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Edited version of your written advice
Authorisation Number: 1012935577054
Date of advice: 15 January 2016
Ruling
Subject: Whether the trust will resettle because of proposed variations to the trust deed
Question 1
Will one or more of CGT events A1, E1 or E2 occur because of the proposed variations to the trust deed to limit the beneficiaries and specify a Guardian?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
Overall purpose of transaction
• It is desired to amend the trust deed for the X Trust ('the Trust') to confine its beneficiaries to the biological descendants of A and B, in accordance with their divorce settlement.
Existing arrangement
• The Trust is a discretionary trust.
• The trustee of the Trust has power under the trust deed to amend the deed.
• The Trust's beneficiaries are:
• the children of A and B (the 'Specified Beneficiaries'); and
• various relations (siblings, spouses, children, etc) of the specified beneficiaries (as specified in clause 1(3)(b) the deed) and associated entities.
• The body of the deed provides for a Guardian to be appointed to the Trust. The Guardian's role is to be notified if the trustee of the Trust wishes to exercise certain powers under the deed, such as varying the deed. There is currently no Guardian named in the schedule to the Trust Deed.
Proposed variation
• The trust deed will be varied to:
• redefine 'Specified Beneficiaries' to mean C, D and E;
• confine the relations who can be beneficiaries (clause 1(3)(b) of the deed) to the biological lineal descendants of the Specified Beneficiaries;
• specify the Guardian of the Trust in the schedule to the deed to be F Pty Ltd; and
• require that any future trustee of the Trust be a company held by the same shareholders as, and have the same constitution as, the existing trustee.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 104-55 and
Income Tax Assessment Act 1997 Section 104-60.
Reasons for decision
Summary
A resettlement of a trust does not occur merely because the list of discretionary beneficiaries is changed to exclude some beneficiaries, or when a guardian is appointed.
Therefore, there is no disposal of a CGT asset (CGT event A1), creation of a trust over an asset (CGT event E1), nor transfer of a CGT asset to an existing trust (CGT event E2).
Detailed reasoning
The key issue is whether the proposed variations to the trust deed constitute a resettlement of the trust. A resettlement means that the effect of the transaction is that the existing trust settles its assets upon a distinct, newly-created trust which would be a separate entity for tax purposes. As a result, one or more of CGT events A1, E1 or E2 would occur and all unrealised capital gains would be crystallised for tax purposes.
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? contains the ATO's views on this issue. These views are informed by the judgment in Commissioner of Taxation v Clark [2011] FCAFC 5.
A resettlement does not occur unless the trust is terminated or a new trust is created, such as if the trustee of a discretionary trust declares a specific asset to be held on trust for a specific beneficiary.
A variation to the trust deed which adds to the list of beneficiaries or excludes some beneficiaries does not terminate the trust: TD 2012/21, paragraphs 2-5 (Example 1).
Variations which result in the appointment of a guardian to a trust are not addressed explicitly by TD 2012/21. However, Example 2 in TD 2012/21, paragraph 6, demonstrates that a change to the trustee's powers will not constitute a resettlement.
The proposed variations in this case do not constitute the termination of the X Trust, nor do they constitute the creation of a new trust. Therefore no CGT event will occur upon the making of the proposed variations.
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