Edited version of your written advice

Authorisation Number: 1051478663638

Date of advice: 30 January 2019

Ruling

Subject: Proposed Resolution to Amend the Terms of a Trust Deed

Question 1

Would the execution of a proposed resolution to amend the terms of the Trust, pursuant to a valid exercise of an amendment power in the Trust Deed, cause a trust resettlement to occur?

Answer

No.

Question 2

If the answer to Question 1 is ‘Yes’, will either Capital Gains Tax (CGT) events E1 or E2 in sections 104-55 and 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) occur?

Answer

Not applicable.

Question 3

If the answer to Question 2 is ‘No’, do any other CGT events occur?

Answer

Not applicable.

This ruling applies for the following period:

1 July 2018 to 30 June 2019.

The scheme commences on:

1 July 2018.

Relevant facts and circumstances

The Applicant is a Trustee of a family trust (the ‘Trust’).

Clause X of the Trust Deed provides the Trustee with the power to alter, revoke or add to any of the provisions in the Trust Deed on the condition that any such amendments do not result in the income of the Trust being payable to the Settlor.

The Trust proposes to vary the Trust Deed by:

● removing particular beneficiaries of the Trust

● adding definitions of certain terms to the Trust Deed

● extending the vesting date, and

● changing the streaming provisions in the Trust Deed.

The Deed Poll drafted by the Trustee states that the proposed changes are intended to facilitate a more effective administration of the Trust Fund through modernising the language of the Trust Deed as well as updating and expanding the terms, powers and provisions of the Trust Deed generally, incorporating recent law changes to the administration and taxation of trusts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Reasons for decision

QUESTION 1

Would the execution of a proposed resolution to amend the terms of the Trust, pursuant to a valid exercise of an amendment power in the Trust Deed, cause a trust resettlement to occur?

Summary

The execution of the proposed resolution to amend the terms of the Trust, pursuant to a valid exercise of the amendment power in the Trust Deed, would not cause a trust resettlement to occur.

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 (CGT) could accrue to the trustee and beneficiaries as a result of various CGT events.

Relevant Law

Statute law

Subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

Case law

The High Court in FCT v. Commercial Nominees of Australia Ltd (2001) 47 ATR 220 (Commercial Nominees) considered whether a superannuation fund was entitled to utilise prior year losses following amendments to its trust deed (including the appointment of a new trustee, a new set of rules, and a change in the nature of benefits from defined to accumulation).

It was held that a resettlement did not arise because:

1. the amendments were authorised by the trust deed (which contained wide powers of amendment);

2. the trusts under which the superannuation fund operated were still constituted by the original trust deed (as varied);

3. the trust property and the fund members did not change; and

4. the superannuation industry regulatory authority treated the fund as a continuing fund, both before and after the amendments.

The Full Federal Court in F.C. of T v. Commercial Nominees of Australia (1999) 167 ALR 147 stated:

55…in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property of corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust [emphasis added].

56…so long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligations is established…

The decisions of the High Court and the Full Federal Court in Commercial Nominees were followed in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark).

In Clark, like in Commercial Nominees, the trustee (this time of a unit trust rather than a superannuation fund) sought to apply carry forward losses where the trust deed had undergone significant changes between incurring those losses and seeking to apply them. The Commissioner argued that the relevant changes to the trust deed had triggered a trust resettlement and therefore, the trustee could not apply the carry forward losses as the ‘new’ trust was effectively a different taxpayer to the ‘old’ trust that incurred the losses.

The Commissioner sought to distinguish Commercial Nominees, however Edmonds and Gordon JJ in their majority decision in the Full Court of the Federal Court concluded:

We cannot accept the Commissioner’s contention. When the High Court in Commercial Nominees spoke of trust property and membership as providing two of the indicia for the continued existence of the eligible entity or trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in general. In the present case, the Commissioner never contended, nor on the evidence could he, that there was a severance in the continuum of trust property and objects of the CU Trust. Their identity changed from time to time, but not their continuum.

Such an approach is consistent with the position at general law in relation to the four essential indicia of the existence of a trust: the trustee, trust property, the beneficiary and an equitable obligation annexed to the trust property. JD Heydon and MJ Leeming: Jacobs’ Law of Trusts in Australia (2006) 7^th ed. at [104]-[110].

In Commercial Nominees, both the Full Court, at [49] of its reasons, and the High Court, at [35] of its reasons, pointed out that there was nothing in Pt IX, nor in the 1936 Act generally, which imposed some statutory requirement of continuity for determining when there is a sufficient identity of the trusts involved. With respect, the same applies in the case of Div 6 of Pt III of the 1936 Act.

The Full Court of the Federal Court found in favour of the taxpayer and the Commissioner was denied special leave to appeal to the High Court. In the aftermath of Clark, the Commissioner issued Taxation Determination TD 2012/21.

Taxation Determination TD 2012/21

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 the trust are changed pursuant to a valid exercise of a power contained within the trust’s constituent documents, or varied with the approval of a relevant court? (TD 2012/21) states at paragraph 1 that neither CGT event E1 (creating a trust over a CGT asset by declaration or settlement) nor CGT event E2 (transferring a CGT asset to a trust) happens unless the changes:

● cause the existing trust to terminate and a new trust to arise for trust law purposes, or

● result in 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.

Paragraph 21 of TD 2012/21 explains that:

…as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark, is authority for the proposition that, 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 result in a termination of the trust, despite the extent of the amendments that are made to the trust, and as long as the amendments are properly supported by the power.

Further, paragraph 24 of TD 2012/21 provides that:

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,⁴ 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.⁵

It is noted at paragraph 27 of TD 2012/21 that:

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.

TD 2012/21 provides a number of examples. Of relevance to the current circumstances are Examples 1 (paragraphs 2 to 5) and 3 (paragraphs 7 to 10), as follows:

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 disposes of their interest 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.

…

Example 3: addition of definition of income, power to stream, and extension of vesting date

7. The Lime Trust is a discretionary trust settled in 1980 to benefit the members of the Linden family. The trust deed contains no definition of income nor does the deed contain a provision permitting the trustee of the trust to stream income. The deed contains a clause specifying the date on which the trust is to vest as 30 September 2020.

8. Pursuant to an unfettered power of amendment in the deed, the trustee resolves in writing to amend the deed to insert two clauses:

● the first defining the income of the trust to equal the net income of the trust as calculated under subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936), excluding franking credits, unless the trustee otherwise determines; and

● the second authorising the trustee to separately identify and label various sources of income or receipts that form part of the income of the trust estate and to deal with those amounts by reference to their labelling (that is, to 'stream' particular sources of income to particular beneficiaries).

9. The trustee further resolves to amend the deed by changing the vesting date to 30 September 2050 or such earlier date as the trustee may determine.

10. The making of the 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.

Application to your circumstances

As per the Facts, the Trustee has a power of amendment to alter, revoke or add to any of the provisions in the Trust Deed. Such powers of the Trustee are stated in Clause X of the Trust Deed, which provides that the Trustee may vary the terms of the Trust Deed on the condition that any such amendments do not result in the income of the Trust being payable to the Settlor.

The Trust proposes to vary the Trust Deed by:

● removing particular beneficiaries of the Trust

● adding definitions of certain terms to the Trust Deed

● extending the vesting date, and

● changing the streaming provisions in the Trust Deed.

The proposed changes are largely administrative in nature, with the intention of facilitating a more effective administration of the Trust Fund through modernising the language of the Trust Deed as well as updating and expanding the terms, powers and provisions of the Trust Deed generally, incorporating recent law changes to the administration and taxation of trusts.

The amendments proposed are comparable to the situations in Example 1 (in terms of the removal of a particular beneficiary under the Trust) and Example 3 (in terms of adding definitions of terms to the Trust Deed and extending the vesting date of the Trust) of TD 2012/21, where the making of such resolutions were deemed a valid exercise of a power of amendment contained within the applicable trust deed.

The proposed changes to the Trust Deed are considered to fall within the scope of the Trustee’s power of amendment provided for in Clause X of the Trust Deed. Thus, a resolution to execute the proposed changes would constitute a valid exercise of a power of amendment.

As the proposed amendments are within the Trustee’s powers contained in the Trust Deed, the Commissioner considers that – following execution of the proposed resolution to amend the terms of the Trust Deed – there will be continuity:

● of the Trust property

● in the membership of the Trust (apart from the removal of particular beneficiaries of the Trust), and

● in the operation of the Trust.

The underlying principles encapsulated in paragraphs 21 and 24 of TD 2012/21 provide that, assuming there is some continuity of property and membership of a trust, an amendment to the trust that is made in a proper exercise of a power of amendment contained under the trust deed will not result in a termination of the trust – regardless of the extent of the amendments, so long as the amendments are properly supported by the power.

On this basis, as continuity in the membership, operation and property of the Trust would be maintained following the execution of the proposed amendments to the Trust Deed pursuant to a valid exercise of the amendment power in Clause X of the Trust Deed, such amendments would not result in a termination of the Trust. This is consistent with the decisions in both the Commercial Nominees and Clark cases.

Having regard to paragraph 27 of TD 2012/21, the Commissioner is satisfied that the proposed amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust.

Therefore, in applying paragraph 1 of TD 2012/21, executing the proposed resolution to amend the Trust Deed pursuant to a valid exercise of the amendment power in Clause X of the Trust Deed would not result in a resettlement of the Trust.

Accordingly, neither CGT event E1 or E2 in sections 104-55 and 104-60 of the ITAA 1997 will occur. It is also considered that no other CGT event will arise as a result of the proposed changes to the Trust Deed.

QUESTION 2

If the answer to Question 1 is ‘Yes’, will either Capital Gains Tax (CGT) events E1 or E2 in sections 104-55 and 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) occur?

Summary

As the answer to Question 1 is ‘No’, a response to Question 2 is not applicable. However, as noted in the response to Question 1, the execution of the proposed resolution to amend the terms of the Trust pursuant to a valid exercise of the amendment power in Clause X the Trust Deed would not give rise to CGT events E1 or E2 in sections 104-55 and 104-60 of the ITAA 1997.

QUESTION 3

If the answer to Question 2 is ‘No’, do any other CGT events occur?

Summary

As the answers to Questions 1 and 2 are ‘No’ and ‘Not applicable’ respectively, a response to Question 3 is not applicable. However, as noted in the response to Question 1, the execution of the proposed resolution to amend the terms of the Trust pursuant to a valid exercise of the amendment power in Clause X the Trust Deed would not give rise to any other CGT event.

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