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Edited version of your private ruling
Authorisation Number: 1012563923200
Ruling
Subject: Trust deed variation
Question
Does the proposed Deed of Variation and the proposed Deed of Declaration, to exclude beneficiaries in respect of the Family Trust, give rise to capital gains tax (CGT) event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or any other CGT event?
Answer
No
This ruling applies for the following periods
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on
1 July 2013
Relevant facts and circumstances
The Family Trust (the Applicant Trust) is a post-CGT family discretionary trust and holds post CGT assets.
The creators of the Applicant Trust, who have adult children, are currently implementing their estate plan and, as part of their overall succession plan, wish to exclude one child, their spouse and their child's children as beneficiaries of the Applicant Trust.
Currently, the Specified Beneficiaries of the Applicant Trust are named in the Schedule to the Family Trust Deed as The children of the creators of the Applicant Trust.
The Family Trust Deed confirms the discretionary nature of the trust, including a subclause that provides for an automatic vesting of trust property to the Specified Beneficiaries on the vesting date but only in certain circumstances and thus does not provide any Specified Beneficiary an absolute entitlement over any specific trust property.
The Family Trust Deed allows the provisions of the Family Trust Deed to be revoked, added to or varied by the Trustee in writing with the consent of the Guardians.
A draft Deed of Variation has been prepared (but not yet affected) pursuant to the Family Trust Deed to:
1) give the Trustee power to exclude a person or persons from the class of General Beneficiaries; and
2) vary the Specified Beneficiaries named in the Schedule.
A draft Deed of Declaration has been prepared (but not yet effected) pursuant to the Trustee's power of exclusion, to be inserted by the prepared Deed of Variation, to exclude from the class of General Beneficiaries:
(i) the child;
(ii) the spouse of the child;
(iii) the lineal descendents of the child;
(iv) any company or trust in which any one or more of the above persons hold 20% or more of the shares or represent more than 20% of the Primary or Specified Beneficiaries or the fixed interests in the trust; and
(v) any trust that made distributions of income or capital to or for the benefit of any one or more of the above persons, companies or trusts whether directly or indirectly, including through interposed entities, after the year ending 30 June2011.
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 104-75
Reasons for decision
Subdivision 104-E of the ITAA 1997 details CGT events that may happen in relation to trusts, including:
· Creating a trust over a CGT asset: CGT event E1 (section 104-55).
· Transferring a CGT asset to a trust: CGT event E2 (section 104-60).
· Beneficiary becoming entitled to a trust asset: CGT event E5 (section 104-75).
Taxation Determination TD 2012/21 is about 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. It confirms, if the terms of a trust are changed, CGT events E1 and E2 will not happen unless: (i) the change causes the existing trust to terminate and a new trust to arise for trust law purposes or (ii) 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.
Example 4 in TD 2012/21 is about where CGT events E1 and E2 happen as a result of, in exercise of their power, the trustee declares that one of several assets forming part of the corpus of the trust is henceforth to be held exclusively in trust for one of the objects (beneficiaries).
In your case, although the variation of the Applicant Trust deed will result in one Primary Beneficiary instead of two, clauses 3 and 4 of the trust deed, including clause 4(2), maintain the discretionary nature of the Applicant Trust and do not provide any specific beneficiary with absolute entitlement over any specific trust property. It follows a CGT event will not happen in relation to the proposed variations of the Applicant Trust deed.
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