Private ruling: Trust deed amendment
Date of advice: 8 February 2023
Published: 27 March 2023
Ruling period: 1 July XXXX to 30 June XXXX

Ruling: Q1: Will CGT event E1 or CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of making the variations to the Trust Deed for the Trust? | A1: No | Q2: Will CGT event E3 in section 104-65 of theITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust? | A2: No | Q3: Will the amendments to the trust deed result in CGT event E4 in section 104-70 of the ITAA 1997? | A3: No | Q4: Will CGT event E5 in section 104-75 of theITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust? | A4: No | Q5: Will CGT event E6 or CGT event E7 in sections 104-80 or 104-85 of the ITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust? | A5: No | Q6: Will CGT event E8 in section 104-90 of theITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust? | A6: No | Q7: Will any other CGT event in section 104 of theITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust? | A7: No

Relevant facts and circumstances: The Trust was established pursuant to the terms of the trust deed (Trust Deed). The Trustee was the first trustee of the Trust and continues to be sole trustee of the Trust. All entities are Australian residents for income tax purposes. No beneficiary holds an entitlement to a specific percentage of Income and Capital of the Trust. The Trustee has to amend the Trust Deed, in effect to convert the Trust from a discretionary trust to a unit trust. The beneficiaries of the Unitholder are to comprise the Capital Beneficiary and the Income Beneficiary. The ultimate beneficiaries of these entities are Individuals A and B and their related entities. The main asset of the Trust will continue to be held for the benefit of Individuals A and B and their related entities. The amendments do not result in the transfer of any asset - including in satisfaction of any unpaid entitlement of a beneficiary of the Trust to Income from a prior year. The amendments do not cause any beneficiary to become absolutely entitled to any particular asset of the Trust as against the Trustee. The amendments do not involve an agreement to create a trust over future property The Trust is not a managed investment trust. The amendments do not involve any agreement between the Trustee and another entity under which the right to the use and enjoyment of a CGT asset passes to another entity, shares, , options, prospecting entitlements, mining entitlements, conservations covenants over land, leases, deposits, emission units, debts, depreciating assets or foreign interests, collectables, carried interests, or the ending of Australian residency, a roll-over with respect to a CGT event, or becoming a member of or leaving a consolidated group. The amendments do not result in the loss or destruction of a CGT asset, the cancellation, surrender etc. of a CGT asset, in an adjustment being made to the cost base or reduced cost base of a CGT asset, a CGT asset passing to a tax advantaged entity, a CGT asset becoming trading stock Assumptions The amendments to the Trust Deed are valid. The entities will ensure that the beneficiaries of the unitholders of the Trust are not any permanently Excluded Beneficiary of the Trust. Amongst other things, this means that the Unitholder Trust trust deed will be amended to exclude foreign beneficiaries.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 section 104-55 | Income Tax Assessment Act 1997 section 104-60 | Income Tax Assessment Act 1997 section 104-65 | Income Tax Assessment Act 1997 section 104-70 | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 section 104-80 | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 section 104-90

Reasons for decision: Summary: In accordance with the assumptions, the amendments to the terms of the Trust are made in proper exercise of a power of amendment and are properly supported by that power. Consistent with the Commissioner's views in TD 2012/21, CGT events E1 or E2 will not apply to the amendments. | Detailed Reasoning - Detailed reasoning: The application of CGT event E1 or E2 to amendment to a trust deed will generally turn on questions of trust law, concerning the scope of the variation power in the trust instrument. In TD 2012/21 the Commissioner states that CGT events E1 or E2 will not 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 unless: The Commissioner accepts the general proposition that where there is some continuity of property and membership of the trust, changes to the terms of a trust that are made in proper exercise of a power of amendment will not terminate the trust where they are properly supported by that power. Accordingly, the scope of the amendment power and the validity of its exercise in a particular case will be critical. Application in these circumstances The facts of this ruling contain an assumption that the Trustee has the power to amend the Trust Deed in accordance with the amendments. In accordance with the assumption: There is continuity of property and membership of the trust - the main asset of the Trust will continue to be held for the benefit of Individuals A and B and their related entities. You have provided relevant clauses of the Trust Deed that defines Tertiary Beneficiaries. 'Another Trust' is defined to include a trust other than the Trust. Consequently, the Unitholder satisfies the definition of Another Trust. The beneficiaries of the Unitholder are to comprise the Capital Beneficiary and the Income Beneficiary. The ultimate beneficiaries of these entities are Individuals A and Band their related entities. Therefore, whilst the proposed Deed of Amendment will result in a Tertiary Beneficiary being the sole unit holder, the ultimate beneficiaries of that sole unitholder are trusts of which Individuals A and B are the specified beneficiaries (and will not include excluded beneficiaries). Therefore, in substance the beneficiaries remain the same. On the basis of the assumption that the amendments are valid, and in accordance with the views expressed in TD 2012/21, neither CGT events E1 or E2 will happen by reason of the variation of the trust instrument. It should be noted that where a change is beyond the power conferred by the terms of a trust, it will be of no effect. Therefore, it cannot give rise to a resettlement of the trust, and would not result in CGT events E1 or E2 happening. | Summary: CGT event E3 will not happen as a result of making the variations to the Trust Deed to convert the Trust to a unit trust, as prior to the amendments no beneficiary was absolutely entitled to any of the assets of the Trust. | Detailed Reasoning - Detailed reasoning: Subsection 104-65(1) of the ITAA 1997 provides that CGT event E3 happens if a trust over a CGT asset is converted to a unit trust and just before the conversion, a beneficiary was absolutely entitled to the asset as against the trustee. Draft Taxation Ruling TR 2004/D25 Income Tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25)sets out the Commissioner's view on when a beneficiary may become absolutely entitled to an asset. Paragraphs 10 and 11 of TR 2004/D25 provide: 10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40). 11. Under the rule in Saunders v Vautier , the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it. Beneficiaries of a discretionary trust do not have any interest, either individually or collectively, in the property or income of a trust estate. Where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital: it is for the trustee to determine, firstly, whether such beneficiaries will benefit at all under the terms of the trust and, secondly, to what extent the beneficiaries will benefit. Such beneficiaries have no more than a right to have the trust duly administered. (See Gartside and Another v. Inland Revenue Commissioners [1968] 1 All ER 121 and Re Weir's Settlement MacPherson and Another v. Inland Revenue Commissioners [1970] 1 All ER 297). Prior to the amendments, the Trustee has the discretion to pay the whole or any part of the income or capital of the Trust to any one or more of the eligible beneficiaries to the exclusion of the others in such proportions as the Trustee may determine. Consequently, no beneficiary was absolutely entitled to any of the assets of the Trust. Therefore, CGT event E3 will not happen with respect to the amendments to convert the trust to a unit trust. | Summary: CGT event E4 has no application with respect to the amendments to the Trust Deed itself: however, the changes will mean a trust in the nature of a unit trust, where the unitholders have acquired their units for consideration, such that section 104-70 of the ITAA 1997 is capable of applying where the Trustee makes a non-assessable distribution to the Unitholders in respect of their unitholdings. | Detailed Reasoning - Detailed reasoning: In broad terms, CGT event E4 (section 104-70 of the ITAA 1997) happens where the trustee of a trust makes a payment to a taxpayer in respect of their unit or interest in the trust acquired after 20 September 1985 (except for CGT event A1, C2, E1, E2, E6, or E7 happening in relation to it), and some or all of the payment is not included in the taxpayer 's assessable income, described as a non-assessable part (non-assessable distribution), which may be reduced by exclusions and adjustments under section 104-71. The Revised Explanatory Memorandum to the New Business Tax System (Miscellaneous) Act (No. 2) 2000 explains the operation of the provision as follows: 10.8 Section 104-70 of ITAA 1997 reduces the cost base of a unit or fixed interest in a trust where the trustee pays a non-assessable amount to the beneficiary. If the payment is more than the beneficiary's cost base, a capital gain is made. This means that, where the Trustee makes such a payment, the beneficiary will need to make an adjustment to the cost base of their trust asset or unit. This adjustment will affect the calculation of any capital gain or capital loss on the sale of the trust asset or unit. However, if the amount of the payment exceeds the cost base of the trust interest or unit, the excess is treated as a capital gain in the year it is paid to the beneficiary (see Taxation Determination TD 93/170 Income tax: capital gains: how is the adjusted payment calculated pursuant to subsection 160ZM(3A) of the Income Tax Assessment Act 1936 where there is a non assessable distribution from a unit trust and when is the adjusted payment used for the purposes of calculating a capital gain or loss under section 160ZM? and Taxation Determination TD 93/171 Income tax: capital gains: what are the consequences where a taxpayer receives a non assessable distribution in respect of units in a unit trust and the distribution exceeds the indexed cost base of the units? ). In Taxation Determination TD 2003/28 Income tax: capital gains: does CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997 happen if the trustee of a discretionary trust makes a non-assessable payment to (a) a mere object; or (b) a default beneficiary?, the Commissioner confirm that that CGT event E4 applies in respect of an interest in a trust that acquired for consideration or by way of assignment: In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a Unitholder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests. CGT event E4 has no application with respect to the variations itself: however, the changes will mean a trust in the nature of a unit trust, where the unitholders have acquired their units for consideration, such that section 104-70 of the ITAA 1997 is capable of applying where the Trustee makes a non-assessable distribution to the Unitholders in respect of their unitholdings. | Summary: CGT event E5 will not happen as a result of making the variations to the Trust Deed to convert the Trust to a unit trust, as prior to the proposed amendments no beneficiary was absolutely entitled to any of the assets of the Trust. | Detailed Reasoning - Detailed reasoning: Section 104-75 of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. A beneficiary of a discretionary trust does not have any interest in the trust assets except to the extent that the trustee exercises a discretion in favour of that beneficiary. Draft Taxation Ruling TR 2004/D25 Income Tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25)sets out the Commissioner's view on when a beneficiary may become absolutely entitled to an asset . Paragraphs 10 and 11 of TR 2004/D25 provide: 10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. This derives from the rule in Saunders v Vautier applied in the context of the CGT provisions (see Explanation paragraphs 41 to 50). The relevant test of absolute entitlement is not whether the trust is a bare trust (see Explanation paragraphs 33 to 40). 11. Under the rule in Saunders v Vautier , the courts do not regard as effective a direction from the settlor of the trust that purports to delay the beneficiary's full enjoyment of an asset. However, if there is some basis upon which a trustee can legitimately resist the beneficiary's call for an asset, then the beneficiary will not be absolutely entitled as against the trustee to it. Paragraph 13 of TR 2004/D25 states that an object of a discretionary trust cannot be absolutely entitled prior to any exercise of the trustee's discretion in their favour. This is because they do not have an interest in the trust's assets. Paragraphs 73 and 74 of TR 2005/D25 describe the type of interest required in the trust asset for a beneficiary to be absolutely entitled: 73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest. 74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it. The nature of the beneficiary's interest in the asset, and whether it meets the requirements of absolute entitlement, therefore depends on the particular trust instrument, and whether the trustee has made a resolution in favour of a beneficiary (such that the beneficiary would be absolutely entitled). In this case, no beneficiary has an entitlement to the property/assets of the Trust - and the amendments do not cause any beneficiary to have an entitlement to the assets of the Trust. Therefore, CGT event E5 will not happen as a result of making the variations to the Trust Deed for the Trust. | Summary: CGT events E6 and E7 will not happen as a result of making the variations to the Trust Deed to convert the Trust to a unit trust as the Trustee does not dispose of any assets of the Trust under the amendments. | Detailed Reasoning - Detailed reasoning: CGT events E6 and E7 happen if a trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the income or capital of the trust: sections 104-80 and 104-85 of the ITAA 1997. In this case, the amendments do not cause the disposal of the assets of the Trust. Therefore, CGT events E6 and E7 will not happen as a result of making the variations to the Trust Deed for the Trust. | Summary: CGT event E8 will not happen as a result of making the variations to the Trust Deed to convert the Trust to a unit trust as no beneficiary was absolutely entitled to any of the assets of the Trust and no beneficiary disposes of their interest, or part of it. | Detailed Reasoning - Detailed reasoning: CGT event E8 happens to a beneficiary of a trust (except a unit trust or a trust to which Division 128 applies) who did not give any money or property to acquire the CGT asset that is the beneficiary's interest in the trust capital and they did not acquire it by assignment and the beneficiary disposes of the interest, or part of it (but not to the trustee): section 104-90. Taxation Determination TD 2009/19 Income tax: does a taker in default of trust capital have an 'interest in the trust capital' for the purposes of CGT event E8 in section 104-90 of the Income Tax Assessment Act 1997? states that 'only those interests which constitute a vested and indefeasible interest in a share of the trust capital fall within the scope of CGT event E8' (paragraph 2 of TD 2009/19). No beneficiary has an interest in the trust that constitutes a vested and indefeasible interest in the trust capital. Therefore, the making of the amendments will not cause CGT event E8 to happen. | Detailed Reasoning - Question 7: Will any other CGT event in Division 104 of theITAA 1997 happen as a result of making the variations to the Trust Deed for the Trust? | Summary: No other CGT events in Division 104 of the ITAA 1997 will occur on the amendment of the Trust Deed. | Detailed Reasoning - Detailed reasoning: It is considered that there are no other CGT events happening when the Trust is converted into a unit trust on the basis: a) the amendments are, in accordance with the assumption, in effect, within the Trustee's powers contained in the trust instrument, so that the continuity of the Trust is maintained for trust law purposes; and b) the facts reflect that:

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. | The amendments will not result in the termination of the Trust, provided that the amendments are validly made within the scope of the amendment power. | The amendments will not, if valid, result in any assets of the Trust being held on new and different trusts. | the amendments do not involve any agreement between the Trustee and another entity under which the right to the use and enjoyment of a CGT asset passes to another entity, the creation or transfer of rights that is not disregarded, shares, options, prospecting entitlements, mining entitlements, conservations covenants over land, leases, deposits, emission units, debts, depreciating assets or foreign interests, collectables, carried interests, or the ending of Australian residency, a roll-over with respect to a CGT event, or becoming a member of or leaving a consolidated group; or