Edited version of private ruling

Authorisation Number: 1011700758673

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Ruling

Question 1

Where the proposed Deed of Variation (amending the definition of the Vesting Date) is undertaken, will CGT event E1 or CGT event A1, as provided in sections 104-55 and 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) respectively, happen?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Scheme

The settlement of the Trust (the Trust) was established by Deed of Trust (the Trust Deed).

The trust was established as an investment vehicle for the benefit of the members of the family. The original purpose was to acquire shares in the family company, which operates a dairy and cattle grazing farm.

The Trust is a discretionary trust. Accordingly, the beneficiaries and the class of the beneficiaries of the Trust, do not have any specific entitlements to the income or assets of the Trust. Their only rights under the Deed are to be properly considered in the exercise of the Trustee's discretions under the Trust Deed.

The proposed amendments extend the Vesting date from 60 to 80 years.

The Trust Deed provides an express power to vary, revoke or amend the Vesting Date of the Trust Deed, subject to certain conditions. These conditions will be satisfied.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-55

Reasons for decision

Summary

The facts present that the Trust Deed confers an express power to vary or amend the Vesting Date of the Trust; the Trust period is not a fundamental feature of the trust; and no fundamental change to the Trust, Trust relationships or Trust property will occur.

It is considered that these amendments are representative of a procedural change to a continuing trust, consistent with paragraph 5.2 of The creation of a new trust - Statement of Principles August 2001 (Statement of Principles), and no new trust is created.

Therefore, the proposed extension of the Vesting Date will not cause CGT event E1 or CGT event A1, under sections 104-55 and 104-10 of the ITAA 1997 respectively, to happen.

Detailed reasoning

A capital gain or loss is made only if a CGT event happens (section 100-20 of the ITAA 1997). The CGT events at issue are CGT events E1 and A1.

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55 of the ITAA 1997).

CGT Event A1 happens when you dispose of a CGT asset (section 104-10 of the ITAA 1997). You are deemed to dispose of a CGT asset if a change of ownership happens from you to another entity, whether because of some act or event or by operation of law.

Subsection 102-25(1) of the ITAA 1997 provides that if more than one CGT event can happen, then you use the one that is the most specific to your situation. In this case CGT event E1 is the most specific event and is considered firstly.

Overview

CGT event E1 will happen where 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 Statement of Principles provides guidance as to when the Commissioner will treat changes to a trust as giving rise to a new trust estate, and specifically discusses the following:

· Any change in beneficial interests in trust property

· A new class of beneficial interest

· Redefinition of the beneficiary class

· Changes in the terms of the trusts 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.

Part 5.5 of the Statement of Principles states:

It is important to distinguish between changes which are merely procedural and those which fundamentally redefine the relationship between the trustee and beneficiaries in respect of the trust property. It is generally only changes of the latter type which will give rise to a new trust.

Depending on the nature and extent of the changes, and their combination with other indicia, these changes may amount to a fundamental change in the essential nature and character of the trust relationship, or alternatively, a mere variation of a continuing trust.

Whether a new trust is created will depend, among other things, on the terms of the original trust, the powers of the trustee and the original intentions of the Settlor.

General Observations

As a discretionary trust, the beneficiaries of the Trust have a contingent interest in the income and capital of the Trust and following the proposed amendments to the Trust Deed, the beneficiaries will still have that contingent interest in the income and capital of the Trust. There are no changes being made to the rights or obligations of the trustee nor is there any addition or depletion of the trust property.

Extending the Vesting Date

The proposed amendment to the Vesting Date of the Trust will extend that date from 18 September 2034 to 18 September 2054.

Part 5.2 of the Statement of Principles discusses extending the term (duration) of the trust and provides:

' … 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.'

Express Power

The Trust Deed confers an express power to vary or amend the Vesting Date of the Trust subject to certain conditions which will be satisfied.

Vesting date - fundamental feature of the trust relationship

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".

The Trust was established for the benefit of the members of the family. Also included in the list of potential beneficiaries were such children and grandchildren of the sons, and their spouses.

There is no evidence to suggest the trust was established for a specific limited project. The 60 year termination date more likely represents the option chosen by the settlor to avoid infringing upon the common law rule of perpetuities.

It is considered that the proposed change to the Vesting Date of the Trust is procedural, to enable the ongoing achievement of the original intentions of the Settlor, and is consistent with the requirements of a continuing trust.

Fundamental change to the trust - cumulative changes

When extending the term of a trust, even in situations where no new trust estate arises, it is essential to consider those parties whose interests would have vested in possession on the original vesting date.

As the Trust is a discretionary trust, the proposed extension of the Vesting Date, whilst possibly displacing certain potential beneficiaries in favour of alternate descendant beneficiaries, does not add beneficiaries not originally intended by the Settlor or alter the class of potential beneficiaries of the Trust.

Prior to the amendment of the Vesting Date, beneficiaries of the Trust do not have any specific entitlements to income or capital of the Trust. The amendment of the Vesting Date will not alter these rights; all potential beneficiaries will continue to have the right to be considered by the Trustee in exercise of distribution discretions.

Considering the circumstances of this case, any changes in potential beneficiaries is not of a fundamental nature and is consistent with changes in the membership of a continuing beneficiary class.

The effect of the proposed amendment to the definition of the Vesting Date is indicative of a continuing trust estate. Accordingly, the proposed amendment does not cause a change in the trust relationship such that one trust ceases and a new trust is created.

CGT event E1

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, CGT event E1 under section 104-55 of the ITAA 1997 will not happen.

CGT event A1

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, there is no change in ownership of the Trust Property and no disposal of a CGT asset under section 104-10 of the ITAA 1997. Therefore CGT event A1 under section 104-10 will not happen.

Conclusion

The facts present that the Trust Deed confers an express power to vary or amend the Vesting Date; the Trust period is not a fundamental feature of the trust; and no fundamental change to the Trust, Trust relationships, or Trust property will occur.

It is considered that these amendments are representative of a procedural change to a continuing trust according to paragraph 5.2 of the Statement of Principles and no new trust is created.

Therefore, an extension of the Vesting Date will not trigger either CGT event E1 or CGT event A1 under section 104-55 and 104-10 of the ITAA 1997 respectively.