Edited version of private ruling

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Ruling

Subject: Trust deed amendments - Continuation of the existing trust or creation of a new trust - CGT event E1, A1.

Will the proposed amendments (extension to the Vesting Day, definition of Guardian and definition of Appointor) to the X Family Trust (the Trust) give rise to CGT Event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT Event A1 under section 104-10 of the ITAA 1997?

Advice/Answers

No

Relevant facts

Correspondence from the applicant requesting a private ruling and including:

A copy of the Trust Deed of settlement;

A copy of the Minutes of Meeting of Directors resolving to changing the name of the trust;

A copy of the Deed of Appointment and Retirement appointing a new trustee; and

A copy of the draft Deed of Appointment and Amendment detailing proposed changes to:

· the Vesting Day

· the definition of "the Appointor"

· the definition of "the Guardian"

· Scheme

The Trust is a discretionary trust.

The draft Deed of Appointment and Amendment details the following 'proposed amendments':

Appoint a later date for Vesting;

Amend the definition of "the Guardian" by including the words:

"or any other person appointed by the current Guardian, either by deed or will, whether during the lifetime of the current Guardian or after his or her death"

after the word "Schedule" in the second line of the definition in the Trust Deed.

Amend the definition of "the Appointor" by including the words:

"or any other person appointed by the current Appointor, either by deed or will, whether during the lifetime of the current Appointor or after his or her death"

after the word "Schedule" in the second line of the definition in the Trust Deed.

The Trust Deed provides express power to the Trustee to appoint a later date as "the Vesting Day" subject to the consent of the Guardian and the new date being within the perpetuity period.

The Trust Deed provides a general power to the Trustee to vary the terms of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 104-55

Reasons for decision

Question 1

Summary

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, CGT event E1 under section 104-55 of the ITAA 1997 will not happen. As there has been no change in ownership of the Trust Property and no disposal of a CGT asset under subsection 104-10(2), CGT event A1 under section 104-10 of the ITAA 1997 will also not happen.

Detailed reasoning

A capital gain or loss is made only if a CGT event happens (section 102-20 of the ITAA 1997). The CGT events at issue are CGT events E1 and A1.

CGT Event E1

Section 104-55 of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT Event A1

CGT Event A1 under section 104-10 of the ITAA 1997 happens when you dispose of a CGT asset. You are deemed to dispose of a CGT asset if a change of ownership happens from you to another entity, whether because of some act or event or by operation of law.

Subsection 102-25(1) of the ITAA 1997 provides that if more than one CGT event can happen, then you use the one that is the most specific to your situation. In this case CGT event E1 is the most specific event, and is considered firstly.

Overview

CGT event E1 will happen where changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created.

The creation of a new trust - Statement of Principles August 2001 (Statement of Principles) gives guidance as to when the Commissioner will treat changes to a trust as giving rise to a new trust estate.

Part 5.5 of the Statement of Principles states:

It is important to distinguish between changes which are merely procedural and those which fundamentally redefine the relationship between the trustee and beneficiaries in respect of the trust property. It is generally only changes of the latter type which will give rise to a new trust.

The Statement of Principles provides that a change to the essential nature and character of the original trust relationship creates a new trust. The Statement of Principles considers the following changes which may result in the creation of a new trust:

· Any change in beneficial interests in trust property

· A new class of beneficial interest

· Redefinition of the beneficiary class

· Changes in the terms of the trusts or the rights or obligations of the trustee

· Changes in the nature or features of trust property

· Additions of property which could amount to a new and separate settlement

· Depletion of the trust property

· A change in the termination date of the trust

· A change to the trust that is not contemplated by the terms of the original trust

· A change in the essential nature and purpose of the trust and/or

· A merger of two or more trusts or a splitting of a trust into two or more trusts.

Depending on their nature and extent, and their combination with other indicia, these changes may amount to a mere variation of a continuing trust or, alternatively, to a fundamental change in the essential nature and character of the trust relationship.

Whether a new trust is created will depend, among other things, on the terms of the original trust, the powers of the trustee and the original intentions of the Settlor.

General Observations

The beneficiaries of the Trust have a contingent interest in the income and capital of the Trust and following the proposed amendments to the trust deed, the beneficiaries will still have that contingent interest in the income and capital of the Trust. There are no changes being made to the rights or obligations of the trustee nor is there any addition or depletion of the trust property.

Extending the Vesting Day

Part 5.2 of the Statement of Principles discusses extending the term (duration) of the trust and provides:

' … the ATO will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate when:

the trust deed confers an express power to alter the termination date;

the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship; and

other accompanying circumstances do not indicate a fundamental change to the trust.'

The Trust Deed provides an express power to the Trustee to appoint a later Vesting Day, subject to the agreement of the Guardian and the date is within the perpetuity period. Both these later provisos will be met. The deed or any other circumstances do not indicate that the trust period was a fundamental feature of the trust relationship.

Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004 notes that the effect of an extension to a vesting date will be to change the beneficial interests in the Trust Fund; however having regard to the particular circumstances of this case, the express power of amendment of the Vesting Date combined with the short extension to the Vesting Date to align with the perpetuity period, the potential change in beneficial interests is not of a fundamental nature and is consistent with changes in the membership of a continuing beneficiary class.

Overall, it is considered that the proposed change to the Vesting Date of the Trust is an extension of the term of the trust and is consistent with a continuing trust estate.

Changes to definitions of Guardian and Appointor

Currently the respective definitions of Guardian and Appointor refer to the Schedule to the Deed for the occupier of those positions and their specified next in line. The proposed changes to the definitions are to allow the existing Guardian and Appointor to nominate a substitute, either during their lifetime or by a will.

Part 5.5 of the Statement of Principles provides that changes which are merely procedural or administrative generally will not in themselves amount to the creation of a new trust. Changes of this nature are stated to include a change in the person acting as trustee or manager or changes which are merely effect administrative and 'housekeeping' procedures without substantially altering the rights of the beneficiaries in respect of the trust property.

The proposed changes to the definitions do not alter the rights of beneficiaries and the Commissioner, in the absence of any other factors, accepts they are changes of an administrative nature.

Cumulative changes

The combined effect of the proposed amendments namely the changes to the Vesting Date and the definitions of Guardian and Appointor are indicative of a continuing trust estate. Accordingly, the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created.

CGT event E1

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, CGT event E1 under section 104-55 of the ITAA 1997 will not happen.

CGT event A1

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, there is no change in ownership of the Trust Property and no disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997. Therefore CGT event A1 under section 104-10 will not happen.

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