context and any relevant admissible evidence. Where a trustee is found not to have power to vary the trust deed in the manner contended, such invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening. Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can also be found in the examples contained in TD 2012/21. Example 1 of TD 2012/21 provides an example of where the trust deed is amended by the addition of new entities to, and exclusion of existing entities from, a class of objects. Application to your circumstances Clause X of the Trust Deed empowers the Trustee to vary the terms and conditions of the Trust to convert the Trust to a unit trust for the purposes of: •                     ensuring the continuity of the existing business of the Trust •                     avoiding potential family dispute •                     appointing Successor Appointor(s) and Backup Appointor(s)

•                     allowing the identified children to gain majority control, and expressly exclude any other beneficiaries from challenging any control, of the Trust. To this end, clause X of the proposed Deed of Variation will insert the identified children into the Additional Members of the Class of General Beneficiaries of in Item X of the Schedule of the Trust Deed. Additionally, all other persons and entities will be excluded from the class of General Beneficiaries. Clause X of the proposed Deed of Variation will insert into the Definitions (clause X) of the terms 'unit' (and 'ordinary unit') and 'unit holders', the trust fund will be divided into units (clause X) and the identified children will each be issued with one unit in the Trust (by clause X). •                     Clauses X to X of the proposed Deed of Variation relate to the units such as, how units are to be priced, acquired, recorded, transferred, new units issued or cancelled and how income will be paid to the unit holders. Other relevant amendments from the proposed Deed of Variation include:

•                     appointment of the identified child as the Successor Appointor and the identified children as Backup Appointors (clause X) •                     declaration that clauses X to X of the Trust Deed will be null and void (clause X) •                     deletion of clause X(x) of the Trust Deed (regarding the Trustee's discretion at termination of the Trust to distribute the assets to the beneficiaries) and replacement that the Trustee shall distribute the assets to the Unit Holders in proportion to the number of Units held by them at vesting date (clause X). Following the execution of the proposed Deed of Variation, no beneficiary will become absolutely entitled to any particular asset of the Trust as against the Trustee. Nor do the variations contemplate a transfer of any asset.

Based on the assumption that Trust Deed permits the amendments under the Deed of Variation, that the making of the amendments will not cause the Trust to terminate and a new trust to arise or that they will 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 particular asset has been settled on terms of a different trust, the proposed amendments will not cause CGT events E1 or E2 to happen. Question 2 Will the proposed variation of the Trust Deed of the Trust result in CGT event E3 in section 104-65 happening? Explanation of the legislation Converting a trust to a unit trust: CGT event E3 Section 104-65 provides that CGT event E3 will occur if a trust (that is not a unit trust) is converted to a unit trust and, just before the conversion, a beneficiary was absolutely entitled to an asset of the trust as against the trustee. The timing of the event is when the trust is converted (subsection 104-65(2)).

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. Paragraphs 10 and 11 of TR 2004/D25 provide: 10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40). 11. Under the rule in Saunders v Vautier

, the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it. Beneficiaries of a discretionary trust do not have any interest, either individually or collectively, in the property or income of a trust estate. Where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital: it is for the trustee to determine, firstly, whether such beneficiaries will benefit at all under the terms of the trust and, secondly, to what extent the beneficiaries will benefit. Such beneficiaries have no more than a right to have the trust duly administered. [12] Application to your circumstances

Prior to the execution of the proposed Deed of Variation, the Trustee has the discretion to pay the whole or any part of the income or capital of the Trust to any one or more of the eligible beneficiaries to the exclusion of the others in such proportions as the Trustee may determine. Consequently, no beneficiary was absolutely entitled to any of the assets of the Trust and CGT event E3 will not happen with respect to the amendments to convert the trust to a unit trust. Question 3 Will the proposed variation of the Trust Deed of the Trust result in CGT event E4 in section 104-70 happening? Explanation of the legislation Capital payment for trust interest: CGT event E4 Subsection 104-70 broadly provides that CGT event E4 happens where the trustee of a trust makes a payment to a taxpayer in respect of their unit or interest in the trust acquired after 20 September 1985 (except for CGT event A1, C2, E1, E2, E6, or E7 happening in relation to it), and some or all of the payment is not included in the taxpayer 's assessable income, described as a non-assessable part (non-assessable distribution), which may be reduced by exclusions and adjustments under section 104-71. In

Taxation Determination TD 2003/28 Income 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? , the Commissioner confirm that that CGT event E4 applies in respect of an interest in a trust that acquired for consideration or by way of assignment: In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a Unitholder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests. Application to your circumstances The execution of the proposed Deed of Variation will not of itself involve the Trustee making a payment to the Unit Holders in respect to their units. As such, CGT event E4 will not apply with respect to the variations themselves.

However, the proposed Deed of Variation will mean the Trust will become one that is in the nature of a unit trust, where Unit Holders may acquire units for consideration, such that section 104-70 is capable of applying where the Trustee makes a non-assessable distribution to the Unit Holders in respect of their Unit Holdings. Question 4 Will the proposed variation of the Trust Deed of the Trust result in CGT event E5 in section 104-75 happening? Beneficiary become entitled to a trust asset: CGT Event E5 Subsection 104-75(1) provides that CGT event E5 will occur if a beneficiary of a trust estate becomes absolutely entitled to a CGT asset of a trust 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) provides guidance on the Commissioner's view on what would constitute absolute entitlement for the CGT provisions. In particular, paragraph 10 explains that a beneficiary will have an absolute entitlement to a CGT asset where the beneficiary has a vested and indefeasible interest in the entire trust asset, to call for the assets to be transferred to them or to be transferred at their direction. Paragraph 13 of TR 2004/D25 states that an object of a discretionary trust cannot be absolutely entitled prior to any exercise of the trustee's discretion in their favour. This is because they do not have an interest in the trust's assets. Paragraphs 73 and 74 of TR 2005/D25 describe the type of interest required in the trust asset for a beneficiary to be absolutely entitled: 73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest.

74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it. The nature of the beneficiary's interest in the asset, and whether it meets the requirements of absolute entitlement, therefore depends on the particular trust instrument, and whether the trustee has made a resolution in favour of a beneficiary (such that the beneficiary would be absolutely entitled). Application to your circumstances The proposed arrangement to execute the proposed Deed of Variation does not result in an object of a discretionary trust being absolutely entitled to a CGT asset as against the Trustee and as such, CGT event E5 in section 104-75 will not occur. Question 5 Will the proposed variation of the Trust Deed of the Trust result in CGT events E6 and E7 in section 104-80 and 104-85 happening? Explanation of the legislation Disposal to beneficiary to end income right: CGT event E6

Section 104-80 provides that CGT event E6 will happen if a trustee of a trust (except a unit trust or one which Division 128 applies) disposes of a CGT asset to a beneficiary in satisfaction of whole or part of a beneficiary's right to receive ordinary or statutory income from the trust. Disposal to beneficiary to end income right: CGT event E7 Similarly, section 104-85 provides that CGT event E7 will happen if a trustee of a trust (except a unit trust or one which Division 128 applies) disposes of a CGT asset to a beneficiary in satisfaction of whole or part of a beneficiary's right to capital of the trust. Application to your circumstances The execution of the Deed of Variation will not cause the disposal of the assets of the Trust and consequently, CGT events E6 and E7 will not happen. Question 6 Will the proposed variation of the Trust Deed of the Trust result in CGT event E8 in section 104-90 happening? Disposal by beneficiary of capital investment: CGT event E8 Subsection 104-90(1) provides that CGT event E8 will occur where a beneficiary of a trust [13]

who did not give any money or property to acquire the CGT asset which is their interest in the trust capital, and they did not acquire the interest by assignment, and that beneficiary disposes of their interest in the trust estate. The Commissioner's view on whether takers in default have an interest in trust capital for the purposes of CGT event E8 can be found in Taxation Determination TD 2009/19 Income tax: does a taker in default of trust capital have an 'interest in the trust capital' for the purposes of CGT event E8 in section 104-90 of the Income Tax Assessment Act 1997? (TD 2009/19). With reference to section 104-90, the Commissioner states in paragraph 2 that 'only those interests which constitute a vested and indefeasible interest in a share of the trust capital fall within the scope of CGT event E8'. Application to your circumstances As the proposed amendments are seeking to remove certain entities from the class of General Beneficiaries of the Trust, and as those beneficiaries' interests in the trust did not constitute a vested and indefeasible interest in the trust capital the proposed amendments will not cause CGT event E8 to happen. > [1]

All future legislative references are to the Income Tax Assessment Act 1997 [2] FC of T v Bamford (2010) 240 CLR 481 at [36] [3] [1980] 1 NSWLR 510 at 518-519. [4] This analysis is similar to that expounded in Jacobs Law of Trusts . [5] A critical point underlining the decisions in FC of T v Commercial Nominees of Australia Ltd [1999] FCA 1455; [2001] HCA 3 and Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550. [6] See for example C of SR (Vic) v. Lam and Kym Pty Ltd (2004) 10 VR 420; Oswal v. FC of T [2013] FCA 745. [7] Kafataris v. DC of T (2015) 243 FCR 291 at [26] ( Kafataris ). [8] Taras Nominees Pty Ltd v. FC of T (2015) 228 FCR 418 at [5]; Kafataris at [31]. [9] ibid, paragraphs 36 and 37. [10] [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550. [11] [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42. [12] See Gartside and Another v. Inland Revenue Commissioners [1968] 1 All ER 121 and Re Weir's Settlement MacPherson and Another v. Inland Revenue Commissioners [ 1970] 1 All ER 297. [13] except a unit trust or a trust to which Division 128 applies.