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Edited version of your written advice
Authorisation Number: 1051225108797
Date of advice: 24 May 2017
Ruling
Subject: Amending the vesting date and beneficiaries of the trust
Question 1
Will extending the vesting date for the P Trust in accordance with the deed of amendment result in any CGT event happening?
Answer
No
Question 2
Will adding additional beneficiaries to the P 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 20ZZ
The scheme commences on:
1 July 20YY
Relevant facts and circumstances
The P Trust was established by deed in 19WW.
The current trustee is M Pty Ltd.
The original appointer was B. After the death of B, the appointer is the legal personal representative of B.
B died in 19XX.
The beneficiaries of the trust are defined in Clause 1(e) of the deed of trust by their relationship to Person T, or the trustee of a trust where the beneficiaries are related to Person T.
The default income beneficiaries are the children of Person T.
The default capital beneficiaries on the vesting day are the children of Person T equally, but if any child of Person T dies before the vesting day then that child's children take equally their parent's share.
Clause 1(d) of the current deed of settlement defines the vesting day to mean either 60 years from the date of the Trust instrument, or twenty years and 364 days after the death of the last survivor of Person T, or the day declared in writing by the Trustee.
The trustee of the Trust will amend the trust vesting date and beneficiaries of the trust by entering into a deed of amendment with Person T. The deed will be amended by deleting the current definition of vesting date, and replacing it with a clause that the vesting date will be either the nominated by the trustee, or a day which avoids breaching the rule against perpetuities. The clause on beneficiaries would be further amended to include other descendants related by blood to Person T.
The Trust Deed of Settlement includes a clause which provides discretionary powers to the trustee to vary the trust.
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
Reasons for decision
Question 1
Will extending the vesting date for the P 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.
Extending the trust vesting period in accordance with the amended deed will allow the trust vesting period to be extended beyond 2038 and will not offend the Rule against Perpetuities.
Therefore, it is considered that the Trustee's proposed amendments will not result in a discontinuation of the trust or create a new trust. The proposed variations are not a trust resettlement and do not trigger any CGT events.
Question 2
Will adding additional beneficiaries to the P 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 hence 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.
As the Trustee has a power of amendment to add beneficiaries that would extend to enlarging a class of beneficiaries to include Person T's great grandchildren, the variations do not go beyond the scope of this power of amendment.
Therefore, it is considered that the Trustee's amendments will not result in a discontinuation of the trust or create a new trust, and the amendments are not a trust resettlement and do not trigger any CGT events.
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