Edited version of private ruling

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Ruling

Subject: Additional trustee and trust resettlement

Question 1

Will the appointment of an additional trustee (who is also a beneficiary of the trust) result in a resettlement of the trust?

Answer

No.

Question 2

Will capital gains tax be payable?

Answer

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

A person executed their Will and probate was granted.

The Will appointed four other persons as executors of the Will and Trustees of a Testamentary Trust (Trust).

By way of a Deed of Retirement a Trustee retired as Trustee due to age and health issues.

The remaining three Trustees (the Continuing Trustees) would like to appoint a fourth trustee.

The intended fourth Trustee is another child of the Testator and is also a beneficiary of the Trust.

Relevant legislative provisions

Division 6 of Part III of the Income Tax Assessment Act 1936

Part 3-1 of the Income Tax Assessment Act 1997

Reasons for decisions

Trust resettlement

The Commissioner has published Creation of a new trust - Statement of Principles August 2001 (Statement of Principles) to provide guidance on when the Commissioner will treat changes made to a trust as giving rise to a new trust estate.

The Statement of Principles uses the term 'resettlement' to describe when changes to a trust are such that, for income tax purposes, one trust estate comes to an end and is replaced by another trust. For convenience these situations are sometimes referred to as resettlements, although resettlements in the technical sense may be only one way in which such terminations occur. 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 in the terminating trust and acquisition of interests in the new trust.

The Statement of Principles advises that it is a change in the essential nature and character of the original trust relationship which creates a new trust.

The Statement of Principles outlines some changes which may result in the creation of a new trust, those being:

· any change in beneficial interests in trust property;

· a new class of beneficial interest (whether new or altered);

· a possible redefinition of the beneficiary class;

· changes in the terms of the trust or the rights or obligations of the trustee;

· additions of property which could amount to a new and separate settlement;

· depletion of trust property;

· a change in termination date of the trust;

· a change in 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

· 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 indicators, these 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 states:

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

and, at Item 5.4:

a change of trustee does not in itself result in a termination of the trust On the other hand, a change in the trustee or the control of the trustee may be an element in arrangements which in their entirety amount to the creation of a new trust.

Application to your circumstances

It is considered there is not a resettlement of the Trust for the following reasons:

· the number of trustees are being increased to the original four as intended by the Testator;

· two of the Continuing Trustees are beneficiaries of the Trust. The additional Trustee will not be the sole beneficiary;

· decisions made by the Trustees must be made jointly as 'one', whether there are 3 Trustees or 4 Trustees. The addition of a Trustee can not be regarded as changing the control of the Trust in such a way to favour a particular beneficiary;

· as the Continuing Trustees are all aged it is considered prudent to fill up the original number of Trustees.

The change of Trustees does not create a fundamental change to the Trust relationship or vary the Trustee's power or control.

Accordingly, there is no disposal of Trust property which may trigger capital gains tax consequences.

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