Edited version of private ruling

Authorisation Number: 1011599823827

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Ruling

Subject: Proposed amendments to trust deed

Question

Where the proposed Deed of Variation to the Trust Deed of the X Trust (the proposed amendments) is undertaken, does CGT event E1 (section 104-55 of the Income Tax Assessment Act 1997 (ITAA1997)) happen?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

From the date of this ruling

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 X Trust is a discretionary trust.

The Trust holds two properties known as P and their combined current market value is over $1 million.

P represents the major asset of the X Trust and represents the net assets of the Trust based on market value.

The trustee of the Trust is T Pty Ltd of which Y is the sole director and shareholder.

The Trust Deed permits the Trust Deed to be amended and allows the trustee to release and revoke any power in the Trust Deed.

The Trust holds capital gains tax assets acquired after 19 September 1985, with the market value exceeding the cost base or indexed cost base.

The proposed Deed of Variation to the Trust Deed of the X Trust will amend the Trust Deed to restrict the rights of the trustee in relation to P from the date of death of Y.

The proposed amendments provide that P is to be transferred to another trust on the vesting date of the X Trust.

Reasons for decision

CGT event E1 (section 104-55 of the ITAA 1997) may apply where a number of variations are undertaken to a trust deed such that the variations cause a fundamental change in the essential nature and character of the original trust relationship.

The Commissioner has provided a guidance paper titled Creation of a new trust - Statement of Principles August 2001 (Statement of Principles) to assist in clarifying when changes to a trust are such that, for income tax purposes, one trust estate comes to an end to be replaced by another.

The consequences of terminating the trust can include:

§ realisation at trustee level of the trust property, and the loss of carried forward tax benefits; and

§ disposal by beneficiaries of their interests and an acquisition of interests in the new trust.

In Commissioner of Taxation v. Commercial Nominees of Australia Limited [2001] HCA 33 (Commercial Nominees), the High Court stated that the three main indicia of continuity of a superannuation entity are:

§ the constitution of the trust under which the fund operates;

§ the trust property; and

§ membership.

The Statement of Principles provides that the necessary requirement for there to be a continuity of the trust (that is, for the fundamental trust relationship to continue), as identified by the High Court in Commercial Nominees, applies to trusts generally.

The Statement of Principles identified some situations which may raise the question of whether a new trust has been created. Relevantly, those situations include, inter alia:

§ 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;

§ a change to the trust that is not contemplated by the terms of the original trust; and

§ a change in the essential nature and purpose of the trust.

Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the powers of the trustee. The original intentions of the settlor must also be considered in determining whether a new trust has been created.

In the present case, the Trust is a discretionary trust and the beneficiaries of the Trust are family members. The trustee has absolute discretion to distribute the net income of the Trust and the Trust capital to beneficiaries as it thinks fit pursuant to various clauses of the Trust Deed.

One of the proposed amendments directs the trustee to transfer P to another trust, whether perpetual or not, on the vesting day that is established for the principal benefit of the family members. This clause can be compared with clauses of the Trust Deed which provide for the distribution of the trust's assets and income upon vesting day, to the primary beneficiaries or their next of kin. The proposed amendments make an exception to the requirements of these clauses for the distribution of the assets of the trust on vesting day in respect of P because it is to be distributed to another trust (perpetual or not) upon vesting date.

The applicant has contended that the 'wait and see' rule would apply in this situation. However, as the proposed amendments state that the transfer is to take effect on the vesting date of the X Trust, the 'wait and see' rule has no application. Further, the proposed amendments remove the ability of the trustee to transfer P before the vesting date of the X Trust, so there is nothing for which to 'wait and see'.

The Trust Deed also provides the trustee with extensive powers regarding capital payments, advances and other advantages to beneficiaries, and also over investments, including dealing with real property. The proposed amendments remove the trustee's discretion to deal with P before the vesting date. They also affect the beneficiaries' right to receive a capital distribution in respect of P, albeit in a discretionary capacity. The effect of the proposed amendments restricts the existing rights of the trustee to deal with P under various clauses of the Trust Deed, from the date of death of Y to the vesting date. The market value of P relative to the other trust assets is also noted.

Given the above, it is the Commissioners view that the undertaking of the proposed amendments to the Trust Deed give rise to fundamental changes in the terms of the Trust and also the rights or obligations of the trustee such that it would cause CGT event E1 (section 104-55 of the ITAA 1997) to happen. These fundamental changes to the trust relationship include, but are not limited to, the matters as discussed above.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55.

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