Private ruling: Trust income
Date of advice: 27 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Did the execution of the deed of variation trigger a CGT event? | A1: No. | Q2: Is the trustee of the Trust assessable on income of the trust derived in the year ended 30 June 2017 where such income is distributed to additional beneficiaries of the Trust by resolution of the Trustee passed and implemented prior to 30 June 2017? | A2: No. | Q3: Is the trustee of the Trust assessable on the capital proceeds from the disposal of a pre-CGT asset of the trust? | A3: No. | Q4: Is the trustee of the trust assessable on the distribution of capital proceeds from the disposal of pre-CGT assets of the Trust? | A4: No. | Q5: Is the trustee of the trust assessable on net capital gains derived on the sale of the share investment portfolio which are distributed to beneficiaries? | A5: No.

Relevant facts and circumstances: The trust was settled in 197X. The trust assets comprise: ● a pre-CGT property ● a portfolio of shares ● cash at bank The Deed of Variation included the residuary beneficiaries named in an individual’s Will as additional members of the class of general beneficiaries of the trust. This Deed also adds a definition of income. The beneficiaries of the Trust have been advised of their prospective entitlements (expressed as percentages). The notification and payment to the beneficiaries will occur prior to 31 August 201X. The present entitlement of the nominated beneficiaries to the trust income will be such that the adjusted Division 6 percentage does not and will not exceed the benchmark percentage for each beneficiary.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 100AB | Income Tax Assessment Act 1936 section 100AA | Income Tax Assessment Act 1936 section 100AB | Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-55(1)

Reasons for decision: Summary: Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs. 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). One question that has arisen concerning the scope of this event is whether an existing trust can change in such a fundamental way that although the trust has not terminated for trust law purposes, nonetheless for tax purposes a new trust has come into being. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various CGT events. Importantly, in situations where a disposal of trust assets is deemed to occur, section 102-25 of the ITAA 1997 provides that if more than one event can happen, for example A1 or E1, the event you use is the one that is the most specific to your situation. Taxation 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 an amendment to the terms of a trust will not result in the termination of a trust as long as: ● the amendment is made pursuant to a valid exercise of power contained within the trust’s constituent document; ● the amendment does not cause the existing trust to terminate and a new trust to arise 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 the circumstances we accept that that the deed of variation did not cause a resettlement or trigger a CGT event. Understanding when a beneficiary is 'presently entitled' is an important concept that affects who declares declaring income and who pays any tax payable: ● If a beneficiary is presently entitled to income then they are responsible for declaring any income and paying any tax due. ● If a beneficiary is not presently entitled to income then the trustee is responsible for declaring any income and paying any tax due. Beneficiaries are presently entitled to the income of the trust if they have: ● an indefeasible, absolutely vested interest in the income – in other words, they have a claim or interest in the income that can't be defeated by another person ● the right to demand immediate payment of the income – this means that beneficiaries can be presently entitled even though they may not have actually received an income distribution. Specific anti-avoidance rules prevent trustees from using tax-exempt entities to avoid tax (sections 100AA and 100AB of the Income Tax Assessment Act 1936) . Broadly, the anti-avoidance rules apply if a tax-exempt beneficiary is presently entitled to trust income for an income year and: ● the trustee does not notify the beneficiary of their entitlement or pay the income within two months of the end of the year – this is the pay or notify rule, or ● the beneficiary's entitlement exceeds a 'benchmark percentage' – this is the benchmark percentage rule. If either of these rules apply, the tax-exempt beneficiary is treated as not being – and never having been – presently entitled to the affected share of trust income. This share of net income is instead assessed to the trustee. | Detailed Reasoning - Application to your circumstances: In this case the trustee will notify and make a distribution of income to the additional beneficiaries prior to 31 August 201X. We accept that the additional beneficiaries were presently entitled to these amounts and given the information provided the anti-avoidance rules will have no application. Therefore the trustee will not be assessed on this income. | Detailed Reasoning - Question 3: Under subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) capital gains tax (CGT) event A1 happens if you dispose of a CGT asset. An entity disposes of a CGT asset if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Under subsection 104-10(5) of the ITAA 1997, a capital gain (or loss) you make is disregarded if you acquired the asset before 20 September 1985. In this case the trustee has disposed of an asset that was acquired before 20 September 1985. Therefore any capital gain or loss made from the disposal of the asset will be disregarded. | Detailed Reasoning - Question 4 and 5: In this case the trustee intends to distribute the capital proceeds from the disposal of both the pre and post CGT assets to members of the class of general beneficiaries. We accept that the additional beneficiaries were presently entitled to these amounts and given the information provided the anti-avoidance rules will have no application. Therefore the trustee will not be assessed on this income.