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Edited version of your written advice

Authorisation Number: 1051473659530

Date of advice: 16 January 2019

Ruling

Subject: Income tax – resettlement of a trust

Question

Will the proposed Deed of Variation to the Z Trust deed result in a termination of the Z Trust or creation of a new trust for income tax purposes and the application of CGT event E1 or CGT event E2?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 2019

Income year ended 30 June 2020

The scheme commences on:

Execution of the Deed of Variation

Relevant facts and circumstances

Background

The Z Trust was settled as a hybrid trust in mid 201x.

The settled sum of $x was paid in consideration for the issue of units and to establish the Z Trust.

Upon settlement of the Z Trust, units were issued in equal proportions to X separate unit holders.

One of those unit holders ceased to be a unit holder at some point during the 201x to 201x financial years.

A new unit holder acquired units on 1 July 201x, 201x and 201x via a new unit issue.

Current unit holders each hold equal proportions of units.

The Z Trust runs an engineering consultancy business.

Terms of the trust deed

The trust deed defines beneficiaries of the trust as being a unit holder and specific trusts, companies and individuals with a prescribed relationship with a sole or join unit holder.

The trust deed provides the Trustee with discretion to distribute income to any beneficiary in any proportion, so long as the distribution of net income is made among the classes of the beneficiaries by reason of a relationship with an effective unit holder and any charity are a separation class of beneficiary.

The trust deed provides the Trustee with the discretion to distribution capital to any beneficiary in any proportion, so long as the distribution of capital is made among the classes of beneficiaries in proportion to the number of units held by unitholders.

The trust deed provides for the transfer of units, initially to the other unit holders and they can then be offered for sale to any other entity the trustee selects.

The trust deed contains a variation clause which requires the consent of the unitholders.

Proposed variations to trust deed

A draft Deed of Variation of the Z Trust has been provided.

The necessary the consents and conditions to vary the trust deed are satisfied.

Relevantly, the draft Deed of Variation:

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 occurs when a trust is created over a CGT asset by declaration or settlement as detailed in section 104-55 of the ITAA 1997.

CGT event E2 occurs when a CGT asset is transferred to an existing trust as detailed in section 104-60 of the ITAA 1997.

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) sets out the Commissioner’s view in respect of trust resettlements and whether or not a resettlement has occurred.

TD 2012/21 draws upon comments made in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5 (Clark case) in forming the ATO View.

TD 2012/21 asserts that a valid amendment to a trust deed will not result in the termination of a trust for income tax purposes provided:

Amendment is made pursuant to an existing power

The proposed amendments will therefore be made pursuant to an existing power.

Amendment does not cause the trust to terminate for trust law purposes

Where there is continuity of property and membership of the trust, an amendment to the trust made in proper exercise of a power contained under the deed will not result in the termination of the trust.

The proposed amendments to the trust will be made in proper exercise of a power expressly provided for in the trust deed. There will be continuity of property of the trust.

As there is continuity of property and membership of the trust, the proposed amendments to the Z Trust will not result in the termination of the Z Trust for trust law purposes.

Asset subject to separate charter of rights and obligations

The proposed amendments to the trust do not lead to a particular asset being subject to a separate charter of rights and obligations and therefore it cannot be concluded conclusion that any asset has been settled on terms of a different trust.

As the three conditions listed in TD 2012/21 are satisfied, there has been no termination of the trust for income tax purposes and no creation of a new trust. CGT event E1 and CGT event E2 will therefore have no application.

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