Edited version of private advice

Authorisation Number: 1051937371168

Date of advice: 12 January 2022

Ruling

Subject: CGT events E1, E2 and A1

Question

Will the execution of the Deed Amendment 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 20XX

The scheme commences on:

The date of the order of the Supreme Court of South Australia

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 Day of Distribution as defined under the Trust Deed specifies a certain day that has not occurred.

The Trust Deed provides the Trustee with the power to vary any of the provisions of the Trust Deed other than a specified provision not presently relevant and subject to certain further restrictions.

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 Supreme Court of South Australia has ordered that the Trust Deed be varied pursuant to section 59C of the Trustee Act 1936 (SA) in the terms set out in a Deed (Deed Amendment) as follows:

1.1          Deleting the current definition of the "Day of Distribution" and replacing it with:

"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 contrary applicable law or Court order.

1.2          Deleting certain restrictions contained in the power to vary the provisions of the Trust Deed; and

1.3          Inserting the following clause into the Trust Deed:

"For the avoidance of doubt, the Trust Fund is governed by the non-exclusive jurisdiction of the laws of South Australia."

The Trustee proposes to execute the Deed Amendment in furtherance of the order of the Supreme Court

Reasons for decision

Summary

The execution of the Deed Amendment 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 assets of the Family Trust.

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 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

In 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 or varied with the approval of a relevant court, 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.

Footnote 4 of TD 2012/21 relevantly notes that:

... In South Australia any person who has an interest in property held on trust (not being a charitable trust or statutory trust) may apply to the Court to have the trust varied. Before so ordering, the South Australian statute requires the Court to be satisfied as to certain things including, for example, that the variation would not unfairly favour some beneficiaries over others...See generally ... sections 59B and 59C of the Trustee Act 1936 (SA); ... As to what constitutes a variation, a classic statement of the test appears in Re Ball's Settlement Trust [1968] 1 WLR 899 where the court described a variation as 'an arrangement, [that] while leaving the substratum, effectuates the purpose of the original trust by other means...even though the means employed are wholly different and even though the form is completely changed' (p 905).

Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can be found in the examples contained in TD 2012/21. Of particular relevance is example 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. The example notes that theresult would be the same if the vesting date was extended with the approval of a relevant court rather than under the trust deed.

Further, in Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting, the Commissioner states 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. Footnote 1 to TR 2018/6 explains:

Where a trust deed does not provide the trustee with a power to extend the vesting date, an application to the Court may be necessary. In many States and Territories the Court has statutory powers that may permit postponement of the vesting date in particular circumstances: ... sections 59B and 59C of the Trustee Act 1936 (SA); ...The Court may also have inherent jurisdiction to postpone the vesting date in particular circumstances.

Application to your circumstances

The Trustee of the Family Trust applied to the Supreme Court of South Australia for an order to vary the terms of the Trust Deed as provided for in the Deed Amendment. The Supreme Court of South Australia ordered that the Trust Deed be varied pursuant to section 59C of the Trustee Act 1936 (SA) in the terms set out in the Deed Amendment.

Therefore, the amendments to be made to the Trust Deed pursuant to the Deed Amendment are with the approval of the relevant court.

In our view, consistent with TD 2012/21 and TR 2018/6, the amendments to the Trust Deed to be made under the Deed 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. The assets continue to be held by the Trustee of the Family Trust on the same trust (with varied terms).

Therefore, CGT Event E1 or E2 will not happen.

Further, the Trustee of the Family Trust will not have 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).

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