Private ruling: Variation of trust deed including pre-CGT status
Published: December 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the proposed Deed of Variation and the proposed Deed of Declaration to exclude beneficiaries in respect of the Trust give rise to capital gains tax (CGT) event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or any other CGT event and/or give rise to a change in the majority underlying ownership of the assets of the Trust for purposes of section 149-30 of the ITAA 1997, thus affecting the pre-CGT status of the assets? | A1: No

Relevant facts and circumstances: The Trust is a family discretionary trust (Applicant Trust), which was established prior to 20 September 1985. The Applicant Trust holds pre-CGT and post CGT assets. The creators of the Applicant Trust, who have adult children, are currently implementing their estate plan and, as part of their overall succession plan, wish to exclude one child, their spouse and their children as beneficiaries of the Applicant Trust. Currently, the Specified Beneficiaries of the Applicant Trust are named in the Schedule to the Family Trust Deed as The children of the creators of the Applicant Trust. The Family Trust Deed confirms the discretionary nature of the trust, including a subclause that provides for an automatic vesting of trust property to the Specified Beneficiaries on the vesting date but only in certain circumstances and thus does provide any Specified Beneficiary an absolute entitlement over any specific trust property. The Family Trust Deed allows the provisions of the Family Trust Deed to be revoked, added to or varied by the Trustee in writing with the consent of the Guardians. A draft Deed of Variation has been prepared (but not yet effected) pursuant to the Family Trust Deed to: i. give the Trustee power to exclude a person or persons from the class of General Beneficiaries; and ii. vary the Specified Beneficiaries named in the Schedule. A draft Deed of Declaration has been prepared (but not yet effected) pursuant to the Trustee's power of exclusion, to be inserted by the prepared Deed of Variation, to exclude from the class of General Beneficiaries: i. the child; ii. the spouse of the child iii. the lineal descendents of the child; iv. any company or trust in which any one or more of the above persons hold X% or more of the shares or represent more than X% of the Primary or Specified Beneficiaries or the fixed interests in the trust; and v. any trust that made distributions of income or capital to or for the benefit of any one or more of the above persons, companies or trusts whether directly or indirectly, including through interposed entities, after the year ending 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-55 | Income Tax Assessment Act 1997 Section 104-60 | Income Tax Assessment Act 1997 Section 104-75 | Income Tax Assessment Act 1997 Section 149-10 | Income Tax Assessment Act 1997 Section 149-30

Reasons for decision: Detailed Reasoning - Pre-CGT status: The rules in Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset, which happens 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. To be a pre-CGT asset, section 149-10 of the ITAA 1997 includes (as one of three criteria) satisfying the former subsection 160ZZS(1) of the ITAA 1936, which formerly held: For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset. Under ordinary legal concepts, 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. Therefore, it is not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) of the ITAA 1997. Taxation Ruling IT 2340, which addresses the application of section 160ZZS of the ITAA 1936 to assets held by trustees of discretionary family trusts, provides: Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application 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, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed…On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - 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 - the section would have its intended application as described. In your case, although the Applicant Trust intends to exclude a family member, their spouse and their children as beneficiaries of the Applicant Trust, the Applicant Trust will remain for the benefit of the members of the same particular family. It follows the pre-CGT assets of the Applicant Trust will not lose their pre-CGT status. | Detailed Reasoning - Variation of trust deed: In its table of sections, Subdivision 104-E of the ITAA 1997 lists CGT events that may happen in relation to trusts, including: § Creating a trust over a CGT asset: CGT event E1 (section 104-55). § Transferring a CGT asset to a trust: CGT event E2 (section 104-60). § Beneficiary becoming entitled to a trust asset: CGT event E5 (section 104-75). Taxation Determination TD 2012/21 is about 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. It confirms, if the terms of a trust are changed, CGT events E1 and E2 will not happen unless: (i) the change causes the existing trust to terminate and a new trust to arise for trust law purposes or (ii) 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. Example 4 in TD 2012/21 is about where CGT events E1 and E2 happen as a result of, in exercise of their power, the trustee declares that one of several assets forming part of the corpus of the trust is henceforth to be held exclusively in trust for one of the objects (beneficiaries). In your case, although the variation of the Applicant Trust deed will result in one less Primary Beneficiary , parts X and Y of the trust deed, including part X.X, maintain the discretionary nature of the trust and do not provide any specific beneficiary with absolute entitlement over any specific trust property. It follows a CGT event will not happen in relation to the proposed variations of the Applicant Trust deed.