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Edited version of your written advice
Authorisation Number: 1051449734831
Date of advice: 21 November 2018
Ruling
Subject: Resettlement of a trust – CGT Event E1 and E2
Question
Will the execution of the Deed of Amendment result in a trust resettlement and therefore trigger CGT event E1 pursuant to section 104-55 or CGT event E2 pursuant to section 104-60 of the Income Tax Assessment Act 1997?
Answer
No
This ruling applies for the following period:
Year ending 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
The Trust is a Hybrid Unit Trust and was settled by a Trust Deed. The Trust carries on a business.
The Trustee, together with the current and former unit holders, treated the trust generally as a Unit Trust and not as a Hybrid Unit Trust. The unit holders have directed distributions of either income or capital to unit holders only.
The Trustee, with the consent of the sole unit holder, is proposing to vary the terms of the deed to remove the discretionary distribution powers of the Trustee in order to ensure that all future distributions of income and capital can only be paid to unit holders.
The Trustee provided a proposed deed which contains a number of amendments to the clauses in the trust deed consistent with the above objective.
The Trustee has powers under the Trust Deed to make the amendments.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-55
Income Tax Assessment Act 1997 Section 104-60
Reasons for decision
Summary
The proposed Deed Amending Trust will not trigger CGT event E1 pursuant to section 104-55 or CGT event E2 pursuant to section 104-60.
Detailed reasoning
Subsection 104-55(1) provides that CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. Section 104-60 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.
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) expresses the view that neither CGT event E1 nor CGT event E2 happens if the terms of the 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 unless:
● the change causes the existing trust to terminate and a new trust to arise for trust law purposes; or
● the effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.
This Taxation Determination (TD 2012/21) was issued following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark) and the High Court's refusal to grant the Commissioner leave to appeal that decision. The explanation to TD 2012/2 explains the Commissioner’s view as follows:
21. …….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.
24. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, 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.
…………….
26. 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.
27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.
[footnotes removed and emphasis added]
Taxation Determination TD 2012/21 further explains that the scope of the relevant power is determined by the construction of the words of the trust deed, the surrounding context and any relevant admissible evidence. Where a trustee is found not to have power to vary the trust in the manner contended, such invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening.
Application to your circumstances
The Trustee has the power to amend the trust deed. The proposed amendments to convert the hybrid trust to a unit trust will not terminate the Trust and will not create a new trust for trust law purposes. In consonance with Clark, the amendments will not impact the continuity of the trust.
Furthermore, the proposed amendment will 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 that asset has been settled on terms of a different trust. Therefore, the proposed amendments will not trigger the happening of CGT event E1 pursuant to section 104-55 or CGT event E2 pursuant to section 104-60.
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