Edited version of private ruling

Authorisation Number: 1011670170236

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Ruling

Subject: Trust Resettlement

Will the extension of the vesting date result in a resettlement of the trust and a consequential occurrence of any capital tax (CGT) events A1, E1, E2 or E8 as described in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) for the trustee or a beneficiary of the trust?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The trust is a discretionary trust which has been established for the benefit of an individual and the individual's relatives.

The beneficiaries are Individual A, his relatives and children and grandchildren of those relatives and any entity appointed to be beneficiaries prior to the perpetuity date.

The trustee has the power under the trust deed to amend the trust deed, providing it does not result in any infringement against the rule of perpetuities and is not in the favour of the trustee or settlor.

The trust deed which is currently governed by the laws of a state in Australia is to be transferred to another state in Australia.

The trust deed is to be amended by extending the perpetuity date.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 104-55 of the Income Tax Assessment Act 1997

Section 104-60 of the Income Tax Assessment Act 1997

Section 104-90 of the Income Tax Assessment Act 1997

Section 104-75 of the Income Tax Assessment Act 1997

Reasons for decision

Generally, a capital gain or loss is made when a CGT event happens to a CGT asset acquired after 20 September 1985. Event E1, as provided in section 104-55 of the ITAA 1997 occurs where a trust is created over a CGT asset. This will be the case if the changes to the trust deed are such that a new trust is created over the trust property, the CGT assets.

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.

Under part 5.2 of the Statement of Principles, the ATO will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate when:

· the trust deed confers an express power to alter the termination date

· the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship, and

· other accompanying circumstances do not indicate a fundamental change to the trust.

In some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations, the subject matter of the trust can be most accurately described as the income and other benefits arising from the trust property over a particular period.

Express Power

The trust deed confers wide discretionary powers on the trustee to alter any of the provisions of the trust deed on the proviso that any variation shall not change the beneficiaries or their entitlements. In addition, any variation shall not be in favour of the trustee or settlor or result in any infringement of the rule against perpetuities.

In relation to whether the wide powers provided to the Trustee under a clause are sufficient to determine that the Deed confers an 'express power' to extend the vesting date, the Full Federal Courts comments in FC of T. v Commercial Nominees Australia Ltd 99 ATC 5115; (1999) 43 ATR 42:

So long as any amendment of the trust obligations relating to such property is made in accordance with any power conferred by the instrument creating the obligations, and the continuity of property that is subject of trust obligations is established, there will be identity of the 'taxpayer…..notwithstanding any amendment of the trust obligation and any change in the property itself.

The comment in the above case support the conclusion that the implied power conferred in the Trust Deed meets the definition of express power and is sufficient to alter the extension date.

However, in accordance the amendment can not result in an infringement of the rule against perpetuities. In this case, the trust's administration is to change so that it will be governed by the laws of another state in which the rule against perpetuities has been abolished.

Therefore, as the trust is to be governed by the laws of a state where there is no rule in relation to perpetuities, the amendment will not result in any infringement of the rule against perpetuities.

As the conditions in the clauses of the trust deed are therefore satisfied, the trustee has the power to change the vesting date.

Under the current trust deed, neither the trustee nor the settlor is beneficiaries of the trust. As they are not beneficiaries, the assets can not be returned to the settlor or trustee.

As the proposed amendment is merely affecting the vesting date of the trust, the amendment will not be in favour of or for the benefit of the settlor or trustee.

It is concluded that as the conditions in the clauses of the trust deed are satisfied, the trustee has an express power to alter the vesting date under the trust deed.

Trust period

It is provided in the Statement of Principles that in some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations, the subject matter of the trust can be most accurately described as the income and other benefits arising from the trust property over a particular period.

In this case, the Trust was established for the benefit of the beneficiaries and any other entity nominated by the trustee. The trust is therefore primarily for the individual beneficiaries is not as a vehicle for a particular project or to hold an asset of intrinsically limited duration.

Therefore, the deed and surrounding circumstances do not indicate that the current term of the trust is a fundamental feature of the trust.

Fundamental change to the trust

The third matter to be considered by the Commissioner is whether the vesting date is considered to be a fundamental feature of the trust relationship. If so, then a variation to it will indicate a resettlement.

The Statement of Principles, at chapter 5.1, considers the addition and removal of beneficiaries and confirms that the identity of those for whose benefit the trust exists is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amounting to a redefinition of the 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.

The relevant beneficial interests in a trust fund obviously constitute a critical element in a trust relationship. In circumstances where default beneficiaries have vested, but defeasible interests in the trust capital, an extension to the vesting date means there may be changes in those beneficial interests. That is, the change may be considered likely to alter who ultimately has the beneficial interests.

But, even before the existing vesting date, those interests might have been defeated. That is, the beneficial interests remain vested and defeasible, both before and after the change to the vesting date, though the likelihood of their being defeated may in some cases be considered greater after the change.

In the current case, the trust which is currently governed by the laws of one state will be transferred to another state and therefore be governed by the laws of that state. The perpetuity date is to be amended to be the last day of the maximum duration of the trust permitted by the governing law of the Trust date of the deed is to be amended or any earlier date that the trustee may elect.

As stated earlier, the rule against perpetuities has been abolished in the state under which the trust is to be governed. Parties may apply to the court for orders to vary the disposition so that any remaining unvested interests will immediately vest.

Therefore, as the trust is to be administered under the laws of the state under which the rule against perpetuities has been abolished, the trust will not vest unless the interested parties apply to the court.

In accordance with clauses of the trust deed, the beneficiaries who will stand possessed of the Trust Fund and the income at the vesting date are the relatives of Individual A and the relatives' children, grandchildren and great grandchildren. Therefore, the assets and income of the trust will vest in those beneficiaries who are alive and over the age of 21 at the vesting date or any earlier date that the trustee determines.

The proposed amendments will remove the vesting date. In accordance with the clauses in the trust deed, the last beneficiaries who can benefit from the trust on the vesting date are the great grandchildren of Individual A's relatives. Therefore, regardless of the vesting date, as there are no further descendants of Individual A who are beneficiaries, the trust must vest on their deaths. Therefore, the removal of the vesting date will not prevent the trust from vesting and a CGT event E5 occurring.

In addition, as a result of the proposed amendment, there may be beneficiaries who were not alive at the original vesting day who may come to hold relevant beneficial interests after that date. However, these beneficiaries were always part of the original class of beneficiaries. Therefore, whilst there will be a potential variation in the beneficial interest as a result of the amendment of the vesting date, the variation is consistent with changes in the membership of a continuing class and therefore not significant enough to cause a resettlement of the trust.

The facts in this case do not disclose any fundamental change in the trust relationship. As discussed above, the potential variation to beneficial interests in the Trust fund is not considered to result in a fundamental change in the essential nature and character of the trust

Conclusion

As all three requirements under part 5.2 of the Statement of Principles are satisfied, the amendment to the Vesting Date will not be treated as giving rise to a new trust estate.

As there has not been a deemed disposal of trust assets, no CGT provisions are applicable.

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