Private ruling: Estate planning
Date of advice: 20 March 2019
Published: June 2019
Ruling period: 1 July 201A to 30 June 201B | 1 July 201B to 30 June 201C | 1 July 201C to 30 June 201D | 1 July 201D to 30 June 201E | 1 July 201E to 30 June 201F
Date scheme commenced: 1 July 201A

Ruling: Q1: Will the Taxpayer make a capital gain under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of the transfer of their shares in the trustee companies to ABC? | A1: No | Q2: If the Taxpayer makes a capital gain as a result of the transfer of their shares in the trustee companies to ABC, will the Taxpayer be entitled to roll-over relief under Subdivision 122-A of the ITAA 1997? | A2: As the answer to Question 1 is no, it is not necessary to answer Question 2 | Q3: Will the Taxpayer make a capital gain under Division 104 of the ITAA 1997 as a result of transferring their shares in ABC to LKJ? | A3: No | Q4: If the Taxpayer makes a capital gain as a result of the transfer of their shares in ABC to LKJ, will the Taxpayer be entitled to roll-over relief under Subdivision 122-A of the ITAA 1997? | A4: As the answer to Question 3 is no, it is not necessary to answer Question 4 | Q5: Does CGT event E1 or E2 happen under Division 104 of the ITAA 1997 if the Taxpayer nominates LKJ as the successor appointor or guardian of the various discretionary trusts in the Group? | A5: No | Q6: Does CGT event E1, E2 or A1 happen under Division 104 of the ITAA 1997 if XY newly incorporated companies, 123 and 678, replace CVB as the trustee of the Family Trusts? | A6: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background ● The Taxpayer is the founder and executive director of the ABC ● The Taxpayer founded the Group in 19XX and undertakes property development projects ● The Group is comprised of many trusts and companies. The Group ownership structure has become complex and difficult to manage ● The Taxpayer is the appointor, and where applicable guardian, of the Group’s discretionary trusts and a shareholder of the several companies that act in the capacity of trustees of the Group trusts ● Generally, both the development projects and properties held for long-term investment are held by discretionary trusts, or unit trusts which are wholly-owned subsidiaries of discretionary trusts within the Group ● CVB and ABC are part of the Group and are wholly owned by the Taxpayer ● CVB acts as trustee of a number of trusts in the Group ● The restructure will not change the ultimate control of the Group, which will still rest with the Taxpayer The scheme The Group will be simplified in the following steps: 1. LKJ was incorporated in 201G. The Taxpayer holds 100% of the shares. The directors of LKJ include the Taxpayer, their spouse and their X children (the Family Board) (step 1) 2. Shares in all the Group trustee companies will be transferred to ABC for a nominal consideration. The consideration will be the issue of ordinary shares by ABC to the Taxpayer for an amount equal to the paid-up share capital of each trustee company subject to the share transfer. ABC’s directors include the Taxpayer, X Jnr and others who are not relatives of the Taxpayer (the Business Board) (step 2) 3. The trustee companies hold no assets other than the amount representing the initial paid-up capital and a trustee’s right of indemnity 4. The Taxpayer will then transfer their shares in ABC to LKJ in return for the newly issued ordinary shares in LKJ. Control of the Trustee Companies will continue to be held indirectly by The Taxpayer through their 100% shareholding in LKJ (step 3) 5. ABC holds no assets other than an amount representing the initial paid-up capital 6. Control of the Group trusts, via the trustee companies, will be exercised by the business board but subject to the family board which will control LKJ 7. The Taxpayer will execute various deeds in relation to the Group discretionary trusts which will nominate LKJ as their successor appointor and, where applicable, guardian (step 4). The Deed of Appointment nominating LKJ as the successor appointor or guardian will be: ‘the Present Guardian appoints the Successor as the Guardian, such appointment to take effect on the day upon which date the Present Guardian resigns as guardian or immediately following their death or permanent incapacity (whichever is sooner)’ 8. Control of the Group trusts, currently exercised by the Taxpayer through their shareholding and their appointorships in the trustees of several Group trusts will be reorganised so that the Taxpayer will have ultimate control through their shareholding in LKJ. Control of the Group will pass to the family board on any succession event 9. 123 and 678 were incorporated in 201G. The Taxpayer holds 100% of the shares in both 123 and 678 10. 123 and 678 are not part of the main operating business; they are the Taxpayer’s private undertakings. As such, the direct control of 123 and 678 will not pass to ABC 11. CVB will be replaced as the trustee of the Family Trusts. 123 and 678 will become the trustees of the Family Trusts (step 5) 12. The Taxpayer will continue as the guardian of the AAA Trust with the power to appoint and remove the trustee. The Taxpayer proposes to nominate their spouse as successor appointor or, if they predeceased them, LKJ 13. The Taxpayer confirmed: a) The steps are being undertaken for the primary purpose of estate planning and to facilitate ongoing control of the group b) There are no other Private Ruling Applications lodged in respect to the Group simplification c) The proposed scheme is not part of a broader restructure d) While the Group is constantly changing and evolving other activities undertaken by ABC are not related to this estate planning exercise

Relevant legislative provisions: Income Tax Assessment Act 1997 , section 100-10 | Income Tax Assessment Act 1997 , Division 102 | Income Tax Assessment Act 1997 , section 102-20 | Income Tax Assessment Act 1997 , Division 104 | Income Tax Assessment Act 1997 , section 104-10 | Income Tax Assessment Act 1997 , section 104-55 | Income Tax Assessment Act 1997 , section 104-60 | Income Tax Assessment Act 1997 , Subdivision 110-A | Income Tax Assessment Act 1997 , section 110-25 | Income Tax Assessment Act 1997 , section 116-20 | Income Tax Assessment Act 1997 , Subdivision 122-A | Income Tax Assessment Act 1997 , section 995-1

Reasons for decision: Summary: Transferring shares from The Taxpayer to ABC will trigger CGT event A1. The cost base of the shares under section 110-25 of the ITAA 1997 is the total paid-up capital of the trustee companies. Under the general rules about capital proceeds in section 116-20 of the ITAA 1997 the amount received by the Taxpayer is the same as the cost base. As a result no capital gain will arise in respect of the transfer of the shares in the trustee companies from the Taxpayer to LKJ under step 2 of the Group simplification. | Detailed Reasoning - Capital gains tax (CGT): When a person transfers a CGT asset to someone else under section 104-10 of the ITAA 1997 a CGT event A1 happens. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. Subdivision 110-A of the ITAA 1997 contains the rules about calculation of a CGT asset’s cost base. The cost base of a CGT asset is made up of five elements: 1. Money paid or property given for the CGT asset 2. Incidental costs of acquiring the CGT asset or that relate to the CGT event 3. Costs of owning the CGT asset 4. Capital costs to increase or preserve the value of your asset or to install or move it 5. Capital costs of preserving or defending your title or rights to your CGT asset These elements added together form the CGT asset’s cost base. According to subsection 100-10(1) of the ITAA 1997 the net capital gain is the total of the capital gains for the income year, reduced by any capital losses that have been made. The amount received by the Taxpayer will comprise both the capital proceeds and the cost base. Section 116-20 of the ITAA 1997 provides the general rules to be applied when calculating capital proceeds. Section 116-20 of the ITAA 1997 states: The capital proceeds from a CGT event are the total of a) the money you have received, or are entitled to receive, in respect of the event happening; and b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) The cost base of the shares under section 110-25 of the ITAA 1997 is the total paid-up capital of the trustee companies. The Taxpayer will receive the paid-up capital of each corporate trustee as the capital proceeds for transferring their shares to ABC; the Taxpayer will not receive any other property. The trustee companies hold no assets in their own right other than an amount representing the initial paid-up capital and a trustee’s right of indemnity. Therefore, the market value of each trustee company will not be more than the paid-up capital. Under the general rules about capital proceeds under section 116-20 of the ITAA 1997 the amount received by the Taxpayer is the same as the cost base. | Detailed Reasoning - Conclusion: A capital gain will not arise in respect of the transfer of trustee companies’ shares from the Taxpayer to ABC under step 2 of the Group simplification. | Detailed Reasoning - Question 2: If the Taxpayer makes a capital gain as a result of the transfer of their shares in the trustee companies to ABC, will the Taxpayer be entitled to roll-over relief under Subdivision 122-A of the ITAA 1997? | Detailed Reasoning - Detailed reasoning: As the answer to Question 1 is no, it is not necessary to answer Question 2 | Detailed Reasoning - Question 3: Will the Taxpayer make a capital gain under Division 104 of the ITAA 1997 as a result of transferring their shares in ABC to LKJ? | Summary: Transferring ABC shares from the Taxpayer to LKJ will trigger CGT event A1. The cost base of the shares under section 110-25 of the ITAA 1997 will be the total paid-up capital of ABC. Under the general rules about capital proceeds under section 116-20 of the ITAA 1997 the amount received by the Taxpayer is the same as the cost base. As a result no capital gain will arise in respect of the transfer of the Taxpayer’s shares in ABC to LKJ under step 3 of the Group simplification. | Detailed Reasoning - Detailed reasoning: Transferring ABC shares from the Taxpayer to LKJ will trigger CGT event A1. The Taxpayer will receive the paid-up capital of ABC as the capital proceeds for transferring their shares to LKJ; the Taxpayer will not receive any other property. Before step 2 of the scheme ABC held no assets in their own right other than the amount representing the initial paid-up capital. After step 2, but before step 3, ABC will hold assets (the shares in the trustee companies). The cost base of ABC’s shares under section 110-25 of the ITAA 1997 will be the total paid-up capital of ABC. The market value of ABC will not be more than the paid-up capital. The cost base of the shares under section 110-25 of the ITAA 1997 will be the total paid-up capital of ABC. In the general rules about capital proceeds under section 116-20 of the ITAA 1997 the amount received by the Taxpayer is the same as the cost base. | Detailed Reasoning - Conclusion: A capital gain will not arise in respect of the transfer of the Taxpayer’s shares from ABC to LKJ under step 3 of the Group simplification. | Detailed Reasoning - Question 4: If the Taxpayer makes a capital gain as a result of the transfer of their shares in ABC to LKJ, will the Taxpayer be entitled to roll-over relief under Subdivision 122-A of the ITAA 1997? | Detailed Reasoning - Detailed summary: As the answer to Question 3 is no, it is not necessary to answer Question 4 | Detailed Reasoning - Question 5: Does CGT event E1 or E2 happen under Division 104 of the ITAA 1997 if the Taxpayer nominates LKJ as the successor appointor or guardian of the various discretionary trusts in the Group? | Summary: There will be full continuity of each trust’s constitution, property and membership. There will be no fundamental changes to each trust’s characteristics. The proposed amendments will not trigger the happening of CGT event E1 pursuant to section 104-55 of the ITAA 1997 or CGT event E2 pursuant to section 104-60 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. Section 104-60 of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust. 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 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? (TD 2012/21) expresses the view that neither CGT event E1 nor CGT event E2 happens if the terms of the 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 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. TD 2012/21 was issued following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ) and the High Court's refusal to grant the Commissioner leave to appeal that decision. The explanation to TD 2012/2 explains the Commissioner’s view as follows: 21. …….assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power. 24. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, 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, 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. …. 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. 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. Taxation Determination TD 2012/21 further explains that the scope of the relevant power is determined by the construction of the words of the trust deed, the surrounding context and any relevant admissible evidence. Where a trustee is found not to have power to vary the trust in the manner contended, such invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening. There will be changes to some of the Group’s discretionary trust deeds to allow the Taxpayer to nominate a successor. Once executed the Deed of Appointment nominating LKJ as the successor appointor or guardian in relation to the Group discretionary trusts will read: ‘the Present Guardian appoints the Successor as the Guardian, such appointment to take effect on the day upon which date the Present Guardian resigns as guardian or immediately following their death or permanent incapacity (whichever is sooner)’. As there will be full continuity of each trust’s constitution, property and membership and no fundamental changes to each trust’s characteristics under the principles established in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42 ( Commercial Nominees ) and Clark there can be no CGT event. | Detailed Reasoning - Conclusion: The proposed amendments will not trigger the happening of CGT event E1 pursuant to section 104-55 of the ITAA 1997 or CGT event E2 pursuant to section 104-60 of the ITAA 1997. | Detailed Reasoning - Question 6: Does CGT event E1, E2 or A1 happen under Division 104 of the ITAA 1997 if the XY newly incorporated companies, 123 and 678 replace CVB as the trustee of the Family Trusts? | Summary: The change in trustees of the XY trusts will not trigger CGT event E1, E2 or A1 when the title to the underlying trust property passes to the new trustee. | Detailed Reasoning - Detailed reasoning: If 123 and 678 replace CVB as trustee of the Family Trusts there will be: ● no fundamental change to either of the trust’s characteristics ● full continuity of the constitution, property and membership of each trust ● no change to most of the trust deeds with the one exception being changes to some of the deeds to allow the appointor to nominate a successor. The Trustee change in both trusts does not create fundamental changes to the trust’s characteristics as the control will remain with the Taxpayer. Accordingly, there will be no CGT event E1 or E2. This is supported by the principles established in Commercial Nominees and Clarke, and discussed in Question 5. The change in trustees of the XY trusts will not trigger CGT event A1 when the title to the underlying trust property passes to the new trustee. Expressly, the note to section 104-10(2) of the ITAA 1997 states ‘a change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust… This means that CGT event A1 will not happen merely because of a change in the trustee’. | Detailed Reasoning - Conclusion: The change in trustees of the XY trusts will not trigger CGT event E1, E2 or A1 when the title to the underlying trust property passes to the new trustee.

Reasons for Decision: These reasons for decision accompany the Notice of private ruling for 123 and others. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Will The Taxpayer make a capital gain under Division 104 of the ITAA 1997 as a result of the transfer of their shares in the trustee companies to ABC?