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Ruling

Subject: Trust resettlement - additional beneficiary

Question

Will the addition of a newly incorporated company or trust to the beneficiaries of the current trust 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 2010

Financial year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

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

Individual X and their spouse are the shareholders and company officeholders of the trustee.

Individual X is a relative of individual Y.

The trust deed allows the trustee to amend clauses in the trust deed.

An amending deed varied the terms and conditions in the trust deed.

The amending deed updated the administrative powers of the trustee, and aligned the powers with current banking principles. The amendments include changes to procedural, income, capital, beneficiary and administrative clauses.

The trust deed and amending trust deed defines the trust beneficiaries to include:

· Individual Y,

· The spouse of individual Y,

· Any child or grandchild or remoter issue of individual Y,

· The spouse of any child or grandchild or remoter issue of individual Y,

· Any blood relation of any description of individual Y or their spouse or the spouse of any person above named including the spouse of any child or remoter issue,

· A company which has a director or natural person holding voting class shares who is also one of the trust's beneficiaries, and

· The trustee of a secondary trust, which has beneficiaries that also belong to the current trust's beneficiaries.

Persons, corporations, or trusts can be the current trust's beneficiaries, notwithstanding they did not exist at the time of the trust deed or amending deed.

Individual X and their spouse would like to incorporate a new company and become its shareholders and company office holders.

The trust's beneficiaries would also like to form a new trust, in which they will become the new trust's beneficiaries.

The trustee wishes to confirm the addition of the new company and trust to the existing beneficiaries will not result in a trust resettlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55.

Reasons for decision

Summary

Will the addition of a newly incorporated company or trust to the beneficiaries of the trust constitute a resettlement or the creation of a new trust, under section 104-55 of the ITAA 1997?

The trustee is exercising an existing power to include a company and trust in the trust's continuing class of discretionary beneficiaries. This 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.

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 under section 104-55 of the ITAA 1997 will occur over the trust's property.

Addition or removal of beneficiaries

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. The power must be exercised in favour of a clearly defined group, which could be reasonably inferred that the trust was intended to benefit.

Trust beneficiaries

The trust beneficiaries include individual Y, their blood relatives, the spouse of individual Y, spouses of individual Y's blood relatives, and company and trusts connected to individual Y, the blood relatives, and spouses.

Individual X and their spouse intend to incorporate a new company and become its shareholders and company office holders. The trust's beneficiaries also intend to create a new trust, and become the new trust's beneficiaries.

The original trust deed and amending deed include a company in the trust's beneficiaries. However, the company's directors and voting class shareholders must be members of the current trust's beneficiaries.

In this case, individual X is a relative of individual Y. This connection to individual Y means individual X and their spouse are part of the trust's beneficiaries. When they establish a new company and become its voting class shareholders and directors, the company will be included in the trust's beneficiaries.

Similarly, the original trust deed and amending deed include secondary trusts in the trust's beneficiaries. When the trust's beneficiaries create a new family trust and become its beneficiaries, the new trust will be included in the current trust's beneficiaries.

In this case, the trustee is exercising an existing power to include a company and trust in the trust's continuing class of discretionary beneficiaries.

Amendments to date

A trust amending deed varied the terms and conditions in the trust deed. The amendments updated the administrative powers of the trustee, and aligned the powers with current banking principles. The amendments include changes to procedural, income, capital, beneficiary and administrative clauses.

In this case, the amending deed clarifies beneficiaries' entitlement to income and capital. In addition, the changes to other procedural and administrative clauses do not substantially alter beneficiaries' rights in respect of the trust property.

The changes, in combination with adding a new company and trust beneficiary, 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 additional beneficiaries 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 trustee is exercising an existing power to include a company and trust in the trust's continuing class of discretionary beneficiaries. This 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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