Edited version of private ruling

Authorisation Number: 1011720039635

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Ruling

Subject: Trust resettlement

Question

Will the proposed amendment to the trust deed resulting in a change to the definition of the vesting day cause a resettlement of the trust for the purposes of the capital gains tax (CGT) provisions under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

year ended 30 June 2011

Relevant facts and circumstances

The Trust was established by deed dated with two companies as joint trustees.

The trust is a discretionary trust established for the benefit of the descendants and spouses of the descendants of Person A and Person B.

One company has resigned as trustee and the other remains as the sole trustee.

A copy of the current Deed has been provided

The deed has no provision that determines the law that the deed is to be governed by, and construed in accordance with, a particular jurisdiction.

The deed provides wide powers to the trustee. These powers are contained in the relevant clause of the Deed.

The trustee wishes to amend the deed as follows:

to include a clause providing for the deed to be governed by and construed in accordance with the laws of South Australia, and

to amend the meaning of 'date of distribution' in clause 4 by deleting sub-paragraphs (a) and (b) and inserting instead the words as follows 'the day immediately prior to the day that would cause the trust fund to infringe the law against perpetuities and excessive accumulations as applies in the jurisdiction applicable to the deed'.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Reasons for decision

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 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 Commissioner has published Creation of a new trust - Statement of Principles (Statement of Principles) to provide guidance on when the Commissioner will treat changes made to a trust as giving rise to a new trust estate. The Statement of Principles was released on 9 June 1999 and updated on 29 August 2001.

The Statement of Principles advises that it is a change in the essential nature and character of the original trust relationship which creates a new trust. The Statement of Principles outlines some changes which may result in the creation of a new trust, those being:

· any change in beneficial interests in trust property;

· a new class of beneficial interest (whether new or altered);

· a possible redefinition of the beneficiary class;

· changes in the terms of the trust or the rights or obligations of the trustee;

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

· depletion of trust property;

· a change in termination date of the trust;

· a change in 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

· 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 indicators, these 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. A fundamental change in the essential nature and character of the trust relationship means that 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.

The Statement of Principles states that in most circumstances the ATO will accept that the mere extension of the term of a trust is consistent with a continuing trust estate. This conclusion will be reached where:

· 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 relevant clause provides wide discretionary powers to the trustee to alter all or any of the provisions of the deed provided any variation, alteration or addition shall not:

· infringe the law against perpetuities, and

· be in favour of Person A

In relation to whether the wide powers provided to the trustee under the relevant Clause are sufficient to determine that the deed confers an 'express power' to extend the vesting date, the Full Federal Court's 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 deed meets the definition of express power and is sufficient to alter the extension date.

As the conditions in the relevant clause of the deed are satisfied, the trustee has the power to change the vesting date.

As the proposed amendment merely affects the vesting date of the trust, the amendment will not be in favour of or for the benefit of Person A.

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

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 who are the descendants and spouses of the descendants of Person A.

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 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.

In the current case, you propose that the trust will be governed by the laws of South Australia. The perpetuity date is to be amended to be the last day of the maximum duration of the trust permitted by the governing law of the trust.

In accordance with section 61 of the Law of Property Act 1936 (SA), the rule against perpetuities has been abolished in SA. Section 62 of the Law of Property Act 1936 (SA) provides that 80 years after the date of disposition, parties may apply to the court for orders to vary the disposition so that any remaining unvested interests will immediately vest.

Therefore, as the trust is to be administered under the laws of SA, the trust will not vest unless the interested parties apply to the court.

As a result of the proposed amendment, there may be beneficiaries who were not alive at the original vesting day who may come to hold relevant beneficial interests after that date. However, these beneficiaries were always part of the original class of beneficiaries. Therefore, 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.

Conclusion

As all three requirements under part 5.2 of the Statement of Principles are satisfied, the amendment to the vesting date will not be treated as giving rise to a new trust estate.

As there has not been a deemed disposal of trust assets, no capital gains tax provisions are applicable.