Private ruling: Declaration of trust
Published: March 2013
Ruling period: 1 July 2013 to 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will a Capital Gains Tax ('CGT') event occur when the draft Deed of Confirmation in relation to the subject shares is executed? | A1: No

Relevant facts and circumstances: The trust is a discretionary trust established for the benefit of the primary beneficiary and their family and related entities. The trust was established by a deed in the 1980s with a corporate trustee. The primary beneficiary and their family members - collectively the legal owners - hold shares ('subject shares') in X private companies established in the 1990s. The Australian Securities and Investments Commission ('ASIC') current records show that the legal owners do not hold the subject shares beneficially. The applicant of the private ruling request states that: • at or around the time the private companies were incorporated, the legal owners executed declarations of trust evidencing that they now held their respective shares in the relevant companies for the absolute benefit of the discretionary trust; • the documents evidencing the declarations of trust ('Declarations of Trust') have been misplaced and cannot be located. • the parties now wish to execute a Deed of Confirmation to confirm the existence of the trust whereby the subject shares continue to be held on trust for the absolute benefit of the discretionary trust. The applicant states that there are no working papers or other records detailing the capital gain tax calculations for any of the Declarations of Trust as at the time the three private companies would have been incorporated recently and therefore would have had nominal value only. There would have been no capital gain to calculate.

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

Reasons for decision: Summary: It is considered that CGT event A1 (section 104-10), CGT event E1 (section 104-55), or CGT event E2 (section 104-60) could occur under the arrangement. | Detailed Reasoning - CGT event E1: Section 104-55 provides that CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. A trust is considered to have been created when changes made to the trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created. One example is when there is a change in the underlying beneficial ownership of the asset. In the present case, at issue is whether the Declarations of Trust did exist as claimed such that the execution of the Deed of Confirmation will not result in a change in the underlying beneficial ownership of the subject shares and, therefore, CGT event E1 will not occur. The applicant claims that each legal owner of the relevant subject shares executed declaration of trust over those shares shortly after the subject companies were incorporated back in the 1990s. As a result, they no longer held the subject shares for their own benefit but for the absolute benefit of the corporate trustee as trustee for the family trust. The primary evidence of this change of beneficial ownership - the Declarations of Trust - is claimed to have been misplaced and cannot be located. The purpose of the Deed, accordingly, is to reiterate the declarations and confirm that the subject shares are already held for the benefit of the family trust and it does not declare a further trust in respect of the subject shares. If this assertion is to be accepted, the execution of the proposed deed will have no tax consequences as there will not be the requisite change in the beneficial ownership of the shares. The change would have occurred at the time when the legal owners first declared trust over their respective shares, giving rise to CGT event E1. The applicant states that the legal owners executed sworn statements in 200X in support of their claim as to the existence of the Declarations of Trust. For the purposes of this private ruling request, the legal owners have also executed statutory declarations setting out the factual history of the Declarations of Trust. The details provided indicate that the majority of the documents, in particular the sworn declarations, are either incomplete or not provided. As such, they have limited evidentiary value. Extracts from the Australian Security & Investment Commission ("ASIC') database provided by the applicant confirm that none of the legal owners beneficially owned any of the issued shares in the X subject companies as at month 20XX. Further search of the ASIC records has revealed that the 199X annual return lodged by one of the companies with ASIC recorded that neither of the two shareholders held their shares beneficially. The information alights with the claim of the applicant. Similarly, the 199X annual return of the second private company also recorded that the shareholders were not the beneficial owners of the shares. However, in the 199X annual return of the third company, each shareholder answered 'Y' to the question "Is the member the beneficial owner of the shares?' This is inconsistent with their statements in respect of the Declaration of Trusts. The legal owners explained that the annual return had been lodged incorrectly without proper regard to the actual nature of share ownership. In support of the claim, they have provided copies of the annual returns of a later year with ASIC. The error was rectified by notifying ASIC that the shareholders did not own the shares beneficially. The legal owners have also provided copies of the annual returns of other years confirming the legal owners were not the beneficial owners. A copy of the ASIC historical extract of one of the companies provided by the applicant indicates that the shares were not beneficially owned by the registered holders. The applicant claims that these details are consistent with the ASIC Company Statements they have lodged since 200X following the abolition of annual returns from 1 July 2003. They further explain that it is rare in their experience for ASIC records to be free from all errors and to have a completely accurate statement of details of a company over many years. In determining whether the Declarations of Trust did exist as asserted by the legal owners, the following facts are considered: • The ASIC documents are obtained from an independent source. The 199X annual returns for two of the companies are, therefore, credible documentary evidence in support of the claim that the subject shares have always been held by the legal owners for the absolute benefit of the family trust. • In regard to the shares of the third company, the information disclosed in the 199X annual return contradicts the statement that the legal owners declared a trust over the shares for the benefit of the family trust on or around the time of incorporation. On the other hand, the details in the annual returns in subsequent years which, although unrelated to 199X, do give credence to the explanation that the anomaly was an error due to a lack of proper regard to the actual nature of share ownership. There is also no reason to doubt the veracity of the applicant's claim that the beneficial ownership status has been reflected in all ASIC Company Statements since 200X. On the basis of the ASIC documents and the statements made by the applicant, it is considered reasonable to accept the legal owners' claim that each member declared a trust over their respective subject shares on the declaration dates and the Declarations of Trust have since been lost. It is accepted that CGT event E1 would have occurred at the time of the declarations. Accordingly, when the Deed is executed, it will merely record a trust already in existence and there will be no change in the underlying beneficial ownership of the subject shares. Since no trust will be created over the shares, it will not give rise to CGT Event E1 under section 104-55. CGT event E2 Subsection 104-60(1) provides that CGT event E2 happens when an entity transfers a CGT asset to an existing trust. Under the proposed arrangement no property will be transferred to an existing trust. Therefore, CGT event E2 will not arise. CGT event A1 CGT Event A1 under section 104-10 happens when a taxpayer disposes of a CGT asset. There is a disposal of a CGT asset if a change of ownership happens from the taxpayer to another entity, whether because of some act or event or by operation of law.