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Edited version of your private ruling
Authorisation Number: 1012581016964
Ruling
Subject: Income Tax: Capital Gains Tax - Events E1 to E9 - trusts
Question 1
Will the proposed Deed of Appointment and 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.
Pursuant to the power contained within the Trust Deed, the Trustee wishes to appoint Appointors and Guardians of the Trust as well as vary the provisions of the Trust Deed in the manner contained in the proposed Deed of Appointment and Variation.
The Deed of Appointment and Variation proposes to:
· Place appointors in office who have oversight of the trust.
· Place guardians in office who have oversight of the trust and must first provide their unanimous consent before the trustee may undertake any of the following:
o Exclude a beneficiary from a particular class of beneficiaries
o Nominate an earlier vesting date for the trust than the 80 year perpetuity period permitted
o Net capital gains can be distributed to beneficiaries
o Advance capital to beneficiaries before the vesting date
o Distribute capital to beneficiaries on the vesting date
o Permit trust property to be used or occupied by a beneficiary
o Lend money to a beneficiary
o Remove or appoint the trustee
o Amend the terms of the trust pursuant to the amendment clause.
· Remove the general power in the trust deed for the trustee to be able to freely determine whether an asset is of an income or capital nature. The aim of this variation is to reduce the risk of a trustee categorising an amount which is of a capital nature as income in order to avoid the requirement to obtain the guardian's consent with respect to the distribution of trust capital.
· Provide for a means of succession of the office of appointor and guardian.
· Provide for the removal of an appointor or guardian 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 Appointment and Variation for The Trust do not create a new trust and do not trigger CGT event E1.
Detailed reasoning
CGT event E1 happens when you create a trust over a CGT asset by declaration or settlement (section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997).
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.
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.
Paragraph 24 of TD 2012/21 states:
… 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.
Paragraphs 26 and 27 of TD 2012/21 provide the:
26. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective.
27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.
In the case of the Trust, the Trust Deed contains a power to revoke, add to, alter or amend the deed. Additionally, the Trustee is granted the power in the Trust Deed, (subject to the Schedule), to appoint an Appointor and a Guardian. Consequently, the Deed of Appointment and Variation is a valid exercise of power.
Since the amendments were, in effect, contemplated in the existing Trust Deed, the continuity of the Trust will be maintained for trust law purposes.
Therefore, the proposed amendments within the Deed of Appointment and Variation will not result in the creation of a new trust and CGT event E1 will not be triggered.
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