Private ruling: CGT - testamentary trust
Date of advice: 12 December 2023
Published: 5 February 2024
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will capital gains tax (CGT) event A1, E1 or E2 happen if, in the circumstances outlined in the scheme, a new trustee is appointed to CGT assets of property of the trust and those assets are transferred to the new trustee? | A1: No.

Relevant facts and circumstances: On XX XX 20XX, the Deceased passed away and left a will (the Will). On XX XX 20XX, Grant of Probate was sealed, appointing the Executors under the Will. A testamentary trust has been established in accordance with the Will. The Will has made provisions for the appointment of trustees. The Scheme It is proposed to execute a Deed of Variation and Appointment of trustee of the testamentary trust. You want to replace one of the existing trustees with a new trustee. The decision to replace an existing trustee, and the appointment of a new trustee, has mutual consent of all parties. The move will ensure the trust continues to have two individual trustees as contemplated by the Will. There will be no other changes to the trust or the deed affecting the continuity of property and membership of the trust. The testamentary trust owns investments in the form of listed equities and property in New South Wales.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 100-200 | Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-55 | Income Tax Assessment Act 1997 subsection 104-60

Reasons for decision: Summary: A capital gain or loss is made only if a CGT event happens as detailed in section 100-200 of the Income Tax Assessment Act 1997 (ITAA 1997). The relevant events in your circumstances are CGT events A1, E1 and E2. Section 104-10 of the ITAA 1997 explains that CGT event A1 happens if you dispose of a CGT asset to someone else. Paragraph 104-10(2)(b) explains that the CGT event will not happen if there is merely a change of trustee. CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement as per section 104-55 of the ITAA 1997. CGT event E2 is detailed in section 104-60 of the ITAA 1997 and occurs when you transfer a CGT asset to an existing trust. However, neither event happens if the asset is transferred from another trust and the beneficiaries and terms of both trusts remain the same (paragraphs 104-55(5)(b) and 104-60(5)(b)). If more than one CGT event can happen, then you use the one that is most specific to your situation as provided for under subsection 102-25(1) of the ITAA 1997. At issue is whether the appointment of the new trustee and the transfer of the trust property to that new trustee will cause a CGT event to happen in respect of the transferred property. More particularly, the issue is whether the CGT assets in respect of which the new trustee is appointed will be settled on a new trust or transferred to a different trust. It is considered that the assets will not be settled on a new trust; nor will they commence to be held on a new or different trust. Therefore, neither CGT event E1 nor CGT event E2 will happen. It is considered that following the appointment of the new trustee and the transfer of asset to them, the relevant assets will continue to be held on the same trust as they were immediately before the appointment. In those circumstances, the transfer of assets to the new trustee will amount to no more than a mere change of trustee in respect of those assets. Therefore, the exception in paragraph 104-10(2)(b) will apply such that CGT event A1 will not happen either. An important factor that points to the assets continuing to be held on the same trust is that one of the original trustees will continue to be entitled to be indemnified out of the assets transferred to the new trustee in respect of any liabilities incurred in the proper administration of the trust by the original trustee before the transfer. Also relevant is the act that, following the appointment of the new trustee and the transfer of assets to it, the original and the new trustee will act jointly and will be jointly liable for any expenses properly incurred by either trustee. At law each trustee will owe an obligation to the same beneficiaries, and each beneficiary has rights in respect of each trustee regarding the due administration of the trust. It is considered that in the circumstances of your case there is no difference in substance of the proposed scheme which involves the removal of an existing trustee, to be replaced with new trustee, as mutually agreed by all parties of the testamentary trust. The appointment of the new trustee and the removal of an existing trustee will not, in your circumstances, materially alter the trust relationship in respect of the listed equities and property. It is therefore considered that, under the scheme, there will be a continuing testamentary trust in respect of the relevant assets.