Private ruling: Income Tax: Capital gains tax - CGT events - GCT events E1 to E9 - trusts
Date of advice: 21 December 2015
Published: March 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: Not yet commenced.

Ruling: Q1: Will the proposed changes to the Trust Deed of the Trust and the constitutions of Company A, Company B and Company C cause capital gains tax (CGT) event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen? | A1: No.

Relevant facts and circumstances: The Trustee for the Trust The Trust was created by Trust Deed by the Settlor. It is a discretionary trust. Company A is the trustee (Trustee). The Principal and Appointor of the Trust is Individual D. The Trust Deed has not been previously amended. Pursuant to the powers contained in clause 14 of the Trust Deed, the Trustee wishes to vary the provisions of the Trust Deed in the manner contained in the proposed Deed of Amendment. Other proposed changes: Company A Individual D is the sole shareholder, director and secretary of Company A. Company A is the trustee of the Trust. It is proposed that Individual D will transfer their shares in Company A to Company B. It is proposed that Individual E will be the sole director and secretary of Company A. It is proposed that Company B, as sole shareholder, will resolve to amend the constitution of Company A. Company B Individual E is the sole director of Company B. Company B is owned by (members): • Family Trust F, and • Family Trust G. The Family Trust F is a discretionary trust controlled by Individual E for the benefit of their family. The Family Trust G is a discretionary trust controlled by Individual D for the benefit of their family. It is proposed that the members will resolve, as a special resolution, to amend the constitution of Company B. Company C Company B owns all the shares in Company C. Individual E is the sole director of Company C. Company C is the trustee of the Unit Trust. It is proposed that Company B, as sole shareholder, will resolve to amend the constitution of Company C. The Unit Trust The Unit Trust was created by Trust Deed. Company C is the trustee. The First Unit Holders are: • Family Trust F, and • Family Trust G. Staple Agreement It is proposed there will be a staple agreement between Company B, Company C and the Unit Trust limiting transfers of shares or units to ensure commonality of ownership. It will provide in all circumstances that shares in Company B must be dealt with in the same way as units in the Unit Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-55 | Section 104-60

Reasons for decision: Summary: The proposed changes to the Trust Deed of the Trust and the constitutions of Company A, Company B and Company C will not cause capital gains tax (CGT) event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen. | Detailed Reasoning - Detailed reasoning: CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997). CGT event E2 happens if a CGT asset is transferred to an existing trust (subsection 104-60(1) of the ITAA 1997). 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 the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent documents, or varied with the approval of a relevant court? (TD 2012/21) states that neither CGT event E1 nor CGT event E2 happens in these circumstances 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. Paragraph 24 of TD 2012/21 states: … the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, 4 will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening. 5 5 Where an asset is instead transferred to an existing trust, CGT event E2 will be the relevant event (subsection 104-60(1)). Paragraphs 26 and 27 of TD 2012/21 provide: 26. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. 6 Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective. 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. Paragraphs 2 to 5 of TD 2012/21 provides the following example: | Detailed Reasoning - Example 1: addition of new entities to, and exclusion of existing entities from, class of objects: 2. The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists. 3. Having decided to get out of the flower industry, the Squirrel Family disposes of their interest in Oak Pty Ltd to an unrelated third party. 4. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries: • the respective spouses of the children; • trusts and companies in which the family has a majority controlling interest; and • a philanthropic charity unrelated to the Squirrel Family. 5. the making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event. In your case, the Trust Deed contains a power that allows the Trustee, with the consent of the Principal, to revoke, add to or vary all or any of the provisions contained in the Trust Deed. Since the amendments were, in effect, contemplated in the existing Trust Deed by virtue of an amendment clause, the continuity of the Trust will be maintained for trust law purposes. Therefore, the proposed changes to Trust will not cause CGT event E1 or E2 in sections 104-55 or 104-60 of the ITAA 1997 to happen.