Edited version of private ruling

Authorisation Number: 1011690823563

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: CGT event E1

Question 1

Does the amendment of the definition of the vesting date of the X Trust result in the creation of a new trust triggering CGT event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If yes to question 1, does the new trust arise when the variation takes effect or alternatively, on the previous vesting date (that is, 60 years from the date of execution).

Answer

Not applicable.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

X Trust (the Trust) was constituted by a deed (Trust Deed) between Individual A as settlor and X Pty Ltd as trustee (Trustee).

The Trust is a discretionary family trust which owns property predominantly located in a particular state.

Pursuant to the Trust Deed, the Trustee may distribute income and capital of the Trust at any time during a year of income to the beneficiaries in such proportions as the Trustee determines.

The Trust Deed is discretionary as to the distribution of income and capital on the vesting date. There are also certain beneficiaries under the relevant schedules having a default interest to income and capital. The Trustee also has the power under the Trust Deed to accumulate income which forms part of the capital of the Trust.

Schedules of the Trust Deed list Individual B and his family as the primary beneficiaries of the trust.

The settlor is not a beneficiary of the trust. The settlor is also not related to the beneficiaries listed in the schedules.

The vesting date is defined in the Trust Deed as meaning any one of the following dates: -

(a) the date on which shall expire the period of sixty years from the execution of this Deed, or

(b) such date (being a date earlier than the date referred to in paragraph (a) above) as the Trustees shall determine.

…

PROVIDED ALWAYS that in no case shall the date provided for in Paragraphs (a) or (b) above be later than the date being twenty years after the death of the last survivor of the issue now living of his late Majesty King George VI (hereinafter called the "final date") AND in the event that the date provided for in paragraphs (a) or (b) above (whichever is the relevant date) would otherwise be later than the final date the final date shall be substituted for the date so provided AND this provision shall take effect notwithstanding anything contained in clause 2 of this Deed which clause shall be read subject hereto.

The Trustee submits that as the rule of perpetuities was abolished in South Australia, there is no need to limit the vesting date to 80 years. Accordingly, the Trustee proposes to amend the Trust to delete the existing definition of 'Vesting date' and replacing it with the following:

'Vesting Date means such date as the Trustees shall determine.

Pursuant to the Trust Deed, the Trustee also has the power to vary the Trust provided that any variation is made before vesting and provided that such variation does not:

§ infringe the rule against perpetuities in so far as it applies;

§ favour the settlor; or

§ affect any entitlement to which a Beneficiary has become absolutely entitled pursuant to the deed.

The Trustee submits the following:

§ the variation will be made prior to vesting of the Trust;

§ the proposed variation will not be in favour of, or for the benefit of, or result in any benefit to the settlor; and

§ all amounts that have already been 'set aside' or 'vested' in any of the beneficiaries will not be impacted by the proposed amendment of the vesting date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 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 of the ITAA 1936 applies we will first 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 of the ITAA 1936, go to our website www.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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The amendment of the definition of the vesting date of the Trust does not result in the creation of a new trust triggering CGT event E1 under section 104-55 as the alteration in the definition of the vesting date amount to a mere variation of a continuing trust.

Detailed reasoning

Under section 104-55, CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. This event will also be triggered if changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created.

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 trust.

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 changes that may result in the creation of a new trust include:

§ 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.

In this case, the current definition of vesting date is one of the following dates:

(a) the date on which shall expire the period of sixty years from the execution of this Deed, or

(b) such date (being a date earlier than the date referred to in paragraph (a) above) as the Trustees shall determine.

…

PROVIDED ALWAYS that in no case shall the date provided for in Paragraphs (a) or (b) above be later than the date being twenty years after the death of the last survivor of the issue now living of his late Majesty King George VI (hereinafter called the "final date") AND in the event that the date provided for in paragraphs (a) or (b) above (whichever is the relevant date) would otherwise be later than the final date the final date shall be substituted for the date so provided AND this provision shall take effect notwithstanding anything contained in clause 2 of this Deed which clause shall be read subject hereto.

By replacing the above with 'Vesting Date means such date as the Trustees shall determine', it has in effect removed the restriction that the Trust must be vested within sixty years from the execution of the deed and thereby extending the term of the trust.

Under part 5.2 of the Statement of Principles, the ATO will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate when:

§ the trust deed confers an express power to alter the termination date

§ the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship; and

§ other accompanying circumstances do not indicate a fundamental change to the trust.

In some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations, the subject matter of the trust can be most accurately described as the income and other benefits arising from the trust property over a particular period.

Express Power

Where the trust deed confers an express power to alter the termination date, it is indicating that the mere extension of the term of a trust is consistent with a continuing trust estate.

In this case, the Trust Deed allows the trustee to determine a date earlier than the date on which shall expire the period of sixty years from the execution of this Trust Deed. However, the Trust Deed does not provide express power to extend the vesting date in a similar manner.

In relation to whether the wide powers provided to the Trustee under the Trust Deed are sufficient to determine that the deed confers an 'express power' to vary the Trust to extend the vesting date, it is relevant to note the Full Federal Court's comments in FCT v. Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158:

So long as any amendment of the trust obligations relating to such property is made in accordance with any power conferred by the instrument creating the obligations, and the continuity of property that is the subject of trust obligations is established, there will be identity of the "taxpayer …" notwithstanding any amendment of the trust obligation and any change in the property itself.

The Court's comments support the conclusion that the implied power conferred in the trust deed meets the definition of express power and is sufficient to allow for the extension of the vesting date.

The Trust Deed provides wide powers to the trustee to vary the Trust provided that any variation is made before vesting and provided that such variation does not:

§ infringe the rule against perpetuities in so far as it applies;

§ favour the settlor; or

§ affect any entitlement to which a Beneficiary has become absolutely entitled pursuant to the deed.

If the above conditions are satisfied, the trustee may be considered to have the power to alter the definition of the 'Vesting Date'.

The proposed variation to the deed is to remove the existing definition of the vesting date and to replace it with, 'Vesting Date means such date as the Trustees shall determine.' This new definition would enable the Trust to vest at any time upon the Trustee's discretion.

The Trustee confirms that the variation will be made prior to vesting of the Trust.

The Trust owns property predominantly located in South Australia and therefore, the Trust is governed by the state laws of South Australia. Rules against remoteness and accumulation of income have been abolished in South Australia (section 61(1) of the Law of Property Act 1936 (SA)). Consequently, the amendment of the vesting date will not infringe the law against perpetuities.

Individual A, the settlor, is not a beneficiary of the trust and the amendment will not lead to trust assets being returned to the settlor. Therefore, the change in the definition will not favour the settlor.

The Trust submits that all amounts that have been vested in any of the beneficiaries will not be impacted by the proposed amendment of the vesting date.

As the alteration to the definition of "vesting date" meets all the conditions, it is considered that the Trustee does have an express power to alter the definition as proposed.

Trust period

It is provided in the Statement of Principles that in some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations, the subject matter of the trust can be most accurately described as the income and other benefits arising from the trust property over a particular period.

In this case, the Trustee submits it is apparent from the list of persons named as income beneficiaries, default income beneficiaries, capital beneficiaries and default capital beneficiaries in the schedules of the Trust Deed that the purpose of the Trust is primarily to benefit the Individual B, Individual B's family and its descendants. The trust is therefore for the benefit of the family members and not as a vehicle for a particular project or to hold an asset of intrinsically limited duration.

Nothing suggests that the specified term (60 years from the execution and no longer than the 'royal lives' clause) is an essential feature of the trust. There are no vested assets that only have a 60 year life span (or 80 year life span for that matter) and there is no other change to the trust property.

As the Trustee already has the power to terminate the Trust, by providing for an earlier vesting date at the Trustee's absolute discretion, a particular trust period is not a fundamental feature of the Trust.

Therefore, the Trust Deed and surrounding circumstances do not indicate that the current term of the trust is a fundamental feature of the trust.

Fundamental change to the trust

The third matter to be considered by the Commissioner is whether the proposed amendment and other accompanying circumstances indicate a fundamental change to the trust. In cases where there will be a fundamental change, it indicates that there may be a creation of a new trust.

Part 5.1 of the Statement of Principles considers the addition and removal of beneficiaries and confirms 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 or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.

In this case, the Trust Deed is discretionary as to the distribution of income and capital on the vesting date. There are also certain beneficiaries under the relevant schedules having a default interest to income and capital. The Trustee also has the power under clause 2(a)(ii) of the Trust Deed to accumulate income which then forms part of the capital of the Trust. The Trustee has absolute discretion to determine to which beneficiaries and in what proportions the assets of the Trust are to be distributed on vesting. The beneficiaries therefore only have a contingent interest in the trust fund at the vesting day.

The beneficial interest of the beneficiaries in the trust property is a contingent interest and the proposed amendment to the trust deed does not change the beneficiaries' interests in the trust property as after the amendment they will still have a contingent interest in the trust fund.

In this case, the extension of the vesting date may potentially vary who ultimately has the beneficial interests. However, there is no proposal to change the class of beneficiaries.

The extension of the vesting date does not result in a redefinition of the class of persons who would be beneficiaries. The class of persons who would be beneficiaries remain unchanged. It is therefore considered that the change to the vesting date does not give rise to a fundamental change in the trust relationship.

As all three requirements under part 5.2 of the Statement of Principles are satisfied, the amendment to the definition of 'Vesting Date'will not be treated as giving rise to a new trust estate. A resettlement will not happen. CGT event E1 in section 104-55 will not be triggered.

Question 2

Not applicable as CGT event E1 will not be triggered.