Edited version of private ruling

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Ruling

Subject: Trust - Resettlement

Will the proposed rectification of the Trust Deed result in a resettlement of the Trust such that capital gains tax (CGT) event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or any other CGT event takes place?

No.

Relevant facts and circumstances

The Trust was established in the early 1970s, for a period of 50 years and has been varied by subsequent deeds.

The schedule of the Trust Deed states the Vesting Day.

Pursuant to the Trust Deed, the Trustee of the Trust (the Trustee) wishes to vary the provisions of the Trust Deed subject to a clause of the Trust Deed in the manner contained in the Deed of Appointment and Amendment.

The Deed of Appointment and Amendment has been provided and forms part of this ruling.

Reasons for decision

Changes to trusts

Changes to an existing trust may have important taxation implications. In particular, CGT event E1, as specified in section 104-55 of the ITAA 1997, occurs where a trust is created over a CGT asset.

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 trust estate.

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 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. A fundamental change in the essential nature and character of the trust relationship means that 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.

The answer to whether alterations to trusts, taken together, result in terminations and creations of trust estates will generally flow from establishing whether the essential nature and character of the original trust relationship has fundamentally changed.

Part 5.2 of the Statement of Principles considers the effect of extending the term of a trust. It states:

Given [the] absence of clear judicial guidance, the ATO will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate. The ATO will reach this conclusion 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.

Part 5.5 of the Statement of Principles considers changes to the terms of the trust. It states that:

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 examples in the Statement of Principles on this point demonstrate that it is the interests of the beneficiaries, not necessarily their rights, which are integral to determining whether or not there is a fundamental change to the trust relationship.

Rectification

Rectification is an equitable remedy to rectify mistakes in the expression in written instruments of prior agreements. The nature of a rectification is to restore the agreement to the original intention of the parties.

In Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 366, Mason J stated at 350 that the purpose of the remedy is to make the instrument conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately.

Where rectification is granted, it applies so that the instrument is read as if originally executed in its rectified form. In Davis and Sirise Pty Ltd v. FC of T 2000 ATC 4201: (2000) 44 ATR 140 at ATC 4211, Hill J said:

where an order of a court is obtained to rectify the written agreement, the court order does not operate to alter the past. The order of the court merely recognises what has always been the case, namely that the true agreement between the parties was not that which they have mistakenly executed, but what they in truth agreed upon.

Hill J also stated at 4212 that the same applies to a deed of rectification executed between the parties without an order of the court.

Definition of Trust Income

The Statement of Principles also considers the potential effect of a change in the definition of any income definition in a trust deed, and states that:

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 applied.

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 can be reasonable 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.

The second of the above criteria applies to changes to powers of accumulation as well as changes in definition of income.

Application to your circumstances

Extension of Vesting Date

The proposed Deed of Amendment will change the vesting day specified in the Schedule.

The Trust Deed allows the trustee to appoint a day later than that specified in the Schedule as the vesting day, provided that the new date is within the perpetuity period.

Moreover, there is no indication in the Trust Deed or surrounding circumstances, including the nature of the trusts assets, that the original vesting day of 30 June 2023 was a fundamental feature of the trust. Neither do the accompanying changes to the trust indicate that the change of vesting day is part of a more fundamental change to the trust.

Therefore, it is concluded that neither the change in vesting day, not its confirmation in the Schedule to the Trust Deed will give rise to a resettlement of the trust.

Definition of Trust Income

The current Trust Deed lacks a definition of income and net income and therefore the purpose and effect of the new definition would be to clarify the treatment of income in the Trust and it would not introduce or redefine new entitlements to income and capital under the Trust. Also, the only class of beneficiaries under the Trust Deed as the general beneficiaries who have only rights due administration of the Trust, and there are only income and capital beneficiaries.

Therefore, it is concluded that the proposed changes will not give rise to a resettlement of the trust.

All other changes to Trust Deed

It is considered that the changes, in itself, alters the management of the Trusts undertaking rather than the essential nature of the trust relationship. As there are no other factors present that point to a new trust, the Commissioner accepts that the proposed changes will not give rise to a resettlement of the trust.

CGT consequences

In this case there is no trust resettlement and hence no CGT consequences arising from the proposed amendments to the Trust Deed.

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