The Federal Court has held that the trustee of a discretionary trust who exercised a special power of “appointment” to make 2 beneficiaries of the trust absolutely entitled to part of the corpus of the trust (being certain shares held by the trust), triggered CGT event E1 (with the resultant CGT liability). This was despite the fact that the taxpayer argued that the effect of the declaration was “merely” to establish a “separate fund of assets under the umbrella of the trust” and that therefore the appointment did not create a new trust in respect of that part of the corpus. However, in dismissing the taxpayer’s argument, the Federal Court found that the legal effect of the appointment was to create a separate trust over that part of the corpus for the absolute benefit of the 2 beneficiaries (namely the trustee himself and his wife as beneficiaries).
In arriving at this decision, the Federal Court found it unnecessary to deal with the Commissioner’s alternative claims that the effect of the declaration resulted in a “resettlement” (albeit, noting that the declaration did constitute a resettlement) or that it resulted in the CGT event A1. Likewise, it found that it was unnecessary to deal with the Commissioner’s other claim that the declaration resulted in CGT event E5 – albeit, finding that CGT event E5 would not have applied because the beneficiaries did not become “absolutely entitled” to the assets because of the trustee’s lien in respect of his right of indemnity over trust assets given the trust’s existing liabilities.
(Oswal v FCT [2013] FCA 745, Federal Court, Edmonds J, 31 July 2013.)
[LTN 146, 31/7/13]