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Edited version of your private ruling
Authorisation Number: 1012560849314
Ruling
Subject: Trust resettlement
Question 1
Will the proposed amendments to the trust deed result in the happening of capital gains tax (CGT) event E1?
Answer:
No
Question 2
Will the proposed amendments to the trust deed result in the happening of CGT event A1?
Answer:
No
This ruling applies for the following period
Year ending 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
The Trust was established for the purpose of providing benefits for X and Y.
The Trust was also established for the purpose of providing benefits for X's parent, should both X and Y predecease the parent.
The primary appointors of the trust are X and Y.
The trustee of the trust is Company A. X is the sole director of Company A.
X wishes for their legal personal representative to become the Appointor and trustee of the Trust after their death.
X wishes to make appointment as to the distribution of the capital and income among various beneficiaries within the beneficiary class upon the vesting day and does not wish for this appointment to be overturned after their death.
A clause of the trust deed states that the trustee may add, alter or delete any provision of the trust deed.
You intend to amend the trust deed by altering several provisions.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 104-55
Income Tax Assessment Act 1997 Section 102-25
Reasons for decision
Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs.
CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997). One question that has arisen concerning the scope of this event is whether an existing trust can change in such a fundamental way that although the trust has not terminated for trust law purposes, nonetheless for tax purposes a new trust has come into being.
The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various CGT events. Importantly, in situations where a disposal of trust assets is deemed to occur, section 102-25 of the ITAA 1997 provides that if more than one event can happen, for example A1 or E1, the event you use is the one that is the most specific to your situation.
Taxation Determination TD 2012/21 sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred. TD 2012/21 asserts that an amendment to the terms of a trust will not result in the termination of a trust as long as:
· the amendment is made pursuant to a valid exercise of power contained within the trust's constituent document;
· the amendment does not cause the existing trust to terminate and a new trust to arise 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.
Application to your circumstances
Based on the information provided, the most relevant CGT event relating to your circumstances would be CGT event E1, as that event considers whether a trust has been created over a CGT asset or assets by settlement or declaration. Accordingly, there is no need to consider whether CGT event A1 would apply.
Therefore, in considering whether CGT event E1 applies to your situation it needs to be established whether the proposed amendments to the trust deed result in the termination of the existing trust.
A clause of the trust deed details the powers available to the trustee to make alterations to the trust deed. The clause gives the trustee the power to add, remove or alter any provision of the deed.
Applying your proposed amendments against the alteration clause of the trust deed finds that the proposed amendments;
· are made pursuant to a valid exercise of power contained within the trust's constituent document
· do not cause the existing trust to terminate, and
· do not lead to a particular asset being settled on terms of a different trust
Accordingly, as the trustee will be acting with their powers, and inline with the conditions declared in TD 2012/21, CGT event E1 will not happen as a result of the proposed changes to the trust deed.
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