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Ruling

Subject: Trust Resettlement and Capital Gains

Question 1

Will the amendment to the trust deed to include an additional beneficiary cause a resettlement of the trust for the purposes of the capital gains tax provisions under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the sale and transfer of a part of a pre CGT property trigger a capital gains liability on the remaining balance of the pre CGT property held by the Trust?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The trust is a discretionary trust which has been established for the benefit of the family of the primary beneficiary and general beneficiaries.

The trust deed is to be amended to replace the original spouse of one of the beneficiaries with the current spouse.

In the current case, the trustee has the power to vary, add to or revoke any of the terms of the trust.

The trust owns a pre CGT property. The trust intends to sell/transfer a percentage of the property to a party who is currently not a beneficiary of the trust. The remainder of the property is to be retained by the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Subsection 104-10(5)

Reasons for decision

Question 1

The Creation of a new Trust Statement of Principles August 2001 (Statement of Principles) outlines when the Commissioner will treat changes as giving rise to a new estate.

It is noted that as the Statement of Principles is the Commissioner's view on the resettlement of trusts, the Commissioner must follow the guidelines outlined in the paper.

The Statement of Principles makes it clear that a change to the essential nature and character of the original trust relationship creates a new trust. The Statement of Principles considers a number of changes that may result in the creation of a new trust, which are listed below:

    · Any change in beneficial interests in trust property

    · A new class of beneficial interest ( whether introduced or altered)

    · A possible redefinition of the beneficiary class

    · Changes in the terms of the trust or the rights or obligations of the trustee

    · Changes in the nature or features of trust property

    · Additions of property which could amount to a new and separate settlement

    · Depletion of trust property

    · A change in the termination date of the trust

    · A change to the trust that is not contemplated by the terms of the original trust

    · A change in the essential nature and purpose of the trust; and/or

    · A merger of two or more trusts or a splitting of a trust into two or more trusts.

Depending on their nature and extent, and their combination with other indicia, these changes may amount to a mere variation of a continuing trust, or alternatively to a fundamental change in the essential nature and character of the trust relationship. In the second case, the original trust is brought to an end and/or a new trust created.

The Statement of Principles highlights that creating a new trust will depend on the terms of the original trust, and on the powers of the trustee. In addition, the original intentions of the settlor must be considered in determining whether a new trust has been created.

Paragraph 5.1 discusses the addition or removal of beneficiaries. It states that the identity of those for whose benefit the trust exists is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amount to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.

Ordinarily, the Tax Office will accept that there has been only a change in the membership of a continuing class when:

An already existing power to nominate new beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which it could be reasonably inferred that the trust was intended to benefit; and

It can be shown from the deed and surrounding circumstances that the actual objective purpose or theme of the trust was to benefit that wide group.

In circumstances where the power to nominate or remove has the broad effect of a power of appointment among a group that the trust is clearly designed to benefit, it is more likely that the group can be reasonably characterised as the beneficiary class. In these situations the trustee may benefit the 'inner group' members (those already named in the deed, for instance Y's child), by an appointment in their favour. When deciding to benefit the 'wide group' members (such as Y's parent), the trustee first exercises the power of nomination and then, if it so decides, the power of appointment.

In other situations, it will be more difficult to characterise all those who may be nominated as beneficiaries as being merely members of a wider beneficiary group. If so, the effect of nominations and removals may be to vary the trust by redefining the group of beneficiaries so that a new trust is created.

In the current case, the trustee has the power to vary, add to or revoke any of the terms of the trust. The trustee therefore has the power under the trust deed to add or remove beneficiaries.

In accordance with the trust deed, the primary beneficiaries are the family of one of the beneficiaries. The beneficiary and his original spouse are included as additions to the class of general beneficiaries

In accordance with the trust deed, the general beneficiaries include the primary beneficiaries and their families. Persons who are additions to the class of general beneficiaries may also be included in any of the General Beneficiaries.

It is considered that the purpose and essential nature of the original trust is to benefit the class of beneficiaries who are named in the additions to the class of general beneficiaries and their children and families. It is concluded that the class of beneficiaries is therefore the original spouse and family of the beneficiary. Therefore, only additions to persons in this class of beneficiaries may be included as general beneficiaries.

The Additional Member or Members of the Class of General Beneficiaries clause in the schedule to the trust deed is to be amended to replace the former spouse of the beneficiary with the current spouse of the beneficiary.

It is considered that the current spouse who was not part of the original family of the beneficiary is not included in the class of general beneficiaries. It is also noted that the additional members of the general beneficiaries are specifically named and did not include a broader category. It is considered therefore that the original intention of the trustee was not to include a future spouse of the beneficiary.

The amendment to include the current spouse of the beneficiary is therefore not merely a change in the membership of a continuing class. As the amendment is redefining the class of beneficiaries, it is considered that the amendment to the trust deed is a resettlement of the trust.

Question 2

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT event A1 happens if you dispose of a CGT asset.

Subsection 108-5(1) of the ITAA 1997 defines a CGT asset as:

      (a) any kind of property;

      (b) a legal or equitable right that is not property.

Subsection 108-5(2) of the ITAA 1997 states:

To avoid doubt, these are CGT assets:

      · part of, or an interest in, an asset referred to in subsection (1);

      · goodwill or an interest in it;

      · an interest in an asset of a partnership;

      · an interest in a partnership that is not covered by paragraph ( c).

Therefore, as the definition of a CGT asset includes a part of, or an interest in, a whole CGT asset, a CGT event happens if only part of a CGT asset is disposed of.

However, subsection 104-10(5) of the ITAA 1997 states that:

A capital gain or capital loss you make is disregarded if:

      · you acquired the asset before 20 September 1985; or

      · for a lease that you granted:

        (i) it was granted before that day; or

        (ii) if it has been renewed or extended - the start of the last renewal or extension occurred before that day.

Therefore, a capital gain or loss from a CGT event A1 is ignored if the asset or part of the asset was acquired before 20 September 1985.

In the current case, the property owned by the trustee of the trust is a pre CGT asset. A part of the property is to be sold by the trustee and the remainder part of the pre CGT asset is to be retained by the trust.

In accordance with subsection 108-5(2) of the ITAA 1997, both parts of the asset are pre CGT assets. Therefore, even though there is a disposal of part of the pre CGT property, the part of the property which is to be retained by the trustee will maintain its pre CGT status.

Any subsequent capital gain or loss from a CGT event A1 on that part of the asset retained by the trustee is therefore disregarded in accordance with subsection 104-10(5) of the ITAA 1997.