Edited version of your written advice

Authorisation Number: 1051500377067

Date of advice: 29 March 2019

Ruling

Subject: Trust resettlement, CGT events E1 and E2.

Question 1

Will the proposed amendments to the Trust Deed of the Family Trust (the Trust) cause capital gains tax (CGT) event E1 to occur pursuant to section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proposed amendments to the Trust Deed of the Trust cause CGT event E2 to occur pursuant to section 104-60 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. In 199x, the Family Trust (the Trust), a discretionary trust, was settled, with The Family Enterprises Pty Ltd appointed as the trustee of the Trust.

2. Clause 17 of the Trust Deed provides:

The Trustee may at any time and from time to time by deed or deeds revoke add to or vary all or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made thereto from time to time and may be the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust Fund or any part or parts thereof but so that any law against perpetuities is not thereby infringed and any such new or other trust powers discretions alterations or variation may relate to the management or control of the Trust Fund or the investment thereof or to the Trustee’s powers or discretions in these presents contained provided however that –

(a) the same shall not be in favour of or for the benefit or result in any benefit to any person from time to time being the Settlor Appointor or Trustee or any of them except a person named or described in item 4 of the Schedule hereto as a Nominated Beneficiary but shall otherwise be for the benefit of all or any one or more of the Eligible Beneficiaries or the next-of-kin of any of them or the next-of-kin of the Nominated Beneficiary or Nominated Beneficiaries or any of them and for the purposes of the Clause “next-of-kin” shall be taken to be the next-of-kin to all or any one of the Eligible Beneficiaries or Nominated Beneficiary or Nominated Beneficiaries at the date of exercise of the power given by this Clause 17; and

(b) the same shall not affect the beneficial entitlement to any amount set aside for any Beneficiary or otherwise affect any interest which has vested prior to the date of the variation, alteration or addition.

3. Clause 29 of the Trust Deed provides for the definition of terms within the Deed.

Proposed variations to the Trust Deed

4. By the execution of a Deed of Variation, the trustee proposes to exercise its powers to vary the Trust Deed pursuant to clause 17 of the Deed to broadly:

a. amend the provisions relating to how Trust income is determined and recorded by the trustee

b. insert provisions relating to the classification and allocation of income to the beneficiaries of the trust, and

c. insert general administrative powers relating to the day to day business of the trustee including powers of the kind required by financial institutions for specific products such as derivatives and hedging against interest rate increases.

5. Specifically, it is proposed that clause 29 of the Trust Deed will be varied to insert definitions for the following terms:

a. Capital Gain

b. Net Accounting Income

c. Net Tax Income

d. Tax Acts

e. Fund, and

f. Trust.

6. It is also proposed that clause 3A be inserted into the Trust Deed:

3A Net income of the Trust Fund

For the purposes of determining the net income of the Trust Fund in each Accounting period under clause 3:

(a) the Trustee may, prior to the end of an Accounting Period, determine that the net income for that Accounting Period will be one of the following amounts:

(i) the Net Tax Income for that Accounting Period; or

(ii) the Net Accounting Income for that Accounting Period;

(b) if no determination is made, or to the extent to which no determination is made, under clause 3A(a) prior to the end of an Accounting Period, then the net income for that Accounting Period will be the sum of:

(i) the Net Tax Income for that Accounting Period; and

(ii) the Capital Gains for that Accounting Period (to the extent that they are not already include in the Net Tax Income).

7. Proposed clause 3B will provide for accounting policies and practices the trustee may follow, including the ability to:

a. determine whether any accretion or loss is to be treated as being on the income or capital account

b. determine whether losses are to be made good out of income or capital, and in which proportions

c. maintain multiple separate accounts to identify net income, and

d. apply or set aside income of a particular class to one or more Eligible Beneficiaries to the exclusion of other Eligible Beneficiaries as the trustee thinks fit.

8. Finally, clause 30 is proposed to be inserted to allow for additional powers of the trustee, including to:

a. open and operate accounts with any bank or financial institution

b. borrow and raise money

c. enter into specified transactions such as trading commodities, interest rate swaps, hedging, give and execute mortgages or other securities, and much more

Relevant legislative provisions

Section 104-55 of the Income Tax Assessment Act 1997

Section 104-60 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will the proposed amendments to the Trust Deed of the Trust cause CGT event E1 to occur pursuant to section 104-55 of the ITAA 1997?

CGT EVENT E1: CREATING A TRUST OVER A CGT ASSET

9. Section 104-55 of the ITAA 1997¹ provides that CGT event E1 will happen when a trust is created over a CGT asset by declaration or settlement. Therefore, when there is an amendment to a trust instrument, in order to determine with CGT event E1 will result, it is necessary to consider whether this change will lead to the creation of a new trust over a CGT asset by way of declaration or settlement.

10. Guidance on when amendments to an existing trust instrument may lead to the creation of a new trust by declaration or settlement can be found in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220 (Commercial Nominees) where the Full Federal Court 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 or 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.

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 obligation is established, there will be identity of the 'taxpayer' for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself.

[emphasis added]

11. 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) the court adopted the decision in Commercial Nominees as authority of the principle that assuming that 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 pursuant to the trust deed will not result of terminating the trust.

12. 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) provides guidance on the Commissioner’s view on the application of section 104-55 in relation to amendments made to existing trust instruments. Paragraph 1 of TD 2012/21 states that neither CGT event E1 or E2 will occur where there has been a change of the terms of the trust that is consistent with the trust’s constituent document. Further, paragraph 1 explains that CGT events E1 and E2 will not occur unless:

a. the change in the terms of trust result in the existing trust being terminating and a new trust to arise for trust law purposes, or

b. the effect of the change in the terms of trust, or court approved variation, is such that it leads to a particular asset being subject to a separate charter of rights and obligations such that the asset has been settled on terms of a different trust.

13. Paragraph 24 of TD 2012/21 explains that it is the Commissioner’s view that a change in the terms of trust pursuant to the exercise of an existing power will not result in the termination of the trust and therefore, will not result in CGT event E1 from occurring.

14. Paragraph 27 of TD 2012/21 further explains that where the trust does not terminate as a result of the change, the change may still lead to some of the assets that were originally held by the pre-existing trust to be held under a separate charter of obligations such that these assets are subsequently held on terms of a distinct and different trust.

15. Example 2 of TD 2012/21 illustrates when an amendment to an existing trust instrument will not lead to a CGT event happening. In this example, the trust deed is amended with consent of the unit holders to broaden the range of assets in which to trustee is empowered to invest. As this amendment is made in accordance with a valid exercise of a power of amendment contained within the trust deed, example 2 explains that this will not give rise to a CGT event.

16. Another illustration of an amendment to an existing trust instrument can be found in example 3 of TD 2012/21. In this example, the existing trust deed does not provide for any definition of income nor does it contain a provision permitting the trustee to stream income. Pursuant to an unfettered power of amendment contained in the deed, the trustee resolves to insert two clauses to the deed to allow for:

a. the definition of income of the trust, and

b. the trustee to separately identify and label various sources of income or receipts that form the income of the trust estate and stream particular sources of income to particular beneficiaries.

17. Example 3 explains that as the above amendments to the deed were made pursuant to a valid exercise of power to amendment contained within the deed, the changes do not give rise to a CGT event.

Application to your circumstances

18. As explained in detail in above, it is proposed that the trustee of the Trust execute a Deed of Variation to the Trust Deed to broadly:

a. amend the provisions relating to how Trust income is determined and recorded by the trustee

b. insert provisions relating to the classification and allocation of income to the beneficiaries of the trust, and

c. insert general administrative powers relating to the day to day business of the trustee including powers of the kind required by financial institutions for specific products such as derivatives and hedging against interest rate increases.

19. The proposed amendments will be exercised pursuant to an existing power to amend pursuant to clause 17 of the trust deed. The amendments will not cause the trust to terminate or lead to assets of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the assets have been settled on a different trust.

20. As a result the proposed variations to the Trust Deed of the Family Trust will not cause CGT event E1 to happen pursuant to section 104-55.

Question 2

Will the proposed amendments to the Trust Deed of the Trust cause CGT event E2 to occur pursuant to section 104-60 of the ITAA 1997?

CGT EVENT E2: TRANSFERRING A CGT ASSET TO A TRUST

21. Section 104-60 broadly provides that CGT event E2 will occur if a CGT asset is transferred to an existing trust.

Application to your circumstances

22. As explained above, the proposed changes to the Trust Deed are to be executed according to an existing power of the trustee and are broadly administrative in nature. As the proposed changes do not involve the transfer of a CGT asset to an existing trust, CGT event E2 will not occur and section 104-60 will not be satisfied.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).