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Edited version of your written advice
Authorisation Number: 1051239406864
Date of advice: 20 June 2017
Ruling
Subject: Amendment of trust deed
Question 1
Do the proposed amendments to the R Family Trust deed, to exclude any person being a foreign person as defined in the Duties Act 1997 (NSW) and Land Tax Act 1956 (NSW) from being a beneficiary of the trust, trigger any CGT event?
Answer
No
This ruling applies for the following periods:
Income year 1 July 2016 to 30 June 2017
The scheme commences on:
Not applicable
Relevant facts and circumstances
By Deed dated xxxx (the Trust Deed), the R Family Trust was established.
X Pty Ltd is the trustee of the Trust.
Clause 17 of the Trust Deed provides that any determination by the Trustee in exercise of any power, discretion or authority conferred on the Trustee by the settlement may be made in writing signed by all the Trustees or by a resolution passed at a meeting of the Trustees or by a resolution of the Directors of a corporate Trustee.
Clause 19 of the Trust Deed gives the trustee the power to amend the provisions of the Deed, including any beneficial interests.
The trustee wishes to amend the Trust Deed by inserting clause 26, which would provide that “…any person being a foreign person as defined in the Duties Act 1997 (NSW) and Land Tax Act 1956 (NSW) is excluded from being a beneficiary as defined in clause 1.5 of this deed and is excluded from benefitting under this deed on and from the date of this deed and is excluded for all time”.
No renunciation of interest is being made by a beneficiary.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-55
Income Tax Assessment Act 1997 section 104-60
Reasons for decision
CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997).
CGT event E2 happens if CGT assets are transferred to an existing trust (section 104-60). However, as no assets are being transferred to an existing trust, CGT event E2 is not applicable here.
One question that has arisen concerning the scope of CGT event E1 is whether an existing trust can change in such a fundamental way that although the trust has not terminated for trust law purposes nonetheless for tax purposes a new trust has come into being.
We accept that a change in the terms of a trust pursuant to exercise of an existing power (including an amendment to the deed of a trust) will not result in a termination of the trust and therefore ordinarily will not result in CGT event E1 happening (paragraph 24 of Taxation Determination TD 2012/21).
Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective (paragraph 26 of TD 2012/21).
Example 1 in TD 2012/21 states:
Example 1: addition of new entities to, and exclusion of existing entities from, class of objects
2. The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists.
3. Having decided to get out of the flower industry, the Squirrel Family dispose of their interests in Oak Pty Ltd to an unrelated third party.
4. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:
● the respective spouses of the children;
● trusts and companies in which the family has a majority controlling interest ; and
● a philanthropic charity unrelated to the Squirrel Family.
5. The making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.
In your circumstances, clause 17 of the Trust Deed provides that any determination by the Trustee in exercise of any power, discretion or authority conferred on the Trustee by the settlement may be made in writing signed by all the Trustees or by a resolution passed at a meeting of the Trustees or by a resolution of the Directors of a corporate Trustee.
Clause 19 of the Trust Deed gives the trustee the power to amend the provisions of the Deed, including any beneficial interests.
The trustee wishes to amend the Trust Deed by inserting clause 26, which would provide that “…any person being a foreign person as defined in the Duties Act 1997 (NSW) and Land Tax Act 1956 (NSW) is excluded from being a beneficiary as defined in clause 1.5 of this deed and is excluded from benefitting under this deed on and from the date of this deed and is excluded for all time”.
The Trust Deed for the Trust provides for a procedure for the trust to be amended, namely in writing signed by the trustee or by resolution. Pursuant to this procedure, the Trustee will in writing amend the Trust Deed by inserting clause 26 to specifically remove any person being a foreign person as defined in the Duties Act 1997 (NSW) and Land Tax Act 1956 (NSW) from being a beneficiary as defined in clause 1.5 of the Trust Deed. The insertion of clause 26, being a valid exercise of a power of amendment contained within the Trust Deed, does not give rise to the happening of CGT event E1.
Accordingly, no CGT event arises from the proposed amendment of the Trust Deed.
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