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Ruling
Subject: Amendment to trust deed
Question 1
Will the proposed amendment to a clause in the Trust Deed result in CGT event E1 or E2 occurring for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 or balancing adjustments under Division 40 of the Income Tax Assessment Act 1997?
Answer
No.
This ruling applies for the following periods:
1 July 2012 - 30 June 2013.
The scheme commences on:
1 July 2012.
Relevant facts and circumstances
The directors of the trustee company XYZ Pty Ltd wish to amend the trust deed of XYZ Trust to better handle dispute resolutions between trustees and appointers.
The proposed amendment is to remove the current clause and replace it with a new clause to deal with trustee disagreements and resolutions.
The current clause states that where a disagreement may occur:
… in the event that there be a 75% majority for or against a particular proposal, effect shall be given to the wishes of such majority as if it were a unanimous decision by all such persons or corporations.
A and B Taxpayer are the directors of the trust company and joint appointers. When both pass away the appointers will be their two children. This means that the original clause cannot be fulfilled if there is a disagreement between the parties.
A clause in the original deed allows the Trustee to vary provisions therein.
Under the new clause proposed by the amendment, where both parties are unable to solve a disagreement, the matter will be taken to mediation than arbitration.
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Section 104-55
Income Tax Assessment Act 1997 Section 104-60
Income Tax Assessment Act 1997 Division 40
Reasons for decision
The question of the continuity of a trust was considered by the Full Federal Court in Commissioner of Taxation v Clark 2011 ATC 20-236. As a result of that decision, the Commissioner outlined his new preliminary position in Taxation Determination TD 2012/D4. In response to the question, 'does CGT event E1 or E2 in sections 104-55 or 104-60 of the ITAA 1997 happen if, pursuant to a valid exercise of a power contained within the trust's constituent document, the terms of the trust are changed?' it says in paragraph 1:
No. Unless the amendment causes the trust to terminate for trust law purposes, or the effect of the amendment is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the ITAA 1997 happens.
Given the amendment proposes to change the dispute resolution process between trustees and appointers, it cannot be said that it leads to a particular asset being subject to a separate charter of rights and obligations.
TD 2012/D4 provides further explanation in paragraph 17. It says that:
'Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark, is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power.'
Given the variation to the dispute resolution process is the only change under the proposed amendment, there is some continuity of property and membership of the trust, and therefore the assumption mentioned in paragraph 17 of TD 2012/D4 is satisfied.
With this assumption satisfied, what remains for an amendment to not result in a resettlement is for it to be made in proper exercise of a power of amendment contained under the deed.
The variation of the clause proposed in the amendment is clearly supported by the power bestowed in the original Trust Deed. It does not affect the beneficial entitlement to any amount set aside for any general beneficiaries. It would therefore be classified as a proper exercise of a power of amendment contained under the deed, and the trust would not terminate for trust law purposes as a result.
Therefore, the proposed amendment will not result in CGT events E1 and E2 occurring for the purposes of Part 3-1 of the ITAA 1997 or balancing adjustments under Division 40 of the ITAA 1997.
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