Little lies ? The Rinehart Private Ruling **

Obviously, there has been an enormous amount of interest in relation to the Rinehart trust dispute matter over an extended period of time.

Interestingly, the centrepiece of the dispute, at least from a tax perspective, does not always receive a significant amount of attention.

Given what has been disclosed publicly, there are many who believe that Ms Rinehart successfully obtained a private ruling from the Tax Office in relation to whether there were any capital gains tax (CGT) consequences of the trust, which is the focus of the dispute, vesting when Ms Rinehart’s youngest child turned 25.

While it cannot be certain, it appears that private ruling authorisation No. 1012254771092 relates to the Rinehart matter. As usual, if you would like a copy of the ruling please contact me.

The private ruling carefully considers whether CGT event E5 occurs on the vesting of a trust. CGT event E5 is said to occur when a beneficiary becomes ‘absolutely entitled' to a CGT asset of trust as against the trustee.

The ruling then goes onto explore in some detail the broad position that the Tax Office adopts in these areas based on Taxation Ruling 2004/D25 (TR 2004/D25). Again, as usual, if you would like a copy of the ruling please contact me.

The Tax Office confirms that while TR 2004/D25 remains in draft, so long as it is not withdrawn, it does represent its view of the law.

Based on the analysis of TR 2004/D25, the ruling concludes that because no beneficiary was able to call for any one or more of the assets to be transferred to them, they were not entitled to any assets as against the trustee, and therefore, CGT event E5 did not occur on the vesting of the trust.

An interesting footnote in this regard is that CGT event E5 was essentially based on similar UK legislation. The CGT rules in the UK however, unlike in Australia, explicitly state that absolute entitlement can be triggered for jointly owned property even when the trustee's right of indemnity is yet to be satisfied.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, ‘Little Lies’ is a song by legendary band Fleetwood Mac from 1987.

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Converting water into wine (or family trusts into fixed trusts) is way cool**

Previous View posts have considered various aspects of fixed trusts.

For a myriad of structuring issues, one issue that appears to be raised more regularly is whether it is possible to convert a family discretionary trust into a fixed trust.

This issue was considered some years ago by the Tax Office in Private Ruling Authorisation Number: 1012991136582. As usual, if you would like a copy of the ruling please let me know.

Broadly the factual matrix was as follows -

1. a 'standard' family trust held an asset;
2. the trust had a widely crafted power of variation;
3. he trustee resolved to make a capital distribution of the balance in the unrealised capital profits account to certain beneficiaries, with this amount left unpaid (ie meaning it was a debt owed by the trust to the beneficiaries);
4. by agreement there was then a conversion of the debts (and some other outstanding loans) to equity such that each of the relevant beneficiaries had a certain percentage of ‘equity’ in the trust;
5. relying on the power to vary, the trustee then amended the terms of the trust deed to convert it into a fixed unit trust.

After analysing the provisions of its Tax Determination in relation to resettlements (namely TD2012/21, see our previous post that explores this) the Tax Office confirms that so long as the amendments are within the powers of the trust deed, the continuity of the trust will be maintained for trust law purposes.

This is because the ultimate beneficiaries of the trust after the proposed amendments would be the individuals who were the objects of the trust before the variation. The fact that the extent of the interests of the beneficiaries in the trust change as a result of the variation was seen as irrelevant.

Therefore, the amendments to the terms of the trust did not trigger capital gains tax (CGT) event E1 or CGT event E2, being the 'resettlement' CGT events.

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement.

CGT event E2 happens if a CGT asset is transferred to an existing trust.

The Tax Office further confirmed that CGT event E5 was not triggered by the conversion of a family trust to a fixed trust.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee despite any legal disability of the beneficiary.

CGT event E5 does not however happen if the trust is a unit trust and thus this exemption was held to apply here.

The Tax Office also confirmed that there are no other CGT events that happened when the family trust was converted into a unit trust. This is because the amendments were within the trustee's powers contained in the trust instrument. This means that the continuity of the trust was maintained for trust law purposes.

A similar conclusion was reached by the Tax Office in Private Ruling Authorisation Number 1051886979078.

The above post is based on an article that originally was published in the Weekly Tax Bulletin.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the King Missile song ‘Jesus was way cool'.

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(out of) ‘Control’** of family trusts

Under the capital gains tax small business concessions, what amounts to ‘control’ of a discretionary trust is an important issue. 

In this regard, a key aspect relates to the concept of whether the trustee of a trust ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes of another person or entity’.

Arguably, the leading analysis of these rules is in the case of Gutteridge v Commissioner of Taxation [2013] AATA 947.

Briefly, the case involved sale of assets by the corporate trustee of a traditional family trust (Trust).

The sole director and shareholder of the corporate trustee was Ms McKenzie, who also controlled another company (Company).

The principal of the Trust was as third party professional adviser to the family (Mr Coffey), who provided evidence that he would always follow any directions from Ms McKenzie’s father (Mr Gutteridge) including, if necessary, removing a trustee from that role. In turn Mr Coffey confirmed he would disregard any instructions from Ms McKenzie that were contrary to those provided by Mr Gutteridge.

The Tax Office denied access to the small business concessions on the basis that Ms McKenzie controlled both the Trust and Company.

The court held however that the Trust ultimately acted in accordance with the directions of Mr Gutteridge and therefore Ms McKenzie did not control it.

The Trust was therefore able to access the small business concessions.

The case ultimately reinforces that the rules are highly dependent upon the factual matrix of each case.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Chemical Brothers song 'Out of control’.

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Happy New Year’s Day**! & some further reasons for the rise and rise of share sales

Last week’s post considered some key aspects impact of the introduction of the 50% general discount on business succession.

A further significant related transaction cost issue that has also changed over the last few years to further encourage purchasers to consider a share acquisition relates to the tax consolidation rules.

In particular, it was historically the case that in order for a purchaser to be able to claim depreciation in relation to the market value of the assets they had acquired, they needed to physically acquire those assets.

In contrast, if the shares in the relevant company were acquired, then there was no adjustment to the tax carrying costs of its assets.

In very broad terms, if a purchaser acquires shares in another company and that company becomes a member of the purchaser’s tax consolidated corporate group, then it is permitted to 'reset' the tax carrying costs of all assets of the company.

Although there can be a number of problems that arise with this resetting, in very general terms, the intention of ensuring that the tax outcome for a purchaser on a share sale as compared to an asset sale in what is otherwise an identical transaction are normally broadly achieved.

One last permutation worth remembering relates to where a purchaser is open to consider a share sale arrangement but wants to ensure that any historical difficulties with the company currently operating the business are quarantined to the maximum extent possible.

In these circumstances, it is often sensible for the vendor to suggest that a restructure be done before completion (often the finalisation of the restructure will be a settlement day condition precedent) whereby the assets of the existing company are 'rolled over' into a cleanskin company.

Obviously, there are a number of commercial, tax and stamp duty issues that need to be considered with this approach, however in many instances, it can deliver the precise outcome that each of the parties are aiming for.

** for the trainspotters, the title here is riffed from the U2 song ‘New Year’s Day’.

Keeping it real** on 30 June – the rise and rise of share sales

Given that it is 30 June, it seemed like an appropriate day to focus on the impact of the introduction of the 50% general discount on business succession.

Since its introduction (and certainly with the various evolutions of the small business capital gains tax concessions), we have seen an ever-increasing number of merger and acquisition transactions take place by way of share sale.

Historically, many (if not all) of these transactions would have taken place by way of asset sale.

Due to the difficulties with accessing the various tax concessions when assets are sold by a company, the attractiveness of a share sale has become significant.

The additional issue in this regard can often be that the share sale will legitimately avoid any stamp duty consequence, which is still in some states not the case in relation to a business sale.

One of the key ramifications of the increased number of share sales is that many vendors will actively embark on a 'vendor due diligence' exercise.

Broadly, this involves, sometimes many months before any sale transaction is entered into, the vendor prepares a complete set of due diligence material from its own perspective.

Such an approach can help to significantly reduce the overall costs and risks that might otherwise be associated with a share sale transaction.

Next week’s post will further explore two other key aspects to consider in relation to share sale arrangements.

** for the trainspotters, the title here is keeping it very real by being riffed from a line in the Hannah Montana song ‘Let’s get crazy’.