Edited version of private advice

Authorisation Number: 1052016427346

Date of advice: 3 August 2022

Ruling

Subject: Change to trust deed - whether a trust resettlement will happen

Question 1

Does CGT event E1 or E2 in section 104-55 or section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the Deed is executed?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

By a deed of trust dated before 19 September 1985 the Trust was established. An alleged error was made in the definition of Primary Beneficiaries of the Trust.

The Trust currently holds the property located in the name of the trustee that was acquired after 20 September 1985.

The Trust carries on a business at the property and has done so since the acquisition of the property.

The trustee may at any time and from time to time by deed revoke add to or vary all or any of the powers and discretions concerning the Trust Fund or any part of parts thereof after providing 30-days written notice to the Appointor.

The trustee in its capacity as trustee of the Trust and as successor appointor proposes to rectify the Trust Deed by executing a Deed to correct the mistake. It is proposed that this change will be executed in the relevant financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Summary

CGT event E1 or E2 will not happen when the Deed is executed.

Reasons for decision

Subsection 104-55 (1) of the ITAA 1997 provides CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT event E2 will happen if an asset is transferred to an existing trust pursuant to section 104-60 of the ITAA 1997.

The decision in Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 550 (Clark) was a precursor to the Commissioner's view in 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 power contained within the trust's constituent document, or varied with the approval of a relevant court?

Clark was decided adversely to the Commissioner and further clarified by the High Court's refusal of special leave for the Commissioner to appeal the decision. This decision followed Commissioner of Taxation v Commercial Nominees of Australia Ltd (1999) FCA 1455; 99ATC 5115, (Commercial Nominees). The Full Federal Court's approach in this case is still good authority for the general proposition that, assuming there is continuity of property and membership an amendment supported by a power under the deed and made in proper exercise of that power will not result in terminating the trust. These decisions verify continuity of trust is a function of whether the trust continues in existence under trust law.

Paragraph 1 of TD 2012/21providesthat a valid amendment to a trust made pursuant to a power contained in the trust deed will not result in CGT events E1 or E2 happening in relation to the trust as long as:

•         the amendment does not cause the trust to terminate for trust law purposes; and

•         the effect of the amendment does not 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'.

A change in the terms of a trust that is made pursuant to the exercise of an existing power including an amendment to the trust deed will not terminate the trust (paragraph 24 of TD 2012/21). Even where a trust does not terminate; assets may be held on terms of a distinct trust where a trust asset is held under a different charter of rights and obligations such as to give rise to a different trust (paragraph 27 of TD 2012/21). Whether a change to a trust in exercise of a power under the deed is properly supported by that power is to be determined in accordance with the principles of trust law (paragraph 26 of TD 2012/21).

The trust deed gives the trustee the power to revoke add to or vary all or any of the power in the trust deed providing they give 30-days written notice to the Appointor.

In the case of the proposed Deed, the amendment will not cause the trust to terminate as the trustee's amendment powers under the Deed to vary any trust or provision are sufficiently broad for the proposed Deed amendments.

It is concluded that the execution of the proposed Deed is a valid exercise of the power of amendment contained in the Deed and in the Commissioner's view will not give rise to a CGT E1 event under section 104-55 of the ITAA 1997 or CGT E2 event under section 104-60 of the ITAA 1997.

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