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Edited version of private ruling

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Ruling

Subject: Trust Resettlement and capital gains tax (CGT) event E1

Can a Self Managed Super Fund (SMSF) be included as a beneficiary of a Trust without triggering CGT event E1?

Yes.

Detailed reasoning

Changes to the terms or objects of a trust may result in that trust ceasing and a new trust arising. A consequence of this happening is that the assets of the old trust are settled in the new trust. CGT event E1, as specified in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), occurs because a trust (the new trust) is being created over a CGT asset (of the old 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 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:

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.

Clause 5.1 of the Statement of Principles considers the implication of the addition or removal of beneficiaries. The identity of those for whose benefit the trust was established is an essential element of the trust relationship. Therefore, changes amounting to a redefinition of a 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 Commissioner will accept that there has been only a change in membership of a continuing class when:

In this situation the Trustee intends to make distributions to a SMSF. This is consistent with the class of beneficiary included in Trust Deed.

Distributing to a SMSF is simply distributing to a class of beneficiary listed in the definitions in the trust deed. It is consistent with the terms of the trust deed and does not introduce a new class of beneficiary. The transaction does not fundamentally alter the nature of the Trust and is merely procedural and administrative.

The proposed transaction of distributing to a SMSF will not trigger CGT event E1.

Would CGT event E1 occur if a de facto was introduced as a beneficiary?

Yes.

CGT event E1, as specified in section 104-55 of the ITAA 1997, occurs because a trust (the new trust) is being created over a CGT asset (of the old trust).

Clause 5.1 of the Statement of Principles considers the implication of the addition or removal of beneficiaries. In addition it states that changes amounting to a redefinition of the membership class would terminate the original trust.

The ATO will accept there has been only a change in the membership of a continuing class when the power to nominate new beneficiaries is only exercised 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 wider group.

In this scenario, the Rulee is seeking to clarify if the de facto can be included as a beneficiary.

The definition of beneficiary in the Trust Deed does not include a de facto. It is considered the de facto would be widening the group or introducing a new class of beneficiary. It is also considered that it cannot be reasonably inferred that it was the intent to benefit a "defacto". Therefore it is considered that this scenario would give rise to a trust resettlement and the possible application of CGT event E1.

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