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Ruling

Subject: Creation, resettlement, or variation to a trust

Question 1

Will the variations to the trust deed, as proposed by the 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

Question 2

Will the variations to the trust deed, as proposed by the amendment deed, constitute a disposal under section 104-10 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Financial year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

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

The trustee is a company.

The trust deed defines the beneficiaries as the entity or entities specified in the schedule to the trust deed.

The trust deed identifies a Principal of the trust.

The trust deed provides the Principal with the power to remove and appoint a trustee of the trust (Power of Appointment). In addition, the Power of Appointment specifies who can or cannot be a trustee.

The trust deed contains a succession clause which describes how the Principal's Power of Appointment can transfer to another entity.

The trustee will exercise its power under an amendment clause in the trust deed to change the terms of the trust. The main focus of the changes in the amending deed is:

· to provide the Principal of the trust (and the Principal's successors) with a more comprehensive and clearly defined mechanism to specify who is to hold the Power of Appointment in the event of death or loss of legal capability, and

· to minimise disputes between Principals of the Trust.

The specific changes to the trust deed include, but are not limited to:

· Amending the Principal definition to include additional Principals,

· Amending the mechanism which controls how the Principal's Power of Appointment transfers,

· Amending the Principal's Power of Appointment, and

· Inserting a mechanism to minimise disputes between Principals.

There are no other proposed changes to the trust deed.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 104-10

Income Tax Assessment Act 1997, Section 104-55 and

Income Tax Assessment Act 1997, Section 102-25.

Reasons for decision

Question 1

Summary

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

The changes proposed by the amending deed do not change the essential nature, purpose, or character of the original trust relationship. This is because the changes follow the intent and purpose of the original terms of the trust.

The proposed changes are a mere variation to 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.

Detailed reasoning

The Creation of a new trust - Statement of Principles August 2011 (Statement of Principles) outlines the Commissioner's view on when changes to a trust are such that, for income tax purposes, one trust estate comes to an end, and another takes its place. It states:

… these situations are sometimes referred to as 'resettlements' ….

In other situations, although the original trust estate may continue, changes may lead to the creation of one or more new and separate trust estates for tax purposes.

The Statement of Principles discusses how resettlements occur in the following paragraph:

In the ATO's view both the stamp duty and estate duty cases indicate that a new trust arises when there is a fundamental change to the trust relationship. It is a change in the essential nature and character of the original trust relationship which creates a new trust. This may mean that the original trust ceases to exist, and a new trust arises. Alternatively, a new trust may arise which exists independently of the original trust.

The Statement of Principles provides examples of changes which raise the question of whether a new trust has been created. 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.

The overall effect of the proposed changes, and the facts surrounding the proposed changes, need to be considered when determining whether a resettlement has occurred:

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 this second case, the original trust is brought to an end and/or a new trust is created.

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. …

The Statement of Principles highlights the important taxation implication that arises from a trust resettlement. It states:

… if changes are such that a new trust relationship arises, there must also be a new trust estate for Division 6 purposes. If the trustee remains the same, it would dispose of the trust property in its capacity as trustee of one trust estate and reacquire it as trustee of another. The disposal would trigger consequences under the capital gains and other provisions of the tax legislation. A capital gains tax (CGT) event would occur …

If changes result in a newly created trust estate, then CGT event E1 under section 104-55 of the ITAA 1997 will occur over the trust's CGT assets.

Changes to the terms of the trust

Part 5.5 of the Statement of Principles discusses changes to the terms of the trust. It states:

It is important to distinguish between changes which are merely procedural and those which fundamentally redefine the relationship between the trustee and beneficiaries in respect of the trust property. It is generally only changes of the latter type which will give rise to a new trust. However:

· it is sometimes unclear whether a variation of terms is fundamental or merely procedural;

· extensive procedural changes may be taken into account along with other changes in considering whether there is a new trust; and

· in some circumstances new trusts have been held to arise even though their terms have been very similar to a prior arrangement (eg Davidson v. Chirnside).

Changes which are merely procedural or administrative generally will not in themselves amount to the creation of a new trust. The Statement of Principles provides the following examples of procedural or administrative changes:

· changes in the person acting as trustee or manager; or

· changes which merely affect administrative and 'housekeeping' procedures without substantially altering the rights of the beneficiaries in respect of the trust property.

It should be noted that changes may substantially alter beneficiaries' rights even though their interests are not adversely affected. What is important is the extent and nature of the change to the bundle of rights making up the beneficiaries' respective interests.

Principal's power

The trust deed identifies a Principal of the trust. In this role, the Principal has an administrative or procedural power under the trust deed to remove the trustee and appoint one or more entities as the trustees. The trust deed also specifies who can or cannot be a trustee.

The Power of Appointment remains solely with the Principal, unless the conditions in the trust deed are satisfied.

Changes to the trust deed

There is a concern the trust deed does not clearly provide for the succession of the Principal's Power of Appointment in its current form.

The trustee intends to amend the trust deed, in order to:

· provide the Principal of the trust (and the Principal's successors) with a more comprehensive and clearly defined mechanism to specify who is to hold the Power of Appointment in the event of death or loss of legal capability, and

· include a mechanism to minimise disputes between Principals of the Trust.

The specific changes to the trust deed include:

· Amending the Principal definition to include additional Principals,

· Amending the mechanism which controls how the Principal's Power of Appointment transfers,

· Amending the Principal's Power of Appointment, and

· Inserting a mechanism to minimise disputes between Principals.

Continuing trust

Based on the facts and surrounding circumstances, the proposed changes will continue to follow the intention and terms of the original trust. The changes clarify and expand on:

· The Principal's Power of Appointment, and

· The succession mechanism for the Principal's Power of Appointment.

The changes do not substantially alter the character or purpose of the Power of Appointment and the Principal succession mechanism. The Principal membership now includes additional Principals. However, the changes do not affect the beneficiaries' rights and interests in the trust property. This is because the beneficiaries never had any rights or interests in relation to who becomes a Principal or trustee.

The changes merely affect administrative and 'housekeeping' procedures, without substantially altering the rights of the beneficiaries in respect of the trust property. No other changes to the trust have been proposed. For this reason, the procedural or administrative changes proposed will not in themselves amount to the creation of a new trust.

Conclusion

The changes proposed by the amending deed do not change the essential nature, purpose, or character of the original trust relationship. This is because the changes follow the intent and purpose of the original terms of the trust.

The proposed changes are a mere variation to 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.

Question 2

Will the variations to the trust deed, as proposed by the draft Deed of Variation, constitute a disposal under section 104-10 of the ITAA 1997?

Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of your ownership of a CGT asset. If there is no contract, then the time of the event is when the change of ownership occurs.

Subsection 102-25(1) of the ITAA 1997 clarifies the situation if more than one CGT event applies, you use the one that is most specific to your situation.

As stated in question 1 above, if the changes to a trust deed result in a newly created trust estate, then CGT event E1 under section 104-55 of the ITAA 1997 will occur over the trust's CGT assets.

As indicated in question 1, the changes proposed by the Deed of Variation do not change the essential nature, purpose, or character of the original trust relationship. This is because the changes follow the intent and purpose of the original terms of the trust.

It follows that there is no resettlement or declaration as required by section 104-55 of the ITAA 1997. As stated earlier, if more than one CGT event occurs, then subsection 104-25(1) of the ITAA 1997 requires you to use the event that is the most specific to your situation. In this case, the most specific event in this situation is CGT event E1 in section 104-55 of the ITAA 1997. This means that CGT event A1 in section 104-10 of the ITAA 1997 will have no application in this instance.

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