Edited version of private ruling

Authorisation Number: 1011839847123

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Ruling

Subject: Trust resettlement

Question 1

Will the extension of the Vesting Date of the Trust give rise to CGT Event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT Event E1 under section 104-55 of the ITAA 1997?

Advice/Answers

No

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

Relevant facts

The Trust is a discretionary trust. The Trust was established by deed.

An individual is the trustee of the Trust.

There has been no change in Trustee since the initial appointment of the Trustee.

The Settlor is an individual.

Since the establishment of the Trust, the provisions of the Trust Deed have been amended by a deed, and also by another deed. The amendments effected by these deeds are not material to this private ruling.

The first category of beneficiary is 'Elder Beneficiary'.

The second category of beneficiaries is the "Younger Beneficiaries".

The Trustee is not, and has never been, a beneficiary.

A Clause of the Trust Deed contains provision for:

(a) the addition of a beneficiary (but only if they are lineal issue, or a legally adopted child, or the linear issue of any legally adopted child of Trustee, or the wife of Trustee);

(b) the removal of a beneficiary; and

(c) the variation of the proportion in which a beneficiary is to share in the trust property at the time of vesting.

The powers in this clause have not been exercised, and so the beneficiaries remain unaltered since the commencement of the Trust.

The Trust has no carried forward tax losses.

Another clause of the Trust Deed prescribes the vesting date as:

(a) the later of 90 days from

(i) the date of death of Trustee;

(ii) the date of death of spouse of Trustee

(iii) the date of the youngest Younger Beneficiary reaching 21

(iv) the date of death of any Younger Beneficiary who doesn't reach 21; or

(b) such date the Trustee may determine by deed or memorandum during his lifetime, with power of alteration, but not later than the latest date allowed according to the rule against perpetuities.

The Younger Beneficiaries have all attained the age of 21 years and so, in the absence of a determination by the Trustee, the Trust will vest 90 days after the death of the last of the trustee or the trustee's spouse.

The Trustee wishes to amend this clause, the Vesting Date. The proposed variation is to determine a vesting date of the Trust to be the date that is 21 years less one day from the date of the Deed of Determination of Vesting Date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 104-55.

Reasons for Decision

CGT Event E1

CGT event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happens if you create a trust over a CGT asset by declaration or settlement. This event will also happen if changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created.

The Commissioner issued a paper titled Creation of a new trust - Statement of Principles August 2001 (Statement of Principles) on 29 August 2001 which outlines when the Commissioner will treat changes to a trust deed as giving rise to a new trust. It lists the following changes that may result in the creation of a new trust:

· 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; and/or

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

Under the Statement of Principles the Commissioner considers it is a change in the essential nature and character of the original trust relationship which creates a new 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 be considered in determining whether a new trust has been created.

In this case the Trustee proposes to amend the Trust Deed to amend the Vesting Date of the Trust.

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

1. the trust deed confers an express power to alter the termination date;

2. the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship; and

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

1. Express power

In relation to whether the wide powers provided to the Trustee are sufficient to determine that the Deed confers an "Express Power" to extend the Vesting Date we examine the Full Federal Courts comments in FCT v Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158:

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 the subject of trust obligation is established, there will be identity of the "taxpayer" … notwithstanding any amendment of the trust obligation and any change in the property itself (emphasis added).

The comments in this case support the conclusion that the implied power conferred in the Trust Deed meets the definition of Express Power and is sufficient to allow for the extension of the Vesting Date.

The proposed variation to the Deed is to remove the existing definition of the Vesting Date and to replace it with one that would enable the Trust to continue for an additional 21 years less a day.

Rules against remoteness and accumulation of income have been abolished in South Australia (section 61(1) of the Law of Property Act 1936 (SA)). The amendment to the vesting date will not infringe the law against perpetuities and excessive accumulations. Furthermore, the extension of the Vesting Date will bring the trust period in line with the rules against perpetuities in most Australian States. Therefore the first condition is satisfied.

The Settlor is not a beneficiary of the Trust. Under no circumstances will the trust assets be returned to the Settlor. The proposed variation will not be in favour of or for the benefit of or result in any benefit to the Settlor. The second condition is satisfied.

The proposed variation that is the subject of this ruling request is not altering in any form any amounts that are "set aside or vested in" any of the beneficiaries "prior to the date of variation".

All amounts that have already been "set aside" or "vested in" any of the beneficiaries will not at all be impacted by the proposed variation of the Vesting Date. The third condition is satisfied.

Accordingly, it is considered that the Trustee does have an express power to alter the Vesting Date.

2. 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 be 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 under Item A and in default of any effective determination for the beneficiaries under Item B. All beneficiaries are family members of the Trustee. The Trust is for the benefit of the Trustees' family and not as a vehicle for a particular project or to hold an asset of intrinsically limited duration.

The Deed also empowers the Trustee to appoint an earlier date to be the Vesting Date.

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

3. Fundamental change to the trust

The Deed provides for the Trust Fund to vest in the beneficiaries when the trust ends. Although the Trustee has absolute discretion to determine shares and proportions on distribution of the trust assets, the Trust Fund has to be transferred to at least one of the beneficiaries once the Trust ends.

In Stein v. Sybmore Holdings Pty Ltd [2006] NSWSC 1004; 2006 ATC 4641; 64 ATR 325 (Stein's case), an application was made to the New South Wales Supreme Court for an order under section 81 of the Trustee Act 1925 (NSW) empowering the Trustee to defer the vesting date.

The Court was aware that the effect of the extension of the vesting date would be to change the beneficial interests in the Trust Fund from what they were at the time of the application. Campbell J considered, at page 4747, that section 81 of the Trustee Act 1925 (NSW) could be used in a way that altered beneficial interests and the fact that the extension of the vesting date would likely to alter who ultimately had beneficial interests in the Trust Fund, was not necessarily fatal to the application.

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. Further, the class of beneficiaries may be unchanged. Where the class of beneficiaries includes children unborn at the original vesting date, any children who may come to hold relevant beneficial interests after that date, were always part of the original class of beneficiaries who might ultimately take.

In this case the extension of the Vesting Date will potentially vary the beneficial interests. The question is whether this potential change to beneficial interest is fundamental enough to cause a resettlement of the Trust.

It is the Commissioner's opinion that 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.

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 extension of the Vesting Date will not be treated as giving rise to a new trust estate. Therefore, the extension of the Vesting Date in these circumstances will not give rise to CGT Event E1 under section 104-55 of the ITAA 1997.

CGT Event A1

CGT Event A1 under section 104-10 of the ITAA 1997 occurs when you dispose of a CGT asset. You are deemed to dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

As it has been determined in this ruling that the extension of the Vesting Date in this case will not cause a trust resettlement, there will not be a disposal of a CGT Asset under sub section 104-10(2) as there has been no change in ownership of the Trust Property. Therefore the extension of the Vesting Date in these circumstances will not give rise to CGT Event A1 under section 104-10 of the ITAA 1997.

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