Edited version of your written advice

Authorisation Number: 1013087624056

Date of advice: 19 September 2016

Ruling

Subject: Deed variation relating to the Appointors and Beneficiaries of The Trust.

Question 1

Will capital gains tax (CGT) event E1 in section 104-55 of the Income Tax Assessment Act 1997 (E1) or E2 in section 104-60 of the Income Tax Assessment Act 1997 (E2) happen if the proposed amendments to the XYZ Trust are executed?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. The XYZ Trust (The Trust) is a discretionary trust established by the deed of settlement (Original Deed). The Trust was established for the benefit of the Income and Corpus beneficiaries, those named as Income Beneficiaries are also Corpus Beneficiaries, these are:

• A and B,

• any spouse of A and B,

• any child of A and B or any child of any spouse of A and B or any spouse of such child,

• any lineal issue living at the distribution date of any child of A and B or any lineal issue living at the distribution date of any child of any spouse A and B,

• any sibling, parent, nephew or niece of A and B or any sibling, parent, nephew or niece of any spouse of A and B or any spouse of such sibling, parent, nephew or niece.

• any company whenever incorporated in which a share is held for the time being by any of the persons referred to above except a company where any such share so held has the right to receive notices of general meetings of members and no other rights. Any company whenever incorporated in which any share is held by the Trustee.

• any Trust established anywhere at any time under which any person or company referred to above has any interest be it expectant, prospective, contingent or vested irrespective of whether other persons have any interests in those Trusts.

• the trustee of any charitable trust in that capacity. Any society, authority, institution, church, religious order, corporation, person or entity which at the time a distribution of income of the Trust is made is exempt from income tax under the Act or, if at such time a gift of money to such body is deductible against assessable income of the donor by virtue of the Act.

• the Trustee named in Schedule I of this Deed.

2. The current Trustee of the Trust and the one named in Schedule I of the Original Deed is XYZ Pty Ltd.

3. The Appointor of the Trust is C and has been since settlement.

4. A proposed Deed of Amendment (Amendment Deed) has been submitted.

5. The Amendment Deed seeks to appoint a new Successor Appointor to act as the Appointor of the Trust upon the death or resignation of the Appointor in the following terms:

2. Appointment and Acceptance

2.1 Appointment of New Successor Appointor

Pursuant to the powers conferred by the Replacement Provisions, and with the consent of the New Successor Appointor, the Appointor hereby appoints the New Successor Appointor to act as the Appointor of the Trust upon the death or resignation of the Appointor, with effect from the date of this Deed.

2.2 Acceptance of New Successor Appointor

The New Successor Appointor accepts the appointment to act as the Successor Appointor of the Trust and agrees to be bound by all the provisions of the Trust Deed.

6. The Amendment Deed also seeks to remove the Retiring Income and Corpus Beneficiaries of the Trust and appointing the New Income and Corpus Beneficiaries in the following terms:

3. Amendment of Beneficiaries

Pursuant to the powers contained in the Amending Authority, the Trustee hereby removes the Retiring Income and Corpus Beneficiaries and includes the New Income and Corpus Beneficiaries as Income and Corpus Beneficiaries of the Trust. The Trustee also amends the original Trust Deed to remove the names of the Retiring Income and Corpus Beneficiaries and to include the names of the New Income and Corpus Beneficiaries in the list of Income and Corpus Beneficiaries in the Schedules of the original Trust Deed. These amendments take effect from the date of this deed.

7. The Original Deed provides the Trustee of the Trust with variation powers which are expressed in the following terms:

18. (a) The Trustee may (with the written consent of the Appointor, if any) at any time by Deed or instrument in writing or by written or oral resolution (evidenced by the certificate of a person present at the making of such resolution) alter, vary, modify or otherwise amend any provision in this Deed or add to this Deed in such manner as it may in its absolute discretion determine. In amplification of this power the Trustee may at any time, in its absolute discretion add or remove a person as an Income Beneficiary or as a Corpus Beneficiary.

(b) Provided that no such alteration, variation, modification or amendment shall be capable of being made if it:-

(i) infringes the rule against perpetuities or paragraph 9(a);

(ii) varies, alters, revokes or amends paragraph 8(a)(i) hereof, this paragraph or paragraph 9(a) or 9(b);

(iii) has the effect of divesting or modifying the interest of any Beneficiary who has become presently, indefeasibly and absolutely entitled pursuant to this Deed.

(c) The Trustee may at any time renounce the power contained in paragraph 18 (a) and upon such renunciation and to the extent thereof such power shall be terminated and shall no longer be exercisable.

8. The Original Deed also provides the Trustee of the Trust the power to remove a beneficiary, this is expressed in the following terms:

22. (a) The Trustee may at any time, with the Appointor's written consent, remove a Beneficiary from the whole or any part of Schedule 2 by signing a declaration to that effect and from the signing of that declaration and the Appointor's written consent, the Beneficiary shall no longer be a Beneficiary of this Trust in accordance with terms of that declaration.

9. The Original Deed provides the Appointor of the Trust the powers relating to Appointors which are expressed in the following terms:

8. (a) The power to appoint a new or additional Trustee and the power to remove a Trustee shall, subject to this paragraph, vest in:

(i) The Appointor/s from time to time.

(ii) if there is more than one Appointor on and from the death of an Appointor, in the surviving Appointor or Appointors.

(iii) on and from the death of a sole or surviving Appointor, in such person or persons as the sole or surviving Appointor may in writing or by their will nominate.

(iv) on and from the death of the sole or surviving Appointor without such nomination having been made or such nominee having died or ceased to be in existence or unwilling to act as Appointor, in the Trustee for the time being of the Trust.

(b) In the event that there shall be more than one Appointor they shall act by a simple majority.

(c) If at any time no persons shall have the power to appoint a new Trustee or an additional Trustee, the power shall be vested in the Trustee or Trustees for the time being of the Trust.

(d) Where a Trustee or an additional Trustee is appointed pursuant to this paragraph, the Trust Fund shall at that time vest in the person or jointly in the persons who shall thereupon be the Trustee without the necessity for any vesting, declaration, transfer, conveyance or other assurance.

(e) The power to appoint a new Trustee contained in this paragraph is subject to paragraphs 9(a) and II.

(f) The power to appoint or remove a Trustee may be exercised by written instrument or by deed signed by the Appointor(s) at that time.

(g) If any Appointor becomes subject to a legal disability including being declared bankrupt or an order being made for the sequestration of the estate of the Appointor, then from the time of such disability, and during the continuance thereof, the power of appointment and removal vested in the Appointor shall vest in the Trustee provided that where there is more than one Appointor, the power shall vest in the other Appointor or Appointors. Upon the cessation of the legal disability including any sequestration order ceasing to have effect, then the power shall revest in the Appointor or the Appointors, if more than one.

10. The Original deed has not been varied previously and the Trustee has not used its powers contained in clause 18(c) to renounce the power its clause 18(a) variation powers.

Relevant legislative provisions

Income Tax Assessment Act 1999 section 104-55.

Income Tax Assessment Act 1999 section 104-60.

Reasons for decision

Summary

CGT event E1 occurs when a trust is created over a CGT asset and CGT event E2 occurs when a CGT asset is transferred to an existing trust. If a valid variation to the terms of a trust is made in accordance with a power of amendment contained in the trust deed or in accordance with trust law this will not amount to a resettlement of the trust.

It is accepted that the proposed amendments to the terms of the XYZ Trust (The Trust) to add to the Income Beneficiaries and the Corpus Beneficiaries and remove others from the Income Beneficiaries and the Corpus Beneficiaries would be a valid exercise of the power of amendment contained within the Original Deed. As such it does not constitute a resettlement of The Trust and it will not trigger CGT event E1 or E2.

The proposed change to the Appointor of The Trust would be a valid exercise of the power of amendment contained within the Original Deed. The proposed change does not constitute a resettlement of The Trust and will not trigger CGT event E1 or E2.

Detailed reasoning

CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happens if you create a trust over a CGT asset by declaration or settlement.

CGT event E2 in section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust.

Paragraph 24 of 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) 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 clarify that:

• the validity of purported changes to a trust are to be determined in accordance with principles of trust law, and

• in instances where a pre-existing trust does not terminate, the assets may commence to be held under a separate charter of obligations as a result of the variation such as to lead to the conclusion that those assets are now held on terms of a different trust.

Example 1 in TD 2012/21 (paragraphs 2-5) demonstrates that a valid change to the objects of a discretionary trust, in accordance with the power of amendment contained within the deed, does not result in resettlement of the Trust. Similarly a valid alteration to the objects of a discretionary trust pursuant to the principles of trust law would not result in resettlement.

Changes to Income Beneficiaries and the Corpus Beneficiaries of the Trust

The Original Deed in clauses 18 and 22 gives The Trustee broad powers to alter, vary, modify or otherwise amend any provision in the deed provided that The Trustee has the written consent of the Appointor. In the Amendment Deed submitted the Appointor is a party which would satisfy this condition, provided it is validly passed and signed by the Appointor.

Clause 18(a) further states that in amplification of the Trustees power to alter, vary, modify or otherwise amend any provision in the deed the Trustee

May at any time, in its absolute discretion add or remove a person as an Income Beneficiary or as a Corpus Beneficiary.

Clause 22(a) states that

The Trustee may at any time, with the Appointor's written consent, remove a Beneficiary from the whole or any part of Schedule 2 by signing a declaration to that effect and from the signing of that declaration and the Appointor's written consent, the Beneficiary shall no longer be a Beneficiary of this Trust in accordance with terms of that declaration.

Considering these two broad powers and the fact that the Appointor is a party to the Amendment Deed the proposed variation to the Income Beneficiaries and the Corpus Beneficiaries would be a valid exercise of the power of amendment contained within the Original Deed.

As the proposed amendments are within the power of the Original Deed there has not been a trust created over a CGT asset by settlement, nor has there been a transfer of a CGT asset to an existing trust. Therefore the proposed Amendment Deed does not give rise to a CGT event E1 or E2.

Adding a Successor Appointor to the Trust

It is accepted that the proposed amendment to add a Successor Appointor to The Trust is in accordance with the variation power of The Trustee contained in clause 8 of the Original Deed.

As this change would be a valid exercise of a power of amendment contained within the trust deed, and The Trust has not resettled, a trust has not been created over a CGT asset. A CGT asset has also not been transferred to the existing trust. Therefore the proposed Amendment Deed does not give rise to CGT event E1 or E2.

Conclusion

The proposed variations to the Income Beneficiaries and the Corpus Beneficiaries, and the proposed addition of a Successor Appointor to The Trust in the Amendment Deed, are valid exercises of the power of amendment contained within the Original Deed.

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