Edited version of private advice

Authorisation Number: 1051792570678

Date of advice: 23 December 2020

Ruling

Subject: Potential capital gains tax events relating to a trust

Question

Will the execution of either the Proposed Deed Amendment No. 1 or the Proposed Deed Amendment No. 2 cause CGT event E1 under section 104-55, CGT event E2 under section 104-60 or CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

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

The Family Trust is a discretionary trust established by deed between the Settlor and the Trustee ("Trust Deed"). There have been no amending deeds or deeds of change of trustee in respect of the Family Trust to date.

The Family Trust holds property in South Australia.

The recitals to the Trust Deed provide:

A. The Settlor wishes to make provision for the benefit of the family of X in the manner herein set out.

...

D. The Settlor desires that the Trustees shall have power from time to time and at any time to vary the trusts and provisions hereof in the manner herein provided

E. The Settlor desires that the Trustees shall have the most absolute discretion possible in relation to the administration of the trusts of this Deed and in the distribution of the Trust Fund and the income thereof.

Clause 2 of the Trust Deed provides a discretionary power for the Trustee to apply the income arising during the income period between the income beneficiaries in the proportions it thinks fit by paying the income beneficiary. The income period means the period from execution of the Trust Deed until the Day of Distribution or the first earlier day upon which the Trustees have in fact distributed the whole of the Trust Fund in the manner provided, which ever shall first occur.

The income beneficiaries of the Family Trust are the spouse of X from time to time, the widow of X and the children and remoter issue of X as are for the time being living.

Clause 4 of the Trust Deed effectively provides that the Trust must wind-up and terminate on the "Day of Distribution" and provides for the Trustee to distribute the Trust Fund among or to all or any one or more of the children and remoter issue of X living on the Day of Distribution (excluding certain persons) as the Trustee thinks fit. Clause 5 provides for default entitlements in the event there are no objects as contained in Clause 4 living at the Day of Distribution. Clause 1(b) provides that the Day of Distribution means:

"...the day on which expires the period of twenty one years from the death of the last to die of the descendants now living of Y deceased (the parent of the Settlor) or the period of seventy years from the date here-of whichever is the earlier or such earlier day as the Trustees by instrument in writing shall nominate as the Day of Distribution;"

Clause 12 of the Trust Deed provides:

(1) The Trustees may in any manner whatsoever as the Trustees think fit from time to time by instrument in writing vary (whether by revocation and re-settlement or otherwise as the Trustees think fit) any of the provisions of this Deed other than the provisions of Clause 10 of this Deed for the benefit of any one or more of the children or remoter issue of X or other relatives by blood of X PROVIDED THAT -

(a) no such variation shall benefit the Settlor or X;

(b) any such variation may have effect so as to vest the whole or any part of the income of the Trust Fund in the spouse of X;

(c) no such variation shall affect the application of any income once applied pursuant to Clause 2 of this Deed;

(d) no such variation shall affect any interest in the capital or income of the Trust Fund already vested in possession;

(e) the persons benefiting under any such variation shall take vested interests in the Trust Fund not later than twenty one years after the death of the last to die of the descendants now living of the said Y deceased.

(2) Any instrument under subclause (1) of this Clause shall be revocable unless expressly stated to be irrevocable.

(3) In this Clause "vary" includes revoke alter or add to and "variation" has a corresponding meaning."

Clause 13 provides that the Trustee may renounce or release the power of variation in clause 12 or any other power conferred upon the Trustees by the Trust Deed wholly or from time to time to such extent or in respect of such matters as may be set out in the instrument.

The Trustee proposes to amend the Trust Deed by deleting existing clause 12(1)(e) pursuant to a proposed deed of amendment ("Proposed Deed Amendment No. 1").

Under South Australian law, the law against perpetuities has been abolished,[1] subject to the jurisdiction of the Supreme Court of South Australia to order a vesting of trust interests.[2]

The Trustee proposes to amend the Trust Deed to ensure that the Family Trust is not required to vest or terminate at a date earlier than is required by South Australian law pursuant to a further proposed deed amending the Trust Deed ("Proposed Deed Amendment No. 2").

The Trust Deed will be amended by deleting the existing words in clause 1(b) and replacing those words with the words as follows:

(b) the expression "the Day of Distribution" shall mean the earlier of:

i. if any property of the Trust Fund is governed by laws outside South Australia which impose a perpetuity period on trust, then in respect of that property only, eighty (80) years from the date of this Deed; and

ii. in any other case such date as the Trustee may in its absolute discretion appoint, subject to any contract applicable law or Court order."

The Trustee proposes to execute the Proposed Deed Amendment No. 1 and immediately after executing the Proposed Deed Amendment No. 1, the Trustee proposes to execute the Proposed Deed Amendment No. 2.

Reasons for decision

Summary

The execution of the Proposed Deed Amendment No. 1 or the Proposed Deed Amendment No. 2 will not result in CGT event A1 (subsection 104-10(1) of the ITAA 1997) or CGT event E1 (section 104-55 of the ITAA 1997) or CGT event E2 (section 104-60 of the ITAA 1997) happening in relation to the Family Trust's assets.

Detailed reasoning

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 do 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 (paragraph 6). 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 at paragraph 8 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, and not otherwise authorised by a court under relevant trust legislation, it will be of no effect[3]. Therefore, it would not result in CGT Event E1 or E2 happening (footnote 6 in TD 2012/21).

Application to your circumstances

We understand that the Family Trust has not vested and will not vest in the period in which this Ruling applies.

If the Proposed Deed Amendment No. 1 or the Proposed Deed Amendment No. 2 are of no effect because the power of variation in clause 12 of the Trust Deed does not extend to removing the restrictions expressly provided for in that power and the restriction on variation provided in subclause 12(1)(e) prevents the proposed variation from being effective, we consider the Family Trust will continue under its original terms and no CGT event will happen.

If the Proposed Deed Amendment No. 1 or the Proposed Deed Amendment No. 2 are valid exercises of the power conferred pursuant to clause 12 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 Trustee of the Family Trust will have not disposed of a CGT asset and therefore CGT event A1 has no application.

[1] Section 61 of the Law of Property Act 7936 (SA).

[2] Section 62 of the Law of Property Act 7936 (SA).

[3] Example 1 in TR 2018/6.

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