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Ruling

Subject: Trust Resettlement - beneficiary redefinition

Question 1

Will the proposed amendment deed constitute a resettlement or the creation of a new trust under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Financial year ended 30 June 2011

Financial year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Individual X and their former spouse Y had a number of children together.

X later remarried another individual named Z.

A discretionary trust was established by a trust deed.

The settlor of the trust is a relative of Z, and is also a relative of the former spouse Y.

The trustee is a company.

The schedule to the trust deed defines the trust's primary beneficiaries as the children of X and Z.

The schedule defines the general beneficiaries to include:

X,

Z,

Their children, grandchildren and great grandchildren, and

Any spouse of any such children, grandchildren and great grandchildren.

A clause in the trust deed allows the trustee to amend clauses in the trust deed. Another clause gives the trustee the power to nominate one or more individuals to be a member or members of the general beneficiaries.

Any amendment to the trust deed must be for the benefit of all or any one or more of the general beneficiaries. In addition, the amendment must not affect a beneficiary's entitlement to an amount set aside for them.

Following the trust's establishment, X and Z raised a number of new children.

An amendment deed later varied a number of clauses in the trust deed. The amendments include, but are not limited to, changes to the definition of net income, income of the trust, and allocation of income classes to beneficiaries However, the amendments did not affect the definition of the primary or general beneficiaries in the trust deed schedule.

Since its establishment, the trust has made income distributions to all of X's children across both marriages.

The trustee has submitted a draft amendment deed to the ATO. The trustee wishes to confirm the draft amendment deed does not result in a resettlement of the trust.

The amendment deed will specifically amend the general beneficiary definition in the trust deed schedule so it includes:

X,

Y,

Their children, namely all of X's children from both marriages,

Their grandchildren and great grandchildren, and

Any spouse of any such children, grandchildren and great grandchildren.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55.

Reasons for decision

Summary

Will the proposed amendment deed constitute a resettlement or the creation of a new trust under section 104-55 of the ITAA 1997?

The amendment to the trust deed schedule does not change the objective purpose, character, or theme of the original trust. This is because all of X's children are part of the trust's original intended beneficiaries.

The proposed change is a mere variation to a continuing trust, and does not result in a trust resettlement. This means there are no capital gains tax implications.

Detailed reasoning

Capital gains and Trust resettlements

Changes to an existing trust may have important taxation implications. In particular, section 104-55 of the ITAA 1997 states a capital gains tax (CGT) event occurs where a trust is created over a CGT asset.

The Creation of a new trust - Statement of Principles August 2011 (Statement of Principles) outlines the Commissioner's view on changes to trusts, and the resettlement of trusts.

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 lists a number of changes that may result in the creation of a new trust.

They include:

· 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 the 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.

· A merger of two or more trusts or a splitting of a trust into two or more trusts.

Depending on their nature, extent, and combination with other indicators, these changes may amount to a mere variation of a continuing trust. Alternatively, they may amount to a fundamental change in the essential nature and character of the trust relationship. A fundamental change means the original trust is brought to an end, and/or a new trust created.

The Statement of Principles highlights the creation of 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.

If the changes result in a newly created trust estate, CGT event E1 will occur over the trust's property.

Redefinition of beneficiary classes

Part 5.1 of the Statement of Principles discusses the addition or removal of beneficiaries.

The identity of the trust's beneficiaries is an essential element of the trust obligation and relationship. The Statement of Principles considers a change which amounts to a redefinition of the membership class or classes would terminate the original trust. In contrast, a mere change to the membership of a continuing beneficiary class is consistent with a continuing trust.

The Statement of Principles provides an example of how the changing membership of a continuing class affects a trust. Example 5.1.1 states 'A discretionary trust has as its beneficiaries "the children and grandchildren of X". One of the children dies and two new grandchildren are born.'

These changes do not terminate the trust. They represent changes in the membership of a continuing beneficiary class.

The ATO will normally accept there has only been a change in the membership of a continuing class when:

· An already existing power to nominate new beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which 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.

Example 5.1.3 in the Statement of Principles describes a situation where:

A family discretionary trust… has as its beneficiaries members of the X family. The trustee has a power in the deed to nominate new beneficiaries. It may not be exercised in favour of certain persons such as the settlor, but is not restricted to members of the family group and their associates. The power is exercised to nominate members of the Y family as beneficiaries.

In this example, adding new beneficiaries to the trust will redefine the beneficiary group, and will lead to the creation of a new trust.

Application to the trust

The trust's primary beneficiaries are defined in the trust deed schedule as the children of X and Z. The general beneficiaries are defined in sub-paragraph (a) to include X, Z, and their children.

There is a concern the meaning of '…their children…' is ambiguous, and could be interpreted as:

All of X's children from both marriages, or

Only X and Z's children from their marriage.

Under a clause in the trust deed, the trustee intends to amend the definition of the general beneficiaries. The amendment will specifically name and include all of X's children from both marriages. This will remove any doubt over the meaning of '…their children…'

The Macquarie Dictionary defines children as the plural of child. A child includes a son or daughter, or any descendant.

At the time the trust started, X's only children were the children from their previous marriage. In addition, the settlor was related to X's children from the former marriage. Since this time, the trust has made income distributions to all of the children across both marriages.

Based on the facts and surrounding circumstances, all of X's children across both marriages are the intended children and general beneficiaries of the trust. In this case, the trust is exercising an existing power to clarify and confirm the continuing class of general beneficiaries.

Amendments to date

An amendment deed varied a number of clauses in the trust deed. The amendments include, but are not limited to, changes to the definition of net income, income of the trust, and allocation of income classes to beneficiaries.

These changes, in combination with the draft confirmation deed, do not change the essential elements of the trust. The fundamental intention and character of the original trust are not changed. In addition, the class of beneficiaries are not changed.

The prior amendments and the proposed change are a mere variation of a continuing trust, and do not result in a trust resettlement. This means there are no CGT implications under section 104-55 of the ITAA 1997.

Conclusion

The amendment to the trust deed schedule does not change the objective purpose, character, or theme of the original trust. This is because all of X's children are part of the trust's original intended beneficiaries.

The essential elements of the trust are not changed. The fundamental intention and character of the original trust are not changed. In addition, the class of beneficiaries are not changed.

The proposed change is a mere variation to a continuing trust, and does not result in a trust resettlement. This means there are no CGT implications under section 104-55 of the ITAA 1997.

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