Edited version of your written advice

Authorisation Number: 5010046025025

Date of advice: 8 November 2017

Ruling

Subject: Income tax exemption

Question 1

Does CGT E1 or E2 happen to the entity when the original appointors resign and a new appointor is appointed, or where two beneficiaries renounce their rights as beneficiaries?

Summary

CGT event E1 and E2 do not happen to the entity when the original appointors resign or when two beneficiaries renounce their rights.

Detailed Reasoning

Subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

The Commissioner’s view on whether CGT event E1 or E2 happens when the terms of a trust are changed is discussed in Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 105-60 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 document, or varied with the approval of a relevant court? (TD 2012/21). Paragraph 1 of TD 2012/21 provides that CGT events E1 and E2 do not happen if the terms of a trust are changed pursuant to a valid exercise of power 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.

This view was developed in light of the decisions by the Full Federal Court in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 and Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42, where it was held that amendments to a trust that are made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, assuming there is some continuity of property and membership of the trust. Whilst these cases concerned whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying losses, the Commissioner accepts that the same principles can be applied in determining whether CGT event E1 or E2 has happened (see paragraph 24 of TD 2012/21).

Paragraphs 2-5 of TD 2012/21 provide an example of a trustee validly executing a resolution to remove a beneficiary without triggering CGT event E1 or E2. The resolution was a valid exercise of power contained within the deed, and continuity of trust property and membership remained.

‘Removal of beneficiaries deed’

The removal of the two beneficiaries of the entity is analogous to the example provided above in TD 2012/21. A clause of the Deed provides the Trustee with the power to vary all of the provisions declared in the Deed, and a clause explicitly includes the power to appoint or remove beneficiaries. A clause provides that the powers of variation contained within another clause may be exercised by deed. The ‘removal of beneficiaries by deed’ is therefore a valid exercise of a power contained within the entity’s constituent documents; removal of beneficiaries is included within the Trustee’s powers, and the power is exercised in an approved form per a clause of the Deed.

Because the ‘removal of beneficiaries deed’ does not contain any other clauses, it is concluded that no trust assets will be subject to a separate charter of rights and obligations, or settled on terms of a different trust. Accordingly, CGT events E1 and E2 will not happen when the ‘removal of beneficiaries’ deed is executed.

‘Change of appointors deed’

The replacement of the two appointors as joint appointors with X and Y as joint appointors is also a purported exercise of power contained within a clause of the Deed. There are no other clauses in the Deed that prevent the Trustee from replacing the appointors. The ‘change of appointors deed’ does contain another clause which alters the Deed. The effect of this change is that an appointor’s legal personal representative will be able to exercise the powers of the appointor if they lose mental capacity, instead of automatically determining the appointor’s powers if they’re found to be of unsound mind.

This is a valid exercise of the Trustee’s powers within a clause, and does not subject any of the trust assets to a separate charter of rights and obligations, or settle them on terms of a different trust. Accordingly, CGT events E1 and E2 will not happen when the ‘change of appointors deed’ is executed.

Conclusion

The exercise of the Trustee’s power to change appointors and remove beneficiaries by deed will be valid exercises of the Trustee’s power contained within the entity’s constituent documents. Because the changes will not result in subjecting any trust assets to a separate charter of rights and obligations, or give rise to the conclusion that they have been settled on terms of a different trust, CGT events E1 and E2 will not happen.

ATO view documents

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 105-60 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 document, or varied with the approval of a relevant court?

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