Edited version of your private ruling

Authorisation Number: 1012463091767

Ruling

Subject: Trust Resettlement

Question 1

Will CGT event E1, CGT event E2 or CGT event A1 under sections 104-55, 104-60 or 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), occur if the trust varies the terms of the trust deed?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

· The Trust is a discretionary trust.

· The beneficiaries of the Trust include specified beneficiaries and general beneficiaries.

· The trustee wishes to amend the trust deed by Deed of Variation, to delete a clause in the trust deed which limits one of the specified beneficiaries from receiving income and capital of the Trust until a future date.

· In effect, the amendment will allow the trustee to exercise its discretion to distribution income and capital to the specified beneficiary.

· A clause in the trust deed confers the trustees with the power to vary the terms of the trust deed.

· Although not necessary, the trustees have sought the consent of the guardians of the Trust to vary the terms of the trust deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Reasons for decision

CGT event E1 & E2

CGT event E1 arises in accordance with section 104-55 of the ITAA 1997 due to a trust being created over a CGT asset. This event will also be triggered if changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created.

CGT event E2 arises in accordance with section 104-60 of the ITAA 1997 as a CGT asset is transferred to a new trust. Where this event occurs as a result of a trust resettlement, the assets are considered to be transferred from the original trust to the new trust.

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred.

The decisions 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) and Federal Commissioner of Taxation v. Commercial Nominees of Australia [1999] FCA 1455; 99 ATC5115; (1999) 43 ATR 42 (Commercial Nominees), are authority cases in determining the continuity of a trust and whether a resettlement has occurred. Paragraph 21 of TD 2012/21 states:

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, 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. Relevantly, in Commercial Nominees, the Full Court had stated that:

55… In order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income, It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust.

56. So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the 'taxpayer' for the purposes of section 278 and section 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself.

Example 1 of TD 2012/21 provides an example of when new entities, exclusion of entities and class of objects are added to the trust deed.

2. The Acorn trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute distraction to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business for growing flowers to supply local florists.

3. Having decided to get out of the flower industry, the Squirrel family dispose of their interests in Oak Pty Ltd to an unrelated family.

4. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:

· The respective spouses of children

· Trusts and companies in which the family has a majority controlling interest; and

· A philanthropic charity unrelated to the Squirrel Family.

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

Therefore, TD 2012/21 asserts that a valid amendment to a trust deed will not result in the termination of a trust as long as:

· the amendment is made pursuant to an existing power;

· the amendment does not cause the trust to terminate for trust law purposes; and

· the effect of the amendment does not 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.

In this case, the trustee has drafted a Deed of Variation to remove a clause which restricts a specified beneficiary from receiving income and capital of the Trust until a future date has passed. The power to amend the terms of the Trust is provided for in the trust deed and consent, although not required, has been sought by the guardians of the Trust.

The effect of the Deed of Variation will allow the trustee to exercise its discretion to distribute capital or income to the specified beneficiary.

Following the decisions in Commercial Nominees and Clark, it is evident that in this case, the amendment is made with a valid exercise of power contained within the trust deed and there is a continuity of trust property and membership, resulting in the continuity of the existing Trust.

Therefore, the proposed amendment does not give rise to a resettlement of the Trust and CGT event E1 or E2 will not occur.

CGT event A1

CGT event A1 under section 104-10 of the ITAA 1997 occurs when you dispose of a CGT asset. You are deemed to dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

CGT event A1 arises if there is a disposal of the assets in a trust. In the context of a resettlement, this occurs as the trustee is considered to have disposed of the assets when the original trust ended.

As it has been determined that the Deed of Variation will not cause a trust resettlement, there will not be a disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997 as there has been no change in ownership of the trust property. Therefore the proposed amendment in these circumstances will not give rise to CGT event A1 under section 104-10 of the ITAA 1997.

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