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Edited version of your written advice
Authorisation Number: 1051219754767
Date of Advice: 24 May 2017
Ruling
Subject: Whether a resettlement of a trust occurs following a proposed amendment.
Question 1
Will extending the vesting date for the X Trust in accordance with the deed of amendment result in any CGT event happening?
Answer
No
Question 2
Will adding additional beneficiaries to the X Trust in accordance with the deed of amendment result in any CGT event happening?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
The X Trust (trust) was established in 19XX.
The current vesting day of the trust is defined in the Deed of Settlement and includes the shorter period of X years after the execution of the deed or Y years after the death of the last survivor of the descendants living at the time of execution of the deed.
A clause within the Deed of Settlement provides for the trustee to amend the Deed of Settlement and appoint an alternative vesting date.
The trustee will be amending the current definition of vesting day in the Deed of Settlement and replacing it with the following clause:
'The vesting day' means the earlier of:
(i) The day nominated in writing by the trustee; or
(ii) The day on which the trust must end to avoid breaching the Rule against Perpetuities”.
The beneficiaries of the trust are defined in the Deed of Settlement as per their family relationship to Person A.
The Trustee will amend the current definition of beneficiaries by enlarging the class of eligible beneficiaries to include great grandchildren and their spouses of Person A, who are born after the vesting date.
The trust Deed of Settlement provides discretionary powers to the trustee to vary the trust, provided that any variation is in favour of 'all or any one or more of the following, namely any relative by blood or adoption of person A or any charitable organisation'.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 104-55
Income Tax Assessment Act 1997 Section 104-60
Question 1
Will extending the vesting date for the X Trust in accordance with the deed of amendment result in any CGT event happening?
Detailed reasoning
A trust resettlement is a trust law concept and occurs where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains tax could accrue to the trustee and beneficiaries as a result of various CGT events.
As per the Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark's case), a trust will not be terminated provided that there is some degree of continuity established of the trust and any amendment to the trust is made in accordance with a power of amendment afforded to the Trustee.
Following Clark's case, the Commissioner issued Taxation Determination 2012/21 (TD 2012/21), which provides that a valid amendment to a trust pursuant to an existing power will not result in termination of the trust and therefore will not result in CGT events E1 or E2 happening when:
● an amendment is made pursuant to an existing power;
● an amendment does not cause the trust to terminate for trust law purposes; and
● the effect of the amendment does not lead to a particular asset being subject to a separate charter of rights and obligations, such as to give rise to the conclusion that the asset has been settled on terms of a different trust.
Tax Determination 2012/21 provides that a mere extension of the terms of a trust is consistent with a continuing trust estate when:
● the trust deed confers an express power to alter the termination date;
● the trust deed and surrounding circumstances do not indicate that a particular trust period was a fundament feature of the particular trust relationship;
● other accompanying circumstances do not indicate a fundamental change to the trust.
As the Trustee has discretionary powers under the trust Deed of Settlement to amend the trust, including the vesting period, it is considered that the Trustee's amendments will not result in a discontinuation of the trust or create a new trust while it is also a valid exercise of a power of amendment.
Therefore, the proposed variations are not a trust resettlement and do not trigger any CGT events.
Question 2
Will adding additional beneficiaries to the X Trust in accordance with the deed of amendment result in any CGT event happening?
Detailed reasoning
The identity of those for whose benefit the trust exist is an essential element of the trust obligation and the trust relationship. Therefore, changes amounting to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.
Taxation Determination 2012/21 accepts that there are changes in the membership of a continuing class when:
● an existing power to nominate new beneficiaries is only exercisable under the terms of the trust in favour a clearly defined group which could be reasonably inferred that the trust was intended to benefit, and
● it can be shown from the deed and surrounding circumstances that the actual objective purpose or theme of the trust was to benefit that wider group.
The Trustee has a power of amendment under the Deed of Settlement to add beneficiaries that are related by blood or adoption to person A. The changes within the deed of amendment do not go beyond the scope of this power of amendment, as they allow for the continuation of beneficiaries to be other descendants related by blood to Person A.
Therefore, it is considered that the Trustee's amendments will not result in a discontinuation of the trust or create a new trust while it is also a valid exercise of a power of amendment, and the amendments will not result in a trust resettlement and do not trigger any CGT events.
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