Edited version of private ruling

Authorisation Number: 1011560175327

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Ruling

Subject: Trust Resettlement

1. Will the proposed deed of variation for the trust, except for the proposed clause in relation to the beneficiaries, constitute a resettlement or the creation of a new trust under subsection 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), thereby causing capital gains tax (CGT) event E1 to occur?

No.

2. Will the proposed clause in relation to the beneficiaries constitute a resettlement or the creation of a new trust under subsection 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), thereby causing capital gains tax (CGT) event E1 to occur?

Decline to rule.

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 was established as a discretionary trust and has been established for the beneficiaries.

In accordance with the original trust deed, the trustee is allowed to distribute the income of the fund in its absolute discretion. Alternatively, the trustee may accumulate all or any part of the income of the fund.

In default of the exercise of the power to accumulate the income or exercise its discretion to distribute income, the income not accumulated or vested is to be vested in equal shares for the living beneficiaries who will be presently entitled to the income.

The proposed amendments to the trust deed will include additional clauses to the current trust deed. The clauses will provide the trustee with the absolute discretion to determine which receipts are included in the income the trust.

The proposed amendments also allow the trustee to stream certain types of income of particular beneficiaries.

Reasons for decision

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 5.5 of the Statement of Principles discusses the circumstances in which changes to the terms of the trust result in a resettlement:

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. However:

· It is sometimes unclear whether a variation of terms is fundamental or merely procedural;

· Extensive procedural changes may be taken into account along with other changes in considering whether there is a new trust; and

· In some circumstances new trusts have been held to arise even though their terms have been very similar to a prior arrangement (e.g Davidson v. Chirnside).

The insertion or variation of any 'income' definition in a trust deed potentially alters the substantive rights of beneficiaries. For example, if a deed defined 'income' as net income for the purposes of section 95 of the Income Tax Assessment Act 1936 the respective rights of capital and income beneficiaries could be significantly different than if the term was undefined and ordinary trust law concepts applies.

Although inserting or varying an income definition may materially change the rights of beneficiaries, it may not in itself alter the essential nature and character of the trust relationship so as to result in a new trust estate. The ATO will accept that no new trust estate arises where, in the absence of other factors:

· It could be reasonably concluded that the purpose and effect of the new definition is to clarify rather than significantly redefine entitlements to income and capital; or

· Where there is a significant change in respective entitlements, it is between the rights of a single beneficiary or class of beneficiary, rather than between different beneficiaries or classes of beneficiaries.

In the current case, in accordance with the original trust deed, the trustee is allowed to distribute the income of the fund in its absolute discretion. Alternatively, the trustee may accumulate all or any part of the income of the fund. In default of the exercise of the power to accumulate the income or exercise its discretion to distribute income, the income not accumulated or vested is to be vested in equal shares for the living beneficiaries who will be presently entitled to the income.

The proposed amendments to the trust deed will include additional clauses to the current trust deed. The additional clauses will provide the trustee with absolute discretion to determine which receipts are included in the income for the trust.

It is considered that the proposed additional clauses are redefining the definition of income. However, as the trustee currently has the discretion to distribute income and capital to beneficiaries, the proposed clauses merely clarify an already existing power that the trustee has in that income and capital can be distributed in the trustee's absolute discretion.

The proposed clauses also allow the trustee to stream certain types of income to particular beneficiaries.

It is considered that the proposed clauses to enable income streaming merely change the distribution of funds, rather than the essential character of beneficiaries' interests.

The proposed clauses also restate or clarify that the income of the fund may be distributed to the beneficiaries or accumulated as an accretion to the fund.

It is considered that the above clauses are merely restating the trustee's already existing power to accumulate or distribute the income of the trust.

The remaining proposed clauses merely outline the administrative functions of the trustee in relation to the allocation of the income.

Conclusion

The additional clauses as per the Deed of Variation to the trust do not affect the essential nature of the trust relationship, but rather clarify the terms of the trust by adding definitions and clarifying the extent of the trustee's powers. The proposed changes are therefore considered administrative and procedural changes that do not alter the rights of the beneficiaries in respect of trust property.

It is concluded that the proposed additional clauses to the trust deed will not create a new trust as the original intention of the Settlor is not altered and there is no fundamental change in the essential nature and character of the trust relationship.

As there is no creation of a new trust, the original trust continues. The proposed trust deed amendments will not give rise to CGT event E1 in relation to the trust's CGT assets.

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