Edited version of private advice

Authorisation Number: 1051746538844

Date of advice: 4 September 2020

Ruling

Subject: CGT consequences of making a variation to a trust deed

Question

Will the proposed amendments to the trust deed of the Trust cause any of CGT events E1, E2 or E8, to happen?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20WW

Relevant facts and circumstances

The Trust is a discretionary trust that was established via a deed of settlement between the settlor and the original trustee (the Trust Deed). This scheme description incorporates and should be read with the Trust Deed.

Company A is the current trustee for The Trust.

The guardian and specified beneficiaries of The Trust are listed in the Trust Deed. The specified beneficiaries are Individual A and Individual B. The specified beneficiaries are both Australian tax residents.

The General Beneficiaries of the Trust are defined in the Trust Deed and relevantly include:

(a)  the Specified Beneficiary or Specified Beneficiaries (as the case may be);

(b)  the parents grandparents uncles aunts brothers sisters cousins spouses widows widowers children and grandchildren of the Specified Beneficiary or Specified Beneficiaries and the spouses widows widowers children and grandchildren of such brothers sisters cousins spouses children and grandchildren and the parents and grandparents of any spouses uncles and aunts aforesaid;

Broadly, the Trust Deed confers on the Trustee discretionary powers of appointment of income and capital for the benefit of General Beneficiaries.

The Trust holds some of the assets of the family group and includes investments in:

·         cash deposits

·         debt securities

·         listed securities

·         residential real estate.

As part of a succession and estate planning exercise the Trustee wishes to vary the Trust Deed.

Clause XX of the Trust's Trust Deed (the final clause in the Trust Deed) provides as follows:

SUBJECT to clause YY hereof the Trustees for the time being may at any time from time to time by deeds revocable or irrevocable revoke add to or vary all or any of the trust terms and conditions hereinbefore contained or the trusts terms and conditions contained in any variation or alteration made thereto from time to time and may in like manner declare any new or other trusts terms and conditions concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied provided that the rule against perpetuities is not thereby infringed and provided that such new or other trusts powers discretions alteration or variations -

(1)          Shall not be in favour of or result in any benefit to any member of the excluded class; and

(2)          Shall not affect the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation alteration or addition.

Clause YY of the Trust Deed contains certain restrictions and certain requirements the Trustee must comply with when exercising the reserved powers or restricted powers as defined in that section. The power contained in Clause XX of the Trust Deed is a reserved power.

It is proposed to vary the definition of General Beneficiaries in the Trust Deed by excluding spouses and their lineal descendants with the intention being to limit the class of general beneficiaries to only the direct blood relatives of the Specified Beneficiaries.

The reason for the amendments is to help:

·         ensure that the wealth of the family is maintained strictly within the 'bloodline' of the family group; and

·         protect the wealth from any future potential matrimonial breakdown that might occur between the current and future blood related family members and their respective current and/or future spouses.

To date the Specified Beneficiaries' current spouses and their lineal descendants have never received any distribution from The Trust.

Assumption

The requirements in Clause YY of the Trust Deed will be complied with to the extent required by the Trustee to amend the Trust Deed.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997.

Summary

The proposed amendments to the trust deed of the Trust will not cause any of CGT events E1, E2 or E8, to happen.

Detailed reasoning

CGT events E1 and E2

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement pursuant to section 104-55.

CGT event E2 happens if a CGT asset is transferred to an existing trust pursuant to section 104-60.

The Commissioner, as per 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?, is of the view that CGT event E1 and CGT Event E2 will not happen if the terms of a trust are changed pursuant to a valid exercise of power contained with the trust deed, unless:

·         the amendment causes the trust to terminate for trust law purposes, or

·         the effect of the amendment is 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:

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 the power to vary the trust deed in the manner contended, such invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening.

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. Example 1 of TD 2012/21 provides an example of where the trust deed is amended by the addition of new entities to, and exclusion of existing entities from, a class of objects.

Application to your circumstances

Subject to compliance with clause YY of the Trust Deed, clause XX of the Trust Deed empowers the Trustee to vary the trusts terms and conditions of the Trust.

The Trustee is proposing to vary the definition of General Beneficiaries in the Trust Deed by excluding spouses and their lineal descendants, the intention being to limit the class of general beneficiaries to only the direct blood relatives of the Specified Beneficiaries. We accept that this is a permissible amendment under the power in clause XX of the Trust Deed.

Further, we consider that the proposed amendments are similar to the amendments considered in example 1 of TD 2012/21.

The making of the amendments will not cause the Trust to terminate and a new trust to arise nor will they lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the particular asset has been settled on terms of a different trust. Therefore, the proposed amendments will not cause CGT events E1 or E2 to happen.

CGT event E8

CGT event E8 happens to a beneficiary of a trust (except a unit trust or a trust to which Division 128 applies) who did not give any money or property to acquire the CGT asset that is the beneficiary's interest in the trust capital and they did not acquire it by assignment and the beneficiary disposes of the interest, or part of it (but not to the trustee): section 104-90.

Taxation Determination TD 2009/19 Income tax: does a taker in default of trust capital have an 'interest in the trust capital' for the purposes of CGT event E8 in section 104-90 of the Income Tax Assessment Act 1997?states that 'only those interests which constitute a vested and indefeasible interest in a share of the trust capital fall within the scope of CGT event E8' (paragraph 2 of TD 2009/19).

As the proposed amendments are seeking to remove certain General Beneficiaries of The Trust, and as those beneficiaries' interests in the trust did not constitute a vested and indefeasible interest in the trust capital, CGT event E8 will not apply to their removal.

Therefore, the making of the proposed amendments will not cause CGT event E8 to happen.

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