Edited version of private advice

Authorisation Number: 1052360568714

Date of advice: 18 February 2025

Ruling

Subject: CGT - trust resettlement

Question

Will capital gains tax (CGT) event E1 or CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of making the proposed amendments to the Trust Deed for the Trust?

Answer

No.

This ruling applies for the following period:

Period ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Individuals A and B (spouses) were married but later divorced. A property settlement was reached with the division of mutually owned assets.

The spouses had three children. Individual A has been estranged from individual B and their children for several decades.

The Trust

The Trust was established by a Deed of Settlement ('the Trust Deed') between the Trustee and the settlor.

The schedule to and forming part of the Trust Deed ('the Schedule') contains details of the key terms of the Trust.

The Trust is a discretionary trust. Individual A is currently the sole Director and Secretary of the Trustee company.

The Trust carries on farming and gift business.

Beneficiaries

The original Trust Deed define the beneficiaries to include:

a)            Primary beneficiaries -means the principals named and described in the Schedule, their wives, widows, husbands, widowers, children and grandchildren and any company (other than any company acting as trustee of this settlement) in existence at the vesting date which is controlled by any one or more of them.

b)            Secondary beneficiaries - means and include brothers, sisters, brothers-in-law, sisters-in-law, nephews, nieces and cousins of the Principals living at the vesting day.

c)            Charitable beneficiary - the corporation, body or organisation named and described in the Schedule.

The spouses and their children were the beneficiaries and principals of the Trust.

Power to amend the Trust Deed

The original Trust Deed provides that the Trustee, with the prior written approval of the appointor, may:

•                     add to or vary all or any of the Trusts and declare any new or other trusts or powers concerning the Trust Fund (including without limiting the addition of any persons or persons to the category of Principals exclusive of the Settlor or Trustee), or

•                     pay or apply any part or all of the Trust Fund to any new or other trust under which any one or more of the Principals (as maybe added) or the next of kin of any of them or the Secondary Beneficiaries or the next of kin of any of them.

provided that the law against perpetuities is not infringed, the amendment shall not be in favour of the settlor and shall not affect the beneficial entitlement to any amount set aside for any beneficiary.

The vesting date of the Trust is 80 years from the date of the Trust Deed.

History of changes to the Trust

Over time, several amendments were made to the trust deed, leading to individual A becoming the sole appointor of the Trust, being the legal representative of the last surviving original appointor.

Relevantly, the Trust Deed has been amended restating the Trustee's power to vary the Trust Deed prior to the vesting day and with the consent of the appointor, provided that:

•                     the variation must not confer any share or benefit to the settlor

•                     the rules of law or equity as to perpetuities are not breached

•                     the amendment or variation shall not affect any previously established beneficial entitlement of any beneficiary.

The proposed amendment

Due to individual A's estrangement from individual B and their children, individual A does not wish for them to benefit from the Trust.

Individual A intends to use his power as sole director of the Trustee company and appointor, to vary the Trust Deed.

The proposed amendments involve:

•                     Removing individual B and their three children as principals and primary beneficiaries.

•                     Amending the definition of the primary, secondary and charitable beneficiaries

•                     Substituting another entity as named charitable beneficiary.

The proposed amendments will be carried in exercise of the Trustee's power under the Trust Deed by executing a deed of amendment with the consent of the appointor (being individual A).

Assumptions

•                     The Trustee has the power to amend the clauses under the Trust Deed. The Amending Deeds are within the amendment powers of the Trustee and do not enliven any restrictions or limitations on the power of amendment under the Trust Deed.

•                     The amendments will not cause the Trust to terminate and a new trust to arise for trust law purposes (it will not lead to any asset of the Trust 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).

•                     The proposed amendments to the Trust Deed are valid and effective in accordance with the law of the relevant state.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'

Reasons for decision

A trust resettlement will occur for income tax purposes where one trust estate has ended and another 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 CGT event including E1.

Subsection 104-55(1) of the ITAA 1997 provides that 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.

In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark), it was established that a trust will not be terminated provided that any amendment to the trust is made in accordance with a power conferred by the trust instrument and there is some continuity of property and membership of the trust.

Following Clark, the Commissioner issued 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 the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent documents, or varied with the approval of a relevant court? (TD 2012/21).

In TD 2012/21 the Commissioner expresses the view that in the 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, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the ITAA 1997 happens 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.

For CGT event E1 to occur, it is required that there be both the creation of a trust and that this be done by way of declaration or settlement.

The phrase "you create a trust over a CGT asset" is to be understood by reference to the general law of trusts.

In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 518-519. Hope JA analysed the 'very nature of a trust' in terms of a personal obligation of a trustee annexed to property to hold the property for the benefit of another.

In order to 'create' a trust, there must be a creation of both elements of a trust; that is, a creation of personal obligations and a creation of rights annexed to property.

Notwithstanding that an existing trust estate may not have come to an end and the entirety of the trust fund settled on terms of a new trust, it is possible for assets to be settled on a new trust estate that has been separated from (or carved out of) the original trust fund. This may occur notwithstanding that the transactional documents executed to affect such a separation do not expressly speak of the asset having been settled on a new trust.

The decision of the Supreme Court of South Australia in Dyda P/L & Anor v Commissioner of State Taxation [2013] SASC 156 (Dyda), albeit concerned with a different legislative regime, is instructive in this context.

In Dyda the Supreme Court of South Australia considered whether a series of steps to transfer control of a real property to the Dyda group gave rise to a stamp duty liability. The land in question was held in a unit trust, the Woodville Property Trust. Units in this trust were held by two family trusts, the Meeuwissen Family Trust and the Young Family Trust.

The transfer of the control of the real property was affected through a series of steps. First Dyda Pty Ltd was appointed as trustee of the part of the trust assets of the Woodville Property Trust which comprised the real property. This part of the trust was to be known as the Burleigh Avenue Trust. The trust deed was amended to allow for a new type of units, funding units, which could receive income in priority to all existing units. Dyda Nominees was appointed as trustee to part of the Meeuwissen Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 2. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 2. Similarly, Dyda Nominees was appointed as trustee to part of the Young Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 3. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 3.

The appellants argued that upon appointment of the new trustee, no rights were conferred in relation to the trust property. The rights remained as they were because the same persons remained objects and beneficiaries of the discretionary trusts.

Stanley J rejected the arguments of the appellants. At paragraphs [143] - [144] he concluded as follows:

143. The appointment of Dyda Nominees as trustee of the Burleigh Avenue Trust No. 2 and No. 3, was in each case, effectively the resettlement of the units under a new trust rather than the appointment of a new trustee to existing trusts. The requisite continuity of the trust did not exist.

1.44 The continuity of trusts was broken because of the transfer of control of these two discretionary trusts to the Dyda group, which occurred on 8 March 2007. This was achieved by the appointment of Dyda Nominees as the trustee, and by the appointment of John Dyda as the appointor and guardian under the trusts. In his capacity as guardian, John Dyda could control the distributions of some income and of all of the capital of the trusts. A member of the class of potential beneficiaries of the trusts who was not a member of the Dyda group could not realistically expect ever again to receive any distributions under the trusts. This conclusion is reinforced by the granting of the indemnities. Accordingly, Dyda Nominees acquired an absolute interest in the ordinary units.

Dyda demonstrates that in particular circumstances the appointment of different trustees and appointors over specific trust assets can cause those assets to be settled on terms of a new trust.

The Commissioner's view on the potential capital gains tax implications of a 'trust split' is contained in Taxation Determination TD 2019/14 Income Tax: Will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? (TD 2019/14). For this determination, a trust split is defined as an arrangement which generally involves the transfer of some of the assets of the original trust to a new trust fund that has been separated, or carved out of, the original trust fund. TD 2019/14 at paragraph 47 sets out that the purpose of such arrangements is directed to separating the functional operation of the trust. It is put into place with the intention of:

(a)          separating those who control and can benefit from part of the trust corpus transferred to the new trustee from those who control and benefit from the remaining assets held by the original trustee

(b)          removing the fiduciary obligations of the original trustee in relation to the assets transferred to the new trustee

(c)          removing the entitlement of the original trustee to be indemnified out of the transferred assets for expenses incurred after the introduction of the new trustee, and

(d)          ensuring that the new trustee will have no fiduciary obligations in respect of the assets retained by the original trustee and will have no right to be indemnified from those assets.

By declaration or settlement

The second element necessary for CGT event E1 to happen is that the creation of the trust is by declaration or settlement.

A trust is created by declaration within the meaning of subsection 104-55(1) when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property (Kafataris v. DC of T (2015) 243 FCR 291 at [26]) (Kafataris). Transactional documentation that evidences an express intention to hold the transferred assets subject to the terms of the trust deed, may suffice to create a trust over those assets by declaration.

A trust is created by settlement when property is vested in a trustee for the benefit of others (Taras Nominees Pty Ltd v. FC of T (2015) 228 FCR 418 at [5]; Kalantaris at [31]). A transfer of existing trust property to, and the vesting of this property in, a new trustee for the benefit of others can satisfy the description of the creation of a trust by settlement.

Application to the taxpayer's circumstances

This ruling is based on the assumption that the Trustee has the power to amend the trust instrument in accordance with the proposed amendments.

The Trust Deed provides the Trustee with broad powers to revoke, alter to or vary all of any of the provisions of the trust instrument at any time.

The changes to the Trust Deed are also considered to fall within the scope of the Trustees' power of amendment. In this regard, it is noted that the amendments are not considered to fall within the specific restrictions.

The Commissioner is satisfied that the factors regarding possible trust splitting will not occur in this case. The Trustee and the Trust assets remain unchanged. The change in the beneficiaries was within the Trustee's power to amend or vary the Settlement Deed.

The amendments to the Trust Deed did not result in the creation of a new trust by declaration or settlement as the Trustee does not have new personal obligations and new rights have not been annexed to the assets held by the Trust.

As the amendments are within the Trustee's powers contained in the trust instrument, the Commissioner considers that, following the execution of the deed of variation to amend the terms of the trust instrument, there will be continuity:

•         of the Trust property;

•         in the membership of the Trust; and

•         in the operation of the Trust.

The underlying principles encapsulated in paragraphs 21 and 24 of TD 2012/21 provide that, assuming there is some continuity of property and membership of a trust, an amendment to the trust that is made in a proper exercise of a power of amendment contained under the trust deed will not result in a termination of the trust - regardless of the extent of the amendments, so long as the amendments are properly supported by the power.

On this basis, as continuity in the membership, operation and property of the Trust would be maintained following the execution of the proposed amendments to the Trust Deed pursuant to a valid exercise of the amendment power in the trust instrument, such amendments would not result in a termination of the Trust.

Having regard to paragraph 27 of TD 2012/21, the Commissioner is satisfied that the amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust.

Therefore, the proposed amendments to the Trust Deed, would not cause either CGT event E1 or CGT event E2 of the ITAA 1997 to happen.

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