Edited version of private ruling

Authorisation Number: 1011583111607

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Trust Resettlement

Will the proposed Deed of Variation for the trust 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?

Yes.

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.

The beneficiaries of the trust are the nominated beneficiaries named in the schedule general beneficiaries who include the nominated beneficiaries and their relatives. The general beneficiaries also include entities in which the general beneficiaries have an interest.

The beneficiaries are, subject to the discretion of the trustee, entitled to the income and capital of the trust.

The trustee wishes to amend the trust deed to ensure that the capital beneficiaries of the trust natural persons who are relatives of each other.

Relevant legislative provisions

Section 104-55 of the Income Tax Assessment Act 1997

Section 104-60 of the Income Tax Assessment Act 1997

Reasons for Decision

Parts 3-1 and 3-3 of the ITAA 1997 provide for situations where a capital gain or loss may arise if a CGT event occurs.  

CGT event E1, as described in section 104-55 of the ITAA 1997, occurs where a trust is created over a CGT asset. CGT event E1 will occur if changes to a trust deed result in one trust ceasing and being replaced by another trust. 

CGT event E2, as described in section 104-60 of the ITAA 1997, occurs where a CGT asset is transferred to an existing trust.

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.

Chapter 5.5 of the Statements of Principles discusses changes to the terms of the trust and 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. 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 Statement of Principles provides various examples which provide an application of the general principles.

Example 5.5.2

The deed of a fixed trust (unitised or otherwise) is amended to give the trustee a discretionary power of appointment over the income of the trust.

Although the new discretionary beneficiaries may not have a proprietary interest in the trust fund, the rights of the holders of previously fixed interests are radically changed. Previously, they would be presently entitled to, and accordingly had a right to demand, payment of all income. Now, assuming a mere power, any rights would only be in respect of the unappointed residue, if any. In this situation the essential nature and character of the trust relationship changes and a new trust estate comes into being.

Example 5.5.4

The beneficiaries of a unit trust are presently entitled to each year's income in proportion to their unit holdings. The deed is varied to give the trustee the discretion to accumulate some, or all, of the income. The beneficiaries' beneficial interests in the accumulated income are unaltered, and they are entitled to share in any distribution of income in proportion to their unit holdings.

Here, the accumulation power can be seen as enabling the trustee to decide from time to time whether the interests of the beneficiaries are best served by retaining or distributing income. Where any accumulations can only be for the benefit of those otherwise entitled to the income, the ATO accepts that conferring the power, in itself, alters the management of the trust's undertaking rather than the essential nature of the trust relationship itself. In the absence of other factors pointing to a new trust, the ATO accepts that no new trust estate arises.

Example 5.5.6

A unit trust has X units with present entitlement to all income and Y units with rights to capital. The trustee is given a new discretion to accumulate income and add it to capital.

In contrast to the previous examples, here the effect of the change is to redefine the nature of the equitable interests in the trust fund. There is a fundamental change in the essential nature and character of the trust relationship, and this will bring about a new trust estate.

In the current case, under the trust deed, the trustee has the discretion to distribute income and/or capital to the beneficiaries. In accordance with the trust deed, the beneficiaries are the general beneficiaries who are the Nominated beneficiaries and their relatives. It is also noted that companies, trust and superannuation funds in which the general beneficiaries have an interest are also included as beneficiaries.

Under the proposed amendments, the definition of beneficiaries will be redefined so that the capital beneficiaries will be restricted to natural persons who are relatives of each other. The trust deed is to be amended to ensure that only the capital beneficiaries will be entitled to the capital of the trust fund and the general beneficiaries will be entitled to the income of the trust. Therefore, the beneficiaries which are companies, trusts and superannuation funds will no longer be entitled to the capital of the trust.

It is considered that the proposed amendments will redefine the nature of equitable interests in the trust fund. Currently, all of the beneficiaries are entitled to the income and the capital of the trust. However, as a result of the proposed amendments, the beneficiaries which are companies, trusts and superannuation funds will only be entitled to the income of the trust.

It is considered that as the proprietary interests in the trust fund have radically changed, the changes are not merely procedural or administrative. Rather, there is a fundamental change in the essential nature of character of the trust relationship.

It is concluded that the proposed changes will result in a resettlement of the trust thereby causing CGT event E1 to occur.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).