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Ruling
Subject: Trust Resettlement
Question
Will the inclusion of 'spouse' to the definition of beneficiaries, 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
Relevant facts and circumstances
The testamentary trust was established under a will and came into existence on the date of death.
The terms and conditions of the trust are set out in the will referred to as the testamentary trust deed.
The testamentary trust deed contains general powers to amend the trust, however, there are some limitations.
The beneficiaries are all members of the family of the principal beneficiaries.
The Principle Beneficiaries and their lineal descendants have a vested interest in the corpus of the trust.
Other beneficiaries may have a contingent interest to the income of the trust.
In accordance with the amendment provision within the testamentary trust deed the trustee proposes to amend the definition of 'Beneficiaries' to include other persons within the family group.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-55.
Reasons for decision
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.
The general powers of the trustee to amend the trust include the ability to amend the definition of beneficiaries. In accordance with the amendment provision within the testamentary trust deed the trustee proposes to amend the definition of 'Beneficiaries' to include other persons within the family group.
It is considered that in this case, the settlor intended the income and corpus of the Trust to be applied for the benefit of the family and their direct lineal descendants.
The proposed amendment to include an additional beneficiary to the definition of beneficiaries has the intention of including a person or persons who are a member of the existing family group of the principal beneficiaries and beneficiaries. The additional is a change in the membership of a continuing class of beneficiary of which the trust was intended to benefit. The objective purpose of the trust was to benefit the family of the principal beneficiaries and their lineal descendants.
A change in the essential nature and purpose of the trust.
The proposed amendment to the definition of beneficiaries does not change the essential elements of the trust. The inclusion of the spouses will not bring a change in the beneficial interest in the income or the assets of the testamentary trust. According to the testamentary trust deed only the Primary Beneficiaries and their lineal descendants have a vested interest in the corpus of the trust. The additional beneficiaries would only ever have a contingent interest to the income of the trust. Therefore, the fundamental intention and character of the original trust are not changed.
In addition, with the changes the class of beneficiaries are not changed, it is merely an inclusion of persons who are members of the existing family group.
The proposed changes are therefore considered to be a 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.
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