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Edited version of private ruling

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Ruling

Subject: Proposed Variation of Trust Deed

Will the proposed amendments to vary the trust deed of the A Family Trust to include the de facto of a beneficiary as an eligible beneficiary give rise to CGT Event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 1989

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The A Family Trust was established by a deed of settlement on XXXX. The Trust was established for the benefit of person A and their family. At the time of the settlement, person A was married to person B and had children from that marriage.

Subsequently, person A and person B divorced and person A has been in a long term de facto relationship for a number of years.

Person A now wishes for their de facto partner to be a beneficiary of the Trust.

Primary beneficiaries were defined as person A and their spouse, person B, and such of their children.

There is no specific mention of person A's 'spouse', and no definition in the deed of 'spouse'.

The client proposes to amend the Trust Deed to include a de facto spouse as an eligible beneficiary.

Person A has had a long standing relationship with their de facto over 10 years.

In the Trust Deed, the beneficiaries are described as income default beneficiaries and shall mean person A and person B, and such of their children as shall at the relevant time be over the age of eighteen (18) years

The Trust Deed also states capital default beneficiaries shall mean the children of person A provided that should on the vesting day any child be not alive then the issue of that child (and if more than one equally per stirpes) shall stand in that place of the deceased child

The Trust Deed also states beneficiaries shall mean the income default beneficiaries, the capital default beneficiaries, all persons who become the guardian or guardians of any capital default beneficiary or capital default beneficiaries, or of any first class beneficiary or first class beneficiaries.

There is no specific power provided in the Trust Deed to allow a Trustee to add or remove beneficiaries.

The proposed variation to the trust deed, to be made under a clause of the Trust Deed, which provides the general powers to vary the deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-55.

Reasons for Decision

The Creation of a New Trust Statement of Principles August 2001 (Statement of Principles) outlines when the Commissioner will treat changes to a trust as giving rise to a new trust. Changes in an existing trust may have important taxation implications. In particular, capital gains tax (CGT) event E1 in section 104-55 of the ITAA 1997 may occur where it is considered that a new trust is created over CGT assets of the existing trust.

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. Part 4 of the Statement of Principles considers a number of changes, which alone or together, may result in a creation of a new trust, including:

Depending on their nature and extent, and their combination with other indicia, these changes may mount 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 this second case, the original trust is brought to an end and/or a new trust is 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 settler must be considered in determining whether a new trust has been created.

In his decision in Kearn v. Hill (1990) 21 NSWLR 107, Meagher JA at 110-111, referred to Re Dyer (1935) VLR 273, where:

The trust deed states that the trust was established for the purpose of applying the trust fund for the benefit of the beneficiaries described in the deed and to create the trusts mentioned in the deed.

It is clear from the trust deed that the settlor's intention was to provide for the beneficiaries defined and described in a clause of the deed at the trustee's discretion.

The deed allows the trustee to distribute income and capital to beneficiaries in their absolute discretion and in default of exercising that discretion to possess fund for such persons referred to in specified paragraphs of the deed.

The essential nature and purpose of the trust can be ascertained from the settlor's intention in establishing the trust. It would appear that the trustee was to apply the fund for the benefit of person A and their descendents. Although the trustee has the power to amend the deed it is considered that the power of variation does not extend to varying the trust in a way which would destroy its substratum.

Unlike example 5.1.3 in the Statement of Principles there is no express power to add beneficiaries. The proposed amendment to include another person, being a spouse, legally married or de facto, of person A will cause a change to the trust that is not contemplated by the terms of the original trust. Moreover, this will also alter the class of beneficiaries intended to benefit from the trust.

Therefore, the variation of the trust deed to include any spouses, legally married or de facto, of person A would result in the creation of a new trust.

As a new trust will be created, CGT Event E1 will be triggered in respect of the creation of a new trust over assets.

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