Edited version of your written advice

Authorisation Number: 1013090557160

Date of advice: 16 September 2016

Ruling

Subject: Capital Gains Tax - Trust Resettlements

Question 1

Will entry into an amendment deed seeking to modify a trust's guardian and appointer and remove the majority of its beneficiaries constitute a 'resettlement' for Capital Gains Tax (CGT) purposes, thereby triggering CGT event E1 under section 104-55 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

1 July 2016 to 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

A trust (the "Trust") was established by deed ("the Deed") made in 19XX.

The Trust has a number of specified beneficiaries and owns significant real estate.

Pursuant to powers contained in the Deed, the trustee of the Trust is seeking to make amendments to the Deed, all of which are outlined in a proposed amendment deed.

The amendment deed intends to remove the majority of the specified beneficiaries bar one.

The Trust's founder has provided for the other beneficiaries, who are their children and their spouses.

The amending deed will also replace the current guardian and appointor of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-55

Income Tax Assessment Act 1997, subsection 104-55(1)

Summary

The proposed amendment deed will not constitute a resettlement for CGT purposes. It is a valid exercise of the trustee's powers contained in the original trust deed, and satisfies the continuity test stipulated in Commissioner of Taxation v Commercial Nominees of Australia [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42 (Commercial Nominees). Therefore, the proposed amendments will not have any CGT consequences under the provisions of the ITAA 1997.

Reasons for decision

Subsection 104-55(1) of the ITAA 1997 provides that:

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

In the context of trust deed variations, one issue that has arisen regarding the scope of CGT event E1 is whether an existing trust can change in such a fundamental way so as to constitute a 'resettlement' of the trust, with the consequence that although the trust has not terminated for trust law purposes, a new trust has nevertheless been 'created' for the purposes of subsection 104-55(1).

The leading authority on this issue is the decision of the Full Federal Court (Edmonds and Gordon JJ, Dowsett J dissenting) 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), where it was established that the main test for determining whether a trust has been resettled involves a characterisation and evaluation of the continuity of the trust estate.

In applying this test, their Honours in Clark cited the High Court case of Commercial Nominees, where it was held that:

[t]he three main indicia of continuity [for the purposes the taxing regime for superannuation funds] are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity [emphasis added by Edmonds and Gordon JJ].

Their Honours concluded that:

[w]hen the High Court in Commercial Nominees spoke about trust property and membership as providing two of the indicia for the continued existence of the…trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question.

Following Clark, the Commissioner issued Taxation Determination 2012/21 (TD 2012/21), in which the administrative impact of the decision was explained. The Commissioner's position, as expressed in TD 2012/21, can be summarised as follows:

a) The decision in Clark does not change the basic proposition that the relevant focus is on whether continuity of the trust estate has been maintained. Therefore, the principles in Commercial Nominees are relevant in determining whether CGT event E1 happens.

b) Continuity of a trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated.

c) In the context of CGT Event E1, Clark 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.

Application

As the above authority confirms, provided that the amendment is within the trustee's powers and there is continuity of at least some of the three indicia specified in Commercial Nominees, it is unlikely that it will trigger a resettlement for CGT purposes.

In applying the three indicia of continuity from Commercial Nominees to your case, it is clear that the proposed amendments will have no effect on the constitution of the trust, nor the trust property. In respect of the trust's membership, although the majority of beneficiaries will be removed, one party will retain and continue their status as a specified beneficiary of the trust. When all of these factors are balanced, it is considered that the proposed amendments do not impose changes in any of the three factors significant enough to destroy the necessary continuity requirement.

Therefore, so long as the amendments are a valid exercise of a power of amendment contained within the trust deed, they will not give rise to the happening of a CGT event. In your case, Clause 16(2) of the Deed expressly outlines the procedure for the appointment of a new appointor or guardian. As the clause states, so long as written notice is provided by the current appointor or guardian, there will be no issues in instating a new appointor or guardian of the Trust.

Moreover, Clause 19 of the Deed invests broad powers of amendment onto the trustee. More specifically, it provides that the trustee may "vary all or any of the provisions" of the Deed so long as the carve-outs under Clauses 19(a) - (c) are not enlivened. On the current facts, given none of the carve-out provisions apply, the removal of beneficiaries via the proposed amendment deed will be a valid exercise of the trustee's power, and will not constitute a 'resettlement' for CGT purposes.

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