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Ruling

Subject: Trust Resettlement

Will the proposed amendments cause a resettlement of the trust?

No.

This Ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Trust is a discretionary trust and formed part of a deceased estate.

The beneficiaries of the discretionary trust are the family of the deceased.

The trustee proposes to amend the trust deed to include the beneficiaries' companies as beneficiaries.

The trustee proposes to also amend the trust deed by including the definition of 'beneficiaries' companies' as any company the shares which are only held by the children of the deceased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Reasons for Decision

Generally, a capital gain or loss is made when a capital gains tax (CGT) event happens to a CGT asset acquired after 20 September 1985. Event E1, as provided in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), occurs where a trust is created over a CGT asset. This will be the case if the changes to the trust deed are such that a new trust is created over the trust property, the CGT assets.

The Creation of a new Trust Statement of Principles August 2001 (Statement of Principles) outlines when the Commissioner will treat changes as giving rise to a new estate.

It is noted that as the Statement of Principles is the Commissioner's view on the resettlement of trusts, the Commissioner must follow the guidelines outlined in the paper.

The Statement of Principles makes it clear that a change to the essential nature and character of the original trust relationship creates a new trust. The Statement of Principles considers a number of changes that may result in the creation of a new trust, which are listed below:

· Any change in beneficial interests in trust property

· A new class of beneficial interest ( whether introduced or altered)

· A possible redefinition of the beneficiary class

· Changes in the terms of the trust 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 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. In the second case, the original trust is brought to an end and/or a new trust created.

The Statement of Principles highlights that creating a new trust will depend on the terms of the original trust, and on the powers of the trustee. In addition, the original intentions of the settlor must be considered in determining whether a new trust has been created.

Paragraph 5.1 discusses the addition or removal of beneficiaries. It states that the identity of those for whose benefit the trust exists is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amount to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.

Ordinarily, the Tax Office will accept that there has been only a change in the membership of a continuing class when:

· An already existing power to nominate new beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which it could be reasonably inferred that the trust was intended to benefit; and

· It can be shown from the deed and surrounding circumstances that the actual objective purpose or theme of the trust was to benefit that wide group.

In circumstances where the power to nominate or remove has the broad effect of a power of appointment among a group that the trust is clearly designed to benefit, it is more likely that the group can be reasonably characterised as the beneficiary class. In these situations the trustee may benefit the 'inner group' members (those already named in the deed, for instance Y's child), by an appointment in their favour. When deciding to benefit the 'wide group' members (such as Y's parent), the trustee first exercises the power of nomination and then, if it so decides, the power of appointment.

In other situations, it will be more difficult to characterise all those who may be nominated as beneficiaries as being merely members of a wider beneficiary group. If so, the effect of nominations and removals may be to vary the trust by redefining the group of beneficiaries so that a new trust is created.

In the current case, in accordance with the trust deed, the trustee has the power to vary, add to or revoke any of the terms of the trust. The trustee therefore has the power under the trust deed to add or remove beneficiaries.

In the current case, the trust deed is to be amended to include beneficiaries which, according to the draft amendments will be a company in which the only shareholders are the children of the deceased.

In accordance with the Trust deed, the beneficiaries are the family of the deceased. The trust deed states that the trustee may distribute funds for the benefit of beneficiaries in such amounts as the trustee determines. The purpose and essential nature of the trust is to benefit the deceased's family.

As a result of the proposed amendments, in addition to existing beneficiaries, the trustee may also distribute to a company which is 100% owned by the family of the deceased. The proposed amendment is therefore not redefining the group of beneficiaries who may benefit from the trust.

As the proposed amendment is not redefining the group of beneficiaries, the proposed amendment will not result in a resettlement of the trust. The proposed trust deed amendments will not give rise to CGT event E1 in relation to the trusts CGT assets.

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