Private ruling: Trust resettlement
Published: June 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: If the trust deed for the trust is varied in accordance with the terms of the deed to expand the beneficiary group of certain eligible beneficiaries, would that cause a termination of the existing trust (CGT event E1) or the creation of a new trust (CGT event E2)? | A2: No.

Relevant facts and circumstances: The trust was established prior to 20 September 1985. The trust holds all the shares in a private company (related entity) which were acquired prior to 20 September 1985. Under the trust deed, the trustee has the power to vary the deed. The deed requires that all alterations be in writing and must be sent to each beneficiary. The deed empowers the trustee to add 'at his absolute discretion' any number of 'persons, corporations and/or charities' to the list of income beneficiaries and corpus beneficiaries. The trust deed currently lists the beneficiaries as: • Income beneficiaries: • Individual A, his/her spouse and children • Company A • Any company (whether beneficially or in its capacity as trustee of any trust and whether subject to any conditions or not) so long as any of its issued shares are held beneficially for any of the other beneficiaries. • Corpus beneficiaries: • Individual A and his/her children. Currently, when one of the children of individual A passes away, the rights and entitlement of that child cease. There is no mechanism within the deed at present for a surviving spouse or child of the deceased child of individual A to benefit from the trust. You propose to vary the trust deed by Deed of Arrangement to allow for the following to be included within the group of beneficiaries: • Income beneficiaries: • The spouse and children of each child of individual A • The private family trust of each child of individual A • Any company (as a trustee or in its own right) whose shares are beneficially held by the spouse or children of each child of individual A. • Corpus beneficiaries: • The spouse and children of each child of individual A • The private family trust of each child of individual A

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 104-55 | Income Tax Assessment Act 1997 - Section 104-60 | Income Tax Assessment Act 1997 - Subsection 149-B | Income Tax Assessment Act 1997 - Section 149-15 | Income Tax Assessment Act 1997 - Section 149-30

Reasons for decision: Summary: CGT event E1 is triggered when a trust resettlement occurs, that is, when one trust estate has ended and another has replaced it. Tax Determination TD 2012/21 sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred. TD 2012/21 asserts that a valid amendment to a trust will not result in the termination of a trust as long as: • the amendment is made pursuant to an existing power; • the amendment does not cause the trust to terminate for trust law purposes; and • the effect of the amendment does not 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. In your case, the proposed variations to the existing Trust deed would be a valid amendment to the trust, not resulting in a termination of the trust, and will not result in the happening of CGT event E1 or E2. The provisions of Subdivision 149-B of the Income Tax Assessment Act 1997 (ITAA 1997) determine when a CGT asset of an entity stops being a pre-CGT asset. This happens at the earliest time when the 'majority underlying interests' in the asset were not held by 'ultimate owners' who held majority underlying interests in the asset immediately before 20 September 1985. An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if: • the other entity were to distribute any of its capital; and • the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner. Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: • the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and • the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. The expression 'beneficial interests' as used in the definition of majority underlying interests is not defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company. Taxation Ruling IT 2340 reflects an approach of 'looking through' interposed entities to determine which natural persons hold the beneficial interests. Where shares in a company are held by the trustee of a discretionary trust, the shares are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained. It states at paragraph 5 that it will be relevant to take into account the way in which the discretionary powers of the trustee are exercised when considering whether majority underlying interests in a pre-CGT asset have been maintained. For example, where a trustee continues to administer a trust for the benefit of a certain group of beneficiaries, IT 2340 states that section 160ZZS will not apply. This is merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion. In such a case, the Commissioner would find it reasonable to assume that for all practical purposes the majority underlying interests have not changed. In this regard, paragraph 6 of IT 2340 requires the taxpayer to show that the trustee has administered the trust for the benefit of its members, for example family members who are beneficiaries, at all times during the relevant years of income. Furthermore, the trustee must not have exercised discretionary powers to appoint beneficiaries or amend the trust deed that would result in a practical change of 50% or more of the underlying interests in the trust assets (paragraph 8), such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions. Taxation Ruling IT 2340 was written with reference to section 160ZZS of the ITAA 1936 (the section that preceded parts of Division 149). It has equal application to the current provisions dealing with changes to underlying majority interests in pre-CGT assets. The NTLG CGT Sub-committee minutes - 28 November 2001 considered the term 'family' for the purposes of Taxation Ruling IT 2340: Continuity of ownership test and growth of family The ICAA raised the following issue: In applying IT 2340, what is meant by 'one family' and by 'a new family'? What changes to the composition of the family (for example, births, deaths, marriages, divorces, and adoptions) affect this issue? What factors does the Commissioner take into account so that he or she can be satisfied or think it reasonable to assume that the majority underlying interests test has been met? The ATO stated that the issues like these arise occasionally, but the propositions in Taxation Ruling IT 2340 seem to be generally accepted. Thus, no comprehensive administrative policy has been developed on these issues. What constitutes a member of a particular 'family' will require consideration of the facts of particular cases. The ATO considers that what is contemplated is narrower that a 'relative' (eg. a distant relative would not normally be thought to qualify), but equally, the concept of 'family' is not intended to be limited to the 'nuclear' family (ie, father, mother and children). What is often described as an 'extended' family (ie, including grandparents, children, grandchildren and their spouses) would ordinarily qualify as a 'family' for these purposes. Also, if distributions are made to post-19 September 1985 additions to a family (for example, the birth of new family members and new persons joining a family through marriage), the 'family' distribution criteria would ordinarily still be satisfied. We consider the proposed variations to the trust deed will continue to benefit the same family as outlined within IT 2340 and is consistent with the response of the ATO in NTLG CGT Sub-committee minutes of 28 November 2001 and that majority underlying interests in the trust assets will not change as a result. Therefore, assets of the Trust acquired before 20 September 1985 will not stop being 'pre-CGT assets' under Division 149 of the ITAA 1997.

1. If the trust deed for the trust is varied in accordance with the terms of the deed to expand the beneficiary group, would this result in a change in the ultimate ownership of the assets of the trust in terms of the rules relevant to majority underlying ownership and affect the pre-CGT status of its assets?