Edited version of your written advice

Authorisation Number: 1012948082613

Date of advice: 2 February 2016

Ruling

Subject: Capital Gains Tax (CGT) implications as a result the proposed amendments to the trust deed

Question

Would the trustee's proposed amendments to the membership of Primary Beneficiaries and the trust's potential beneficiaries result in any of the following CGT events happening to the trust under Division 104 of the Income Tax Assessment Act 1997?

• CGT event A1,

• CGT event E1; or

• CGT event E2.

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Existing arrangement

• The trust is a discretionary trust.

• The trustee of the Trust has the power under clause XX of the trust deed to amend the deed with the consent of the Guardian if alive.

• The trust's Appointer and Guardian is A.

• The trust's current Primary Beneficiaries are A and B who are entitled to a share of the corpus of the trust on vesting date should the trustee be unable to exercise a power of appointment over the corpus of the trust, with the consent of the Guardian, due to there being no Guardian alive at that time.

• On vesting day, it is not envisaged that the trust will have any corpus to distribute to the Primary Beneficiaries.

• The trust has made a family trust election with C being the relevant test individual. The trustee does not propose to revoke, vary or amend its family trust election of the specified test individual.

Proposed variations

• The trust deed will be varied to include the following individuals as additional named Primary Beneficiaries:

• C who is a brother of B and husband of A; and

• D and F who are children of C and A.

• The trust deed will be varied to exclude the following individuals as potential beneficiaries of the trust (The trust does not have any unpaid entitlements payable to either of them.)

• - V and S who are children of C and his former spouse.

• No particular asset of the trust would be held for the benefit of one particular beneficiary or class of beneficiaries when the proposed amendments to the trust's beneficiaries are made.

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

It is accepted that the proposed amendment to the terms of the trust deed to add individuals to the Primary Beneficiaries and remove others from the objects is a valid variation under trust law and does not amount to a resettlement of the trust. Consequently, there is no disposal of a CGT asset (CGT event A1), creation of a trust over an asset (CGT event E1), or 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(titled 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 provided it is a valid exercise of a power of amendment contained in the deed or a court approved variation: TD 2012/21, paragraphs 2-5 (Example 1).

In the present case, the proposed amendment of the membership of Primary Beneficiaries and limiting the trust's potential beneficiaries is a valid exercise of a power of the amendment contained in clause XX of the trust deed and as such it will not result in the termination of the trust.

Relevantly, these proposed changes in the membership of the trust's eligible beneficiaries are relatively minor amendments of a continuing class without creation of a new trust relationship. Therefore, these changes will not result in the creation of a new trust for income tax and CGT purposes. This is supported by the fact that no particular asset of the trust would be held for the benefit of one particular beneficiary or class of beneficiaries when the proposed amendments to the trust's beneficiaries are made.

As explained above, it is concluded that the proposed changes amount to a mere variation of a continuing trust and do not constitute the termination of the trust, or the creation of a new trust. Therefore, no CGT event will occur upon the making of the proposed variations.

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