Edited version of private ruling

Authorisation Number: 1011695129693

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Ruling

Subject: Trust Resettlement and Capital Gains

Question 1

Will the proposed amendments result in a resettlement of the trust and a consequential occurrence of any capital tax (CGT) events E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will Division 149 of the ITAA 1997 apply to the proposed amendments and change the pre-CGT assets of the trust to post CGT assets so that the trustee will be assessable on any capital gain under the following capital gains tax events?

CGT event A1 under section 104-10 of the ITAA 1997

CGT event B1 under section 104-15 of the ITAA 1997

CGT event C1 under section 104-20 of the ITAA 1997

CGT event E2 under section 104-60 of the ITAA 1997

CGT event E3 under section 104-65 of the ITAA 1997

CGT event E4 under section 104-70 of the ITAA 1997

CGT event E5 under section 104-75 of the ITAA 1997

CGT event E6 under section 104-80 of the ITAA 1997

CGT event E7 under section 104-85 of the ITAA 1997

CGT event I2 under section 104-70 of the ITAA 1997

Answer

No.

Question 3

If 50% or more of the income of the trust is distributed in any income year to the beneficiaries added to the trust under the proposed amendments, will that distribution change the pre CGT assets of the trust to post CGT assets because of Division 149 of the ITAA 1997 so that the trustee will be assessable on any capital gain?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The trust has been established for the benefit of a family.

The trust deed provides the trustee with the power to amend the trust deed.

The trust deed currently has two possible vesting dates and the trustee also has the discretion to determine the vesting date. It is proposed that the trust deed will be amended by deleting one of the two possible vesting dates.

It is also proposed to amend the trust deed to include companies as beneficiaries. Two companies are to be formed and added as beneficiaries. The current family members of the trust will indirectly or directly own shares in the two companies.

The two companies will be potential beneficiaries of the trust following the proposed amendments.

Copies of the current trust deed and the proposed amendments have been provided

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-15

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-65

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 section 104-75

Income Tax Assessment Act 1997 section 104-80

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(2)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(2)

Reasons for Decision

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.

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

The trust deed confers wide discretionary powers on the trustee to alter any of the provisions of the trust deed on the proviso that any variation shall not be in favour of the trustee or settlor and not infringe the rule against perpetuities.

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 extend the vesting date, the Full Federal Courts comments in Federal Commissioner of Taxation v. Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158 are relevant:

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 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 (emphasis added).

The comment in the above case support the conclusion that the implied power conferred in the relevant clause of the trust deed meets the definition of express power and is sufficient to alter the extension date.

If the conditions in the clauses of the trust deed are therefore satisfied, the trustee has the power to change the vesting date.

Under the current trust deed, neither the trustee nor the settlor is beneficiaries of the trust. As they are not beneficiaries, the assets can not be returned to the settlor or trustee.

As the proposed amendment is also changing the vesting date of the trust, the amendment will not be in favour of or for the benefit of the settlor or trustee. In addition, the rule against perpetuities will not be infringed as the amendment is merely deleting one of the two possible vesting dates. One of the current vesting dates will therefore be still in existence after the proposed changes.

It is concluded that as the conditions in the relevant clause of the trust deed are satisfied, the trustee has an express power to alter the vesting date under the relevant clause of the trust deed.

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 trust was established for the benefit of the beneficiaries in the relevant clause of the trust deed. The beneficiaries are the members of a family. The trust is therefore for the benefit of a family and is not as a vehicle for a particular project or to hold an asset of intrinsically limited duration.

Therefore, the 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 vesting date is considered to be a fundamental feature of the trust relationship. If so, then a variation to it will indicate a resettlement.

The trust deed provides for the trust fund to vest in the beneficiaries when the trust ends. Although the trustee has absolute discretion to determine shares and proportions on distribution of the trust assets, the trust fund has to be transferred to any living beneficiaries once the Trust ends.

The Statement of Principles, at chapter 5.1, 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.

The relevant beneficial interests in a trust fund obviously constitute a critical element in a trust relationship. In circumstances where default beneficiaries have vested, but defeasible interests in the trust capital, an extension to the vesting date means there may be changes in those beneficial interests. That is, the change may be considered likely to alter who ultimately has the beneficial interests.

But, even before the existing vesting date, those interests might have been defeated. That is, the beneficial interests remain vested and defeasible, both before and after the change to the vesting date, though the likelihood of their being defeated may in some cases be considered greater after the change. Further, the class of beneficiaries may be unchanged. Where the class of beneficiaries includes children unborn at the original vesting date, any children who may come to hold relevant beneficial interests after that date, were always part of the original class of beneficiaries.

In the current case, under the relevant clause of the trust deed, the vesting date currently is the earlier of two possible dates. Alternatively, the trustee has the discretion to nominate a vesting date prior to these dates. Under the proposed amendments, one of the two possible vesting dates is to be deleted. However, the trustee's discretion to determine the vesting date and one of the two possible vesting dates remains unchanged.

The proposed amendments are therefore not altering in any form any amounts that the beneficiaries are entitled to under the trust deed. The beneficiaries' entitlements which the trustee determines during the life of the trust and at the vesting date will therefore not be impacted by the proposed variation of the vesting date.

It is the Commissioner's opinion that whilst there will be a potential variation in the beneficial interest as a result of the amendment of the vesting date, the variation is consistent with changes in the membership of a continuing class and therefore not significant enough to cause a resettlement of the trust.

The facts in this case do not disclose any fundamental change in the trust relationship. As discussed above, the potential variation to beneficial interests in the Trust fund is not considered to result in a fundamental change in the essential nature and character of the trust.

Amendment to trust deed to include additional beneficiaries

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 daughter), by an appointment in their favour. When deciding to benefit the 'wide group' members (such as Y's mother), 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, in accordance with the relevant clause in the trust deed, 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.

The proposed amendments will extend the beneficiaries to include companies who are either directly or indirectly owned by one or more of the beneficiaries of the trust.

As the current beneficiaries of the trust will be the direct and indirect beneficial interest holders of the companies, the trust will continue to exist for the same original beneficiaries.

There is therefore no change in the essential nature and purpose of the trust as the original intention of the trust to benefit the family has not changed.

It is also noted that the previous amendments ensured that the additional beneficiaries listed in the trust deed are not entitled to receive a distribution at the vesting date. As a result of the proposed amendments, this will not change as in accordance with the proposed changes, the additional corporate beneficiaries can also not be paid a part of the trust fund.

Conclusion

It is concluded that the proposed amendments to change the vesting date and include companies as beneficiaries who are either directly or indirectly owned by the beneficiaries of the trust will not change the essential nature and character of the trust relationship.

As the requirements under part 5.1 and 5.2 of the Statement of Principles are satisfied, the amendments will not be treated as giving rise to a new trust estate.

Application of Division 149

Subsection 149-15(1) of the ITAA 1997 states that:

Majority underlying interests in a CGT asset consist of:

· more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly ) in the asset; and

· more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

In accordance with subsection 149-15(2) of the ITAA 1997, 'underlying interest' simply means a beneficial interest that an ultimate owner may have in the asset or any ordinary income derived from the asset.

An ultimate owner is defined to mean an individual or an entity listed in subsection 149-15(3) of the ITAA 1997.

Subsection 149-30(1) of the ITAA 1997 sets out a factual test to determine when an asset of a non public entity stops beings a pre-CGT asset. Under the factual test, the asset stops being a pre-CGT asset at the earliest time when majority underlying interest in the asset were not held by the ultimate owners who held the interests immediately before 20 September 1985.

Subsection 149-30(2) of the ITAA 1997 provides the Commissioner with a discretion to overlook the factual test in subsection 149-30(1) of the ITAA 1997.

Under subsection 149-30(2) of the ITAA 1997, if the Commissioner is satisfied, or thinks it reasonable to assume, that majority underlying interests have not changed up to a particular time, the asset continues to be a pre CGT asset.

Taxation Ruling IT 2340 outlines the circumstances when the Commissioner considers that subsection 149-30 of the ITAA 1997 (formerly 160ZZS of the ITAA 1936) will apply.

Paragraph 6 of IT 2340 states where, for example, a trustee continues to administer a trust for the benefit of members of a particular family, section 160ZZS will not apply merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion. In such a case the Commissioner would, in terms of subsection 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed.

Paragraph 8 of IT 2340 states that on the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application.

In the current case, as discussed previously, after the proposed amendments, the trust will continue to exist for the same original beneficiaries. In accordance with paragraphs 6 and 8 of IT 2340, there has not been change of 50% or more in the underlying interests in the trust. The pre CGT assets of the Trust will therefore maintain their pre CGT status.

In addition, as section 149 of the ITAA 1997 is not applicable, even if more than 50% of the income is distributed to the additional beneficiaries which are to be included as a result of the amendments, the status of the pre CGT trust assets will remain unchanged. The distribution of more than 50% of the income to the additional beneficiaries will therefore not result in the trustee being subject to capital gains on pre CGT assets.