Edited version of private advice

Authorisation Number: 1051785438141

Date of advice: 30 November 2020

Ruling

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

Question 1

Does the change of control of trustee company and the changes to the Trust Deed cause a resettlement of the Trust or give rise to a CGT event E1 or E2?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 20XX

The scheme commences on

XX XXXX 20XX

Relevant facts and circumstances

Entities

A Pty Ltd (A) was incorporated in 19XX and has been the trustee for the Trust since that time.

A has been involved in several commercial ventures since 19XX. However, in recent years, its activities have been limited to holding shares in B Ltd (B).

The shareholders of B are Individual C (C) with XXXX ordinary shares, and A with XXXX ordinary shares.

C was appointed as a director of A on XX XXXX 20XX.

Until the transaction that is the subject of the private ruling occurred:

a)    The shareholder of A was Individual D (D) who held XX shares (being the whole of the issued capital); and

b)    The "Family Beneficiaries" named in the first schedule of the Trust Deed were D and his spouse, Individual E.

On XX JXXX 20XX the following transactions were entered into:

a)    Share Transfer Agreement in relation to the shares issued in A, with D as the vendor and C as the purchaser.

b)    Deed Poll of Amendment in relation to the Trust, which amended the name of "Family Beneficiaries".

c)    Deed of Indemnity between D and C.

d)    These documents are collectively, the (Transaction Documents).

The following documents, including the Transaction Documents, were provided with your application and their contents form part of these facts:

•         A copy of the ASIC extract for A;

•         A copy of the trust deed for the Trust (Trust Deed);

•         A copy of the ASIC extract for B;

•         A copy of the Share Transfer Agreement in relation to the shares issued in A;

•         A copy of the Deed Poll of Amendment; and

•         A copy of Deed of Indemnity between D and C.

The transaction was entered into as D intended to bequeath his interest in the trust to C upon his passing. However, upon seeking legal advice, it became clear that an interest in a trust cannot be bequeathed in a will. Accordingly, D decided to enter into the Transaction Documents.

You state the relationship between C and D was of a nature where they had, for a long period of time, considered each other to be family.

TD 2012/21

You state that in entering into the Transaction Documents, the parties have relied upon Tax Determination TD 2012/21. This is evidenced in the terms of the Deed of Indemnity, which was entered into simultaneously with the other Transaction Documents.

Relevantly, the Trust Deed includes the following clauses:

•         Definition clause defining beneficiary and family beneficiary.

•         Clause X gives the trustee power to appoint additional beneficiaries. It states that the trustee may, at any time to time prior to the Vesting Day, appoint additional beneficiaries (other than the settlor or the Trustee or the Appointor or any person who has donated to settled upon or in any way vested or caused to be vested in the Trustee any property.

•         Clause XX allows the Trustee to be a director of any company in which the trust holds shares.

•         Clause XX Appointor may appoint or remove Trustee.

•         Clause XX allows the Trustee a wide power to vary or amend the Trust Deed by Deed of Appointment or other deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Reasons for decision

Question 1

Summary

It is considered that the changes to the Trust Deed are a valid amendment to the Trust Deed pursuant to an existing power under the Trust Deed and will not result in CGT event E1 or CGT event E2 occurring.

Detailed Reasoning

A trust resettlement will occur for income tax purposes where one trust estate has ended and another trust 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 could accrue as a result of various CGT events.

The Commissioner has released Taxation Determination TD 2012/21Income 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? which was published as a result of the court case Federal Commissioner of Taxation v. Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark's case). Whilst Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application.

TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or CGT event E2 happening 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 or court approved variation 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.

In the present case, it is clear that execution of the Deed Poll of Amendment will have no effect on the constitution of the Trust, nor its property or membership. More specifically, it will not change either the discretionary nature or the purpose of the Trust, nor the rights and responsibilities of the Trustee. Accordingly, execution of the Deed will not constitute a resettlement of the Trust and will not give rise to CGT events E1 or E2 under sections 104-55 and 104-60 of the ITAA 1997.

Clause XX and clause X of the Trust Deed allows the Trustee of the Trust to vary or amend the Trust Deed by Deed of Amendment to appoint new beneficiaries and revoke appointment of beneficiaries any time before the Vesting Day.

As the Trust Deed allows for the Trustee to amend the Trust Deed it is accepted that the amendments appointing C as a family beneficiary is a valid amendment to the Trust Deed under an existing power and neither of the two exclusions mentioned above apply. The changes are considered similar to those in example 1 in paragraphs 2-5 of TD 2012-21, in that the changes are a valid exercise of an existing power under the Trust Deed.

Consequently, neither CGT event E1 nor CGT event E2 arises in relation to the changes that occurred.

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