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Ruling

Subject: Trust resettlement

Question

Would the changes as contained in the proposed Deed of Variation cause a resettlement of the trust, giving rise to a capital gains tax (CGT) event for the property?

Advice/Answers

No.

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The trust was established after 19 September 1985.

You have provided a copy of the trust deed.

Changes to the trust deed are proposed and are contained in the Deed of Variation. A copy of the Deed of Variation has been provided.

The trust operates a business operation and owns properties on which the business operates.

The original intention of the trust was to create a vehicle for the operation of the business enterprise within the family structure and provide for the benefit of Beneficiary 1's family.

The beneficiaries - Beneficiary 1, Beneficiary 1's sibling and Beneficiary 1's other children no longer actively participate in the farming operation and have been provided for by Beneficiary 1.

By varying the trust to place Child 1 and Spouse 1 as primary beneficiaries, there will be no change in the essential nature and purpose of the trust.

As the varied deed also makes provision for the original beneficiaries, there has been no effective change to the potential default beneficiaries.

Relevant legislative provisions

Section 104-55 of the Income Tax Assessment Act 1997

Reasons for decision

The Tax Office document 'Creation of a new trust - Statement of Principles August 2001' (the Statement) outlines when the Commissioner will treat changes to a trust deed as giving rise to a new trust estate - referred to as "resettlements".

The Statement makes it clear that it is a change in the essential nature and character of the original trust relationship which creates a new trust. The Statement considers a number of changes that may result in the creation of a new trust.

Changes potentially leading to a new trust can arise by several means, including variations under a power in the deed and a variation by agreement among the beneficiaries. Listed below are some of the changes which may result in the creation of a new trust.

· 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 the 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 factors, 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 this second case, the original trust is brought to an end and/or a new trust created.

The Statement goes on to highlight that creating a new trust will depend on the terms of the original trust and on the powers of the trustee.

Generally a capital gain or loss is made when a CGT event happens to a CGT asset acquired after 20 September 1985. Event E1, as provided in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), occurs where a trust is created over a CGT asset. This will be the case if the changes to the Trust Deed are such that a new trust is created over the trust property (the CGT assets).

The trust deed

The trust deed for the Trust gives the trustee the power to alter the trust deed in certain circumstances.

The trustee may vary the deed, with the consent of the Appointer, with regards to beneficiaries where:

· the variation will not modify the vested interest of a beneficiary who is absolutely entitled to trust income or capital;

· if a beneficiary is to be removed, that beneficiary declares their determination to no longer be a beneficiary;

· if a default beneficiary is to be removed, at least one default beneficiary remains.

In this case, it is proposed to vary the deed so that one general beneficiary is excluded who is deceased. Of the default beneficiaries, one will remain.

These changes are within the trustee's powers.

Redefinition of the beneficiary class

The Statement looks at the issue of addition and removal of beneficiaries. It explains 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 amounting to a redefinition of the membership class would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.

Changing the name of the trust is an administrative change and will not affect the rights of the beneficiaries.

It is considered that the original intention of the settlor was for the trust to be for the benefit of Beneficiary 1 and their family. The trust deed lists the beneficiaries of the trust as:

· Beneficiary 1

· Any children or grandchildren of Beneficiary 1

· The spouses of those children or grandchildren

· Beneficiary 1's parent

· Beneficiary 1's sibling

· Corporations, secondary trusts and benevolent objects.

The default beneficiaries are Beneficiary 1 and their children.

The proposed amendments to the relevant Clause of the deed merely change the order of beneficiaries in this list, with the exception of the exclusion of Beneficiary who is deceased. These changes will not affect the essential nature or character of the trust.

The proposed amendments to another relevant Clause seek to remove three of the four default beneficiaries - Beneficiary 1, Child 2 and Child 3, and add additional default beneficiaries - Spouse 1 and any children of Child 1 and Spouse 1.

This will not cause a fundamental change to the class of beneficiaries, or the nature and character of the trust. The additional default beneficiaries are existing general beneficiaries of the trust, and the excluded default beneficiaries continue to be general beneficiaries.

The proposed changes appear to be consistent with the settlor's original intention to provide for Beneficiary 1 and his family.

Consequently, amending the trust deed according to the Deed of Variation will not cause a resettlement of the trust to occur and will not give rise to CGT event E1.