Edited version of your private ruling

Authorisation Number: 1012441729326

Ruling

Subject: Variation of trust deed and capital gains tax

Question

Will the changes to the Trust proposed by the Amending Deed result in the creation of a new trust and therefore trigger CGT event E1?

Answer

No. The changes proposed will not result in the creation of a new trust. CGT Event E1 will have no application.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The trust was established by a deed.

The trust deed details the role of an Appointor in appointing or removing trustees.

The trust deed also provides the trustee with the power to vary the provisions, provided that they have consent.

Pursuant to the power contained in the above clause, the trustee, with consent, wishes to vary the provisions of the trust deed by:

· inserting 'distributor provisions' into the deed to facilitate estate planning;

· altering the termination provisions of the deed; and

· updating the appointor provisions of the deed.

The deed of variation proposes to amend the current definition of vesting day by adding the following clause:

'vesting day' means the day that the trustee determines by deed to be the vesting day.'

The variations give the Appointor of the trust the power to:

· direct the trustee to divide the Relevant Distributable Income and/or Relevant Distributable Capital of the trust into such shares as the Appointor thinks fit;

· appoint one or more Distributors in respect of each of those shares; and

· remove a Distributor from office.

While there is a Distributor in office, the trustee must pay, apply or set aside the Relevant Distributable Income of the Trust in accordance with a proposed clause. Under that clause, the trustee must:

· divide the Relevant Distributable Income of the trust into the shares in accordance with the latest direction of the Appointor; and

· pay or apply each of those shares to the beneficiaries of the trust in such proportions as the relevant Distributor may direct.

The rights of the beneficiaries (as a class) to distributions of the income will not be affected by the changes.

Relevant legislative provisions

Section 104-55 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The proposed amendments within the Amending Deed for the trust do not create a new trust and trigger CGT event E1. As per the decision in Commissioner of Taxation v. David Clark ; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark), since alterations were contemplated in the original deed, there is a continuity of property and membership of the trust.

Detailed reasoning

Alterations to a trust deed may need to be considered in the context of whether the alterations cause a capital gain or capital loss to arise. This may occur where changes to a trust are such that for income tax purposes one trust estate comes to an end and is effectively replaced by another. In particular, CGT event E1 in section 104-55 or of the Income Tax Assessment Act 1997 (ITAA 1997) occurs where a trust is created over a CGT asset.

Taxation Determination TD 2012/21 considers whether CGT event E1 in section 104-55 of the ITAA 1997 happens if the terms of a trust are changed pursuant to a valid exercise of power contained within the trust's constituent document. It is considered that CGT event E1 does not happen unless:

the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

the effect of the change or court approved variation is such as 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.

On 21 January 2011, the Full Federal Court (Edmonds and Gordon JJ, Dowsett J dissenting) handed down its judgment in Clark. That case raised squarely for consideration the circumstances in which the nature of a trust has so changed that it might be concluded that the trust that originally incurred capital losses is not the same trust for income tax purposes as that which has derived gains against which the losses are sought to be recouped.

Clark was decided adversely to the Commissioner.

Paragraphs 20 and 21 of TD 2012/21 state:

20. It is clear following Clark that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purposes. As such, in the absence of termination, tax losses being carried forward by a trustee will as a general rule remain available to be recouped against relevant trust income derived in future years of income.

21. 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 ,³ 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.

This final point is expanded at paragraph 24:

24. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation,⁴ will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.⁵

In the case of the trust, the deed contains a power to amend the deed. Consequently, the proposed variations are a valid exercise of power.

Since the amendments were, in effect, contemplated in the existing trust deed, the principles of Clark apply and continuity of the trust will be maintained for trust law purposes.

Furthermore, there is 'some continuity of property and membership of the trust' as per paragraph 21 of TD 2012/21. The variations introduce the position and role of a 'distributor' to the administration of the trust. Essentially, the distributor provisions give the Appointor of the trust the power to:

· direct the trustee to divide the Relevant Distributable Income and/or Relevant Distributable Capital of the trust into such shares as the Appointor thinks fit;

· appoint one or more Distributors in respect of each of those shares; and

· remove a Distributor from office.

When a distributor is in office, the trustee must distribute the income and/or capital of the trust by:

· dividing the Relevant Distributable Income of the trust into shares in accordance with the latest direction of the Appointor, and

· pay or apply each of those shares to the beneficiaries of the trust in such proportions as the Distributor may direct.

No changes will be made to the trust property or the beneficiaries of the trust.

Under the existing trust deed, distributions of income or capital to individual beneficiaries are dependent on the trustee's discretion. After the implementation of the proposed variations, such distributions will still depend on the trustee's discretion, except where there is a distributor in office. Where a distributor is in office, the trustee is bound to deal with the income or capital as directed by the Distributor. The distributions to individual beneficiaries will therefore be dependant on the Distributor's discretion.

The intent of the trust will not change as a result of the distributor provisions being inserted, since each beneficiary's right to distributions of either income or capital remains the same.

In the context of the trust and surrounding circumstances, the proposed changes are consistent with a continuing trust and do not materially alter the rights of the beneficiaries with respect to the trust property. The distribution of income and capital by the trustee will continue to be discretionary in nature. The appointment of trustees will continue to be the responsibly of the Appointor. There will be no substantial change to the Appointor and how successors are appointed to that role. The same beneficiaries will be entitled to income and capital of the trust both before and after the proposed variations.

There is also a proposal to replace the current definition of vesting day with the following:

'vesting day means the day which the Trustee determines by deed to be the vesting day.'

The proposed changes are authorised by a clause within the trust deed with no specific provision preventing the trustee from either amending the definition of vesting day or extending the term of the trust.

On this basis, and the fact that the trustee already has the power to terminate the trust at any time, it is considered that a particular vesting day is not a fundamental feature of this trust.

Additionally, TD 2012/21 gives the following example:

7. The Lime Trust is a discretionary trust settled in 1980 to benefit the members of the Linden family. The trust deed contains no definition of income nor does the deed contain a provision permitting the trustee of the trust to stream income. The deed contains a clause specifying the date on which the trust is to vest as 30 September 2020 .

8. Pursuant to an unfettered power of amendment in the deed, the trustee resolves in writing to amend the deed....

9. The trustee further resolves to amend the deed by changing the vesting date to 30 September 2050 or such earlier date as the trustee may determine .

10. The making of the resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event .

As per the above example and in accordance with the proposed changes to the definition of vesting day described above, the happening of a CGT event will not arise. In short, the change to the vesting day will not give rise to a new trust.

Conclusion

The proposed amendments do not alter or create a new class of beneficiaries or make any change to the beneficial interests in the trust property. The proposed amendments do not amount to a variation of a continuing trust and will not fundamentally change the essential nature and character of the original trust relationship. Accordingly a new trust will not be created and CGT Event E1 will not be triggered.

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