Edited version of private advice

Authorisation Number: 1051565177514

Date of advice: 13 August 2019

Ruling

Subject: Capital gains tax - trust resettlement - CGT events E1, E2 and A1

Question

Does the executed Deed Amendment cause CGT event E1 under section 104-55 of the ITAA 1997, CGT event E2 under section 104-60 of the ITAA 1997 or CGT event A1 under section 104-10 of the ITAA 1997 to happen to the assets of the Trust?

Answer

No

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

1       The Trust was settled by deed entered into between the settlor and the Trustees as trustees (Trust Deed).

2       Pursuant to subclause 1(5) of the Trust Deed, the Trust is governed by, and the Trust Deed is to be construed in accordance with, the laws of State A.

3       The Trust holds property exclusively in State A.

4       As originally drafted subclause 13(1) of the Trust Deed provides that the Trust must wind-up and terminate on the first to occur of:

·       the date which the Trustees with the written consent of the Appointor determines; or

·       80 years from the date of the Trust Deed.

5       Subclause 10(1) of the Trust Deed provides the Trustees with the power to vary the provisions of the Trust Deed with the written consent of the Appointor:

10(1) Subject to cl 10(2), at any time prior to the termination date the trustee may with the written consent of the Appointor (if any) by deed alter, vary or revoke any trust or provision of this deed other than this clause, cl 7 and cl 8(1).

6       Subclause 10(2) of the Trust Deed provides a restriction on the above power of variation:

10(2) An alteration, variation or revocation pursuant to cl 10(1) must not:

(a)              divert or modify a vested interest of a beneficiary in the income or capital of the Trust or the investments representing the same or income derived from any such investment to which such beneficiary has become absolutely entitled pursuant to this deed; or

(b)              infringe any applicable law or rule against perpetuities or relating to remoteness of vesting or the period during which income may be accumulated or otherwise extend the termination date or result in any provision of the Trust becoming void.

7       Pursuant to subclause 1(1)(b) and 7(1) of the Trust Deed, the Trustees are also the Appointors of the Trust.

8       Section 61 of the Law of Property Act 1936 (SA) ("LPA") provides for the abolition of rules against perpetuities and excessive accumulations, subject to the jurisdiction of the Supreme Court of South Australian to order a vesting of trust interests (section 62 of the LPA).

9       The Trustees propose to execute a deed (Deed Amendment) to amend the Trust Deed, pursuant to the Trustee's power conferred by subclause 10(1) of the Trust Deed. They will also consent to the amendments to the Trust Deed in their role as Appointors of the Trust.

10    Under the Deed Amendment, the Trust Deed is amended by deleting subclause 13(1) and inserting the following in its place:

Termination date

13(1) The Trust must wind-up and terminate on the first to occur of:

(a)              if any property of the trust fund is governed by laws outside South Australia which impose a perpetuity period on trusts, then in respect of that property only, the date of expiry of that perpetuity period or such earlier date as the trustee may in its absolute discretion appoint; and

(b)             in any other case, such date as the trustee may in its absolute discretion appoint, subject to any contrary applicable law or Court order.

Reasons for decision

Legislative Framework

CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).

CGT event E2 happens if a taxpayer transfers a CGT asset to an existing trust (subsection 104-60(1) of the ITAA 1997).

CGT event A1 is also relevant in this context. CGT event A1 happens if a taxpayer disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997). A taxpayer disposes of a CGT asset for the purposes of CGT event A1 if there is a change in ownership of the asset from the taxpayer to another entity (subsection 104-10(2) of the ITAA 1997).

Commissioner's public rulings

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? the Commissioner states that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT events E1 and E2 does not happen 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 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.

Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can also be found in the examples contained in TD 2012/21. Of particular relevance are examples 3 and 3A, where a resolution to extend the vesting date, being a valid exercise of a power of amendment under the relevant trust deed, did not give rise to the happening of a CGT event.

In Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting, the Commissioner recognises that prior to a trust vesting it may be possible for the trustee to extend the vesting date of the trust pursuant to a proper exercise of a valid power under the deed or by a court order. It notes that specific exclusion from the scope of the amendment power may prevent a vesting date from being extended.

Further, TR 2018/6 states that once the vesting date has passed, the trust has vested and it will no longer be possible for a trustee to change the vesting date.

TR 2018/6 provides at paragraph 10, that CGT Event E1 does not happen by amending the vesting date through the valid exercise of a power in a trust deed or an approval of a relevant court and refers by footnote to TD 2012/21.

Where a proposed extension of the vesting date is beyond the power conferred by the terms of the deed of a trust, it will be of no effect. Therefore, it would not result in CGT Event E1 or E2 happening.

Application

In this case, the Trust has not terminated and in accordance with the terms of the Trust Deed as originally drafted will not terminate in the period to which this ruling applies.

If the Deed Amendment is of no effect because of the restriction on variation provided in subclause 10(2) the Trust will continue under its original terms and no CGT event will happen.

If the Deed Amendment is a valid exercise of the power conferred pursuant to clause 10 of the Trust Deed, CGT event E1 or E2 will not happen as the amendment will not terminate the existing trust or lead to a particular asset or assets being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset or assets have been settled on a different trust.

For the same reasons the Trustees of the Trust have not disposed of a CGT asset and therefore CGT event A1 has no application.

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