Private ruling: CGT - trust variations
Date of advice: 10 October 2023
Published: 20 November 2023
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Will the variation of the Trust Deed cause any of CGT events A1, D1, E1, E2, or H2 to happen? | A1: No. | Q2: Will execution of the Deed of Agreement cause any of CGT events A1, D1, E1, E2, or H2 to happen? | A2: CGT Event D1 will happen. | Q3: If the execution of the Deed of Agreement results in a CGT event happening, will the XYZ Investment Trust receive any capital proceeds from it? | A3: No.

Relevant facts and circumstances: 1. The XYZ Investment Trust (the Trust) was settled by trust deed (the Trust Deed) in 20XX. 2. The trustee of the Trust is XYZ Investments Pty Ltd (the Trustee). The directors of the Trustee are: • Child A • Child B • Child C (These three individuals are herein referred to as 'the Children'). 3. The Children are each also a beneficiary under the Trust Deed. 4. The Trustee will vary the Trust Deed, which will thereafter have effect in the form provided to and considered by the Commissioner prior to issuing this private binding ruling (the Variation). 5. At or about the time the Trust Deed is varied, the Trustee will enter into a Deed of Agreement (the Agreement) with the Children. The Children will enter into the Agreement and it will bind them in relation to each of their capacities separately, including as beneficiaries of the trust estate. 6. Cl 2.2. of the Agreement provides: Each of the Family Beneficiaries agrees that they will at all times act in the utmost good faith to further the Purpose and to use their best endeavours and take all steps reasonably necessary to do so. 7. Cl 1.1 of the Agreement provides: Class of Beneficiaries means each of the Child A Class of Beneficiaries, the Child B Class of Beneficiaries and the Child C Class of Beneficiaries, as referred to in sub-clause 2(6) of the Trust Deed; ... Purpose means the purpose of sharing all benefits from the Trust as specified in sub-clause 2(4) of the Trust Deed, referred to in Recital F of this deed; 8. Cl 3 of the Agreement provides: The Trustee formally acknowledges the Purpose and the obligations undertaken by each of the Family Beneficiaries under this deed and, subject to proper compliance with its obligations and duties as trustee of the Trust, acknowledges also that it is bound to support the Purpose and to take all steps necessary to do so. 9. Cl 7 of the Agreement provides: Child A, Child B and Child C each acknowledges that all rights and obligations of each of them under this deed apply to every applicable role in which they are acting at any time, including the roles of director or shareholder (whether of the Trustee or of any other company controlled either by the Trustee or by the family of one or more of them), Family Beneficiary, Appointor, and any other role whatsoever. 10. Cl 4 of the Agreement provides: In order to achieve the Purpose, each of the Family Beneficiaries agrees that they will procure that: ... 4.5 In appointing Income and Capital to respective beneficiaries in a Class of Beneficiaries, the wishes of the following persons in relation to that Class of Beneficiaries will be taken into account and such appointments made in accordance with those wishes if legally permitted: 4.5.1 the Family Beneficiary; or 4.5.2 if the Family Beneficiary has died or ceased to have testamentary capacity, the Appointor representing that Class of Beneficiaries. 11. Cl 5 of the Agreement provides: 5.1 Child A, Child B and Child C each acknowledges that, in relation to the Class of Beneficiaries of the Trust of which each is respectively a member, his or her spouse will cease to be entitled to any benefits whatsoever as a Beneficiary of that Class in accordance with sub-clause 2(8) of the Trust Deed once there ceases to be at least one surviving member of that Class who is a member of the lineal line of descendants for that Class for the purposes of the Trust Deed. 5.2 In recognition of that cessation of potential Trust benefits for any of their spouses who cease for that reason to be a Beneficiary of the Trust, Child A, Child B and Child C each agree that the sum of $X million will be paid to any such spouse so affected within 6 months from the time of death of the last surviving member of the lineal line of descendants for the relevant Class: 5.2.1 funded in such manner out of the Trust as the survivors of Child A, Child B and Child C so agree; and 5.2.2 in the absence of any such agreement, the survivors of Child A, Child B and Child C must pay such sum of $X million in equal shares to the affected spouse. 12. Cl 9 of the Agreement provides: To the extent that sub-clause 4(3) of the Trust Deed applies at the Income Time to income of the Trust for a Financial Year or paragraph 5(1)(b) applies on termination of the Trust, each of Child A, Child B and Child C declares that: 9.1 he or she will hold any Income or Capital of the Trust to which they become entitled under sub-clause 4(3) or paragraph 5(1)(b) respectively in equal shares collectively for Beneficiaries of each of the Classes of Beneficiaries in existence at the time; and 9.2 as to the equal share for Beneficiaries of each such Class of Beneficiaries, for the Family Beneficiary belonging to such class or, if the Family Beneficiary has died before the relevant Income Time or the Termination Date, for the descendants of the highest degree of the Family Beneficiary in equal shares as tenants in common. Assumptions The Variation to the Trust Deed will be a valid exercise of the Trustee's powers and will not be a breach of trust. Execution of the Agreement by the Trustee will be a valid exercise of the Trustee's powers and will not be a breach of trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-35(1) | Income Tax Assessment Act 1997 subsection 104-35(5) | Income Tax Assessment Act 1997 subsection 104-55(1) | Income Tax Assessment Act 1997 subsection 104-60(1) | Income Tax Assessment Act 1997 subsection 104-155(1) | Income Tax Assessment Act 1997 subsection 116-40(1)

Reasons for decision: Detailed Reasoning - CGT Event A1: 13. Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides: (1) CGT event A1 happens if you * dispose of a * CGT asset. (2) You dispose of a * CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event A1 will not happen merely because of a change in the trustee. 14. The Variation of the Trust Deed will not cause the disposal of any CGT asset. Therefore, it does not cause CGT event A1 to happen. | Detailed Reasoning - CGT Events E1 & E2: 15. Subsection 104-55(1) of the ITAA 1997 provides: CGT event E1 happens if you create a trust over a * CGT asset by declaration or settlement. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event E1 will not happen merely because of a change in the trustee. 16. Subsection 104-60(1) of the ITAA 97 provides: CGT event E2 happens if you transfer a * CGT asset to an existing trust. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event E2 will not happen merely because of a change in the trustee. 17. 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) provides at paragraph 1 that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen unless: • the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or • the effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust. 18. TD 2012/21 provides at paragraph 21: Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark,[3] 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. 19. In accordance with the assumptions made for this ruling, the Variation of the Trust Deed will be a valid exercise of the Trustee's power and will not be a breach of trust. Furthermore, the Variation will not affect the continuity of property or membership of the Trust. Therefore, the Trust will not terminate as a result of the Variation. 20. TD 2012/21 provides at paragraph 27: 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. 21. TD 2012/21 provides at paragraph 29: ...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust. 22. We do not think the Variation will cause any trust asset to be held subject to a separate charter of rights or obligations. Therefore, alongside the assumption that the Variation will be a valid exercise of the Trustee's power and will not be a breach of trust, CGT events E1 and E2 will not happen when the Variation takes place. | Detailed Reasoning - CGT Event D1: 23. Subsection 104-35(1) of the ITAA 1997 provides: CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity. Example: You enter into a contract with the purchaser of your business not to operate a similar business in the same town. The contract states that $20,000 was paid for this. You have created a contractual right in favour of the purchaser. If you breach the contract, the purchaser can enforce that right. 24. Per the above, the Variation of the Trust Deed will result from a valid exercise of power by the Trustee and there will be a continuity of property and membership of the Trust. Also, the Variation will not cause any assets of the Trust to be held subject to a separate charter of rights and obligations. As a result, the Variation will not result in the creation of a contractual right or other legal or equitable right by the Trust in another entity, and so will not result in CGT event D1 happening. | Detailed Reasoning - CGT Event H2: 25. Subsection 104-155(1) of the ITAA 1997 provides: CGT event H2 happens if: (a) an act, transaction or event occurs in relation to a *CGT asset that you own; and (b) the act, transaction or event does not result in an adjustment being made to the asset's *cost base or *reduced cost base. Example: You own land on which you intend to construct a manufacturing facility. A business promotion organisation pays you $XXX as an inducement to start construction early. No contractual rights or obligations are created by the arrangement. The payment is made because of an event (the inducement to start construction early) in relation to your land. Note: This event does not apply if any other CGT event applies: see section 102-25. 26. The Variation to the Trust Deed will neither be, nor cause, an act, transaction or event to occur in relation to a CGT asset that the Trust owns. Therefore, it will not result in CGT event H2 happening. | Detailed Reasoning - CGT Event A1: 27. Execution of the Agreement will not result in the disposal of any CGT assets owned by the Trust. Therefore, it will not result in CGT event A1 happening. | Detailed Reasoning - CGT Event D1: 28. Execution of the Agreement creates obligations for the Trustee and for the Children. By executing the Agreement, the Trustee will create a contractual right or other legal or equitable right enforceable by the Children. 29. Subsection 104-35(5) of the ITAA 1997 provides: CGT event D1 does not happen if: (a) you created the right by borrowing money or obtaining credit from another entity; or (b) the right requires you to do something that is another * CGT event that happens to you; or (c) a company issues or allots * equity interests or * non-equity shares in the company; or (d) the trustee of a unit trust issues units in the trust; or (e) a company grants an option to acquire equity interests, non-equity shares or * debentures in the company; or (f) the trustee of a unit trust grants an option to acquire units or debentures in the trust; or (g) you created the right by creating in another entity a right to receive an * exploration benefit under a * farm-in farm-out arrangement. 30. None of these exceptions are relevant here meaning that CGT event D1 will happen for the Trust on execution of the Agreement. | Detailed Reasoning - CGT Events E1 & E2: 31. In accordance with the assumptions made for this ruling, execution of the Agreement by the Trustee will be a valid exercise of the Trustee's power and will not be a breach of trust. It will not result in the discontinuance of property or membership of the Trust. The Trust will therefore not terminate as a result of the Agreement. 32. The Agreement will not have the effect that any assets of the Trust are held to a separate charter of rights or obligations causing those assets to be held on terms of a different trust. 33. Based on the assumption that execution of the Agreement will be a valid exercise of the Trustee's power and will not be a breach of trust, CGT events E1 and E2 will not happen when the Agreement is executed. | Detailed Reasoning - CGT Event H2: 34. Because CGT event D1 will happen as a result of the execution of the Agreement, CGT event H2 cannot happen. | Detailed Reasoning - Question 3: 35. In accordance with the above, CGT event D1 will happen as a result of the execution of the Agreement. By executing the Agreement, the Trustee will create a contractual right or other legal or equitable right enforceable by the Children. 36. Subsection 116-40(1) of the ITAA 1997 provides: The capital proceeds from a • CGT event are the total of: (a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) the * market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). 37. Based on the facts on which this ruling is made, the Trust will not receive, or be entitled to receive, any money in relation to CGT event D1 happening. 38. Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 ? (TD 2014/26) at paragraphs 6 and 7 provides: 6. In Yanner v. Eaton (Yanner) the High Court accepted that property refers not to a thing but to a description of a legal relationship with a thing; and, more specifically, to the degree of power that is recognised in law as permissibly exercised over the thing. Noting the difficulties in determining what is meant by 'property' in a thing, their honours quoted Professor Gray who stated '[a]n extensive frame of reference is created by the notion that 'property' consists primarily in control over access'. 7. There is no single test nor a single determinative factor for identifying a proprietary right. Courts have emphasised different characteristics in different circumstances. One formulation that has been applied in Australia is the 'Ainsworth test' - which asks whether a right is definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree. However, courts have also focused on factors such as excludability (whether it is possible to exclude others from the right in question), commercial value (whether something is treated in commerce as a valuable proprietary right), and enforceability of the right against third parties generally. Accordingly, in determining whether something amounts to property it is necessary to weigh up a range of factors, and to treat none as definitive. 39. By executing the Agreement, the Trustee will obtain a contractual entitlement to enforce the Children's obligations under the Agreement (by the Trustee as a chose in action). Taking into account the factors identified in the 'Ainsworth test', it is not apparent whether the Children's obligations under the Agreement would or would not constitute property. Nonetheless, in our view, even if those obligations did constitute property, we do not think they would have market value. Accordingly, the capital proceeds from CGT event D1 happening here would be nil.