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Edited version of your private ruling
Authorisation Number: 1012580819463
Ruling
Subject: Income Tax: Capital Gains Tax - CGT events E1 to E9 - trusts
Question 1
Will the proposed Deed of Variation for the Trust result in the creation of a new trust and therefore trigger CGT event E1?
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 by a deed.
The trust deed provides the trustee with the power to vary the provisions of the deed, with the consent of the appointor.
Pursuant to the power contained in the trust deed, the trustee, with consent, wishes to vary the provisions of the trust deed by:
· providing for a means of succession of the office of appointor;
· clarifying how decisions of multiple appointors are to be made and disputes resolved;
· providing for the removal of an appointor from the office if he or she suffers a 'critical event'. A critical event is defined in the proposed deed of variation as:
o death
o disability
o an act of bankruptcy as defined in the Bankruptcy Act 1966 (Commonwealth)
o becomes a party to property proceedings under the Family Law Act 1975.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-55
Reasons for decision
Summary
The proposed amendments within the Deed of Variation for the trust do not create a new trust and do not 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 Trust 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 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? (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 Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (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 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.
In the case of the trust, the deed contains a power to amend the deed. Consequently, the proposed variations are 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.
Therefore, the proposed variations do not result in the creation of a new trust and CGT event E1 will not be triggered.
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