Edited version of private ruling

Authorisation Number: 1011746550111

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Ruling

Subject: CGT event - extension of vesting date for a trust

Question 1

Will the extension of the vesting date of the Trust give rise to CGT Event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT Event E1 under section 104-55 of the ITAA 1997?

No.

Relevant facts and circumstances

The Trust is a discretionary trust with a corporate trustee being the Trustee. The Trust was established by deed (the Deed) in the 1970s. 

Clause A outlines the 'primary beneficiaries', 'secondary beneficiaries and 'general beneficiaries or beneficiaries'.

Beneficiary 1 and Beneficiary 2 are primary beneficiaries and, as executors of the deceased survivor of the named Guardians, are Guardians of the Trust. 

The Deed is discretionary as to the distribution of income and capital on the vesting date. 

Clause B of the Deed sets out the Trustee's power: 

Clause C of the Deed defines the vesting date as: 

"The Vesting Date" means the thirty-first day of December Two thousand and ten (31/12/2010).

Clause D of the Deed states that:

For the purpose of the rule against perpetuities the perpetuity period applicable to dispositions made by this Deed shall be the period of seventy-nine (79) years commencing from the date hereof.

Presently, the Trust will vest on 31 December in the recent year. 

The Trustee wishes to amend clause C, the vesting date. The proposed variation is by an intended deletion of clause C and replacing it as follows:

"The Vesting Date" means 30 June in the subsequent year.

There being no affect on a beneficial settlement set aside for any beneficiary prior to the date of variation, the Guardians have provided their consent to the extension and the Trustee has extended the vesting date of the Trust to 30 June in the subsequent year.

Reasons for decision

Summary

CGT Event E1

CGT event E1 under section 104-55 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement. This event will also happen 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 Commissioner issued a paper titled Creation of a new trust Statement of Principles August 2001 (Statement of Principles) on 29 August 2001 which outlines when the Commissioner will treat changes to a trust deed as giving rise to a new trust. It lists the following changes that 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.  

Under the Statement of Principles the Commissioner considers it is a change in the essential nature and character of the original trust relationship which creates a new trust. Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the powers of the trustee. The original intentions of the Settlor must be considered in determining whether a new trust has been created.  

In this case the Trustee proposes to amend the Trust Deed to amend the vesting date of the Trust. 

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

1. the trust deed confers an express power to alter the termination date;

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

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

1. Express power

Clause B provides wide 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 excessive accumulations;

· be in favour of the Settlor; and

· affect the beneficiaries' entitlements.  

If all the conditions are satisfied, the Trustee may be considered to have the power to change the vesting date under Clause B. 

In relation to whether the wide powers provided to the Trustee under Clause B are sufficient to determine that the Deed confers an Express Power to extend the vesting date we examine the Full Federal Courts comments in Federal Commissioner of Taxation 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 (emphasis added). 

The comments in this case support the conclusion that the implied power conferred in Clause E of the Trust Deed meets the definition of Express Power and is sufficient to allow for the extension 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 one that would enable the Trust to continue for an additional 30 years, subject to the Trustee determining to vest the Trust at any time if the Trustee so chooses. 

Rules against remoteness and accumulation of income have been abolished in South Australia (subsection 61(1) of the Law of Property Act 1936 (SA)). The amendment to the vesting date will not infringe the law against perpetuities and excessive accumulations. Furthermore, the extension of the vesting date by a further 30 years to 80 years will bring the trust period in line with the rules against perpetuities in most Australian States. Therefore the first condition is satisfied.  

The Settlor is not a beneficiary of the Trust. Under no circumstances will the trust assets be returned to the Settlor. The proposed variation will not be in favour of or for the benefit of or result in any benefit to the Settlor. The second condition is satisfied. 

The proposed variation that is the subject of this ruling request is not altering in any form any amounts that are set aside or vested in any of the beneficiaries prior to the date of variation. 

All amounts that have already been set aside or vested in any of the beneficiaries will not at all be impacted by the proposed variation of the Vesting Date. The third condition is satisfied. 

Accordingly, it is considered that the Trustee does have an express power to alter the Vesting Date under Clause B. 

2. 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 be 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 under Clause A. The trust is set up holding a number of specific properties, however, the trust property is specifically not limited to those listed in the Trust Deed by the use of the words:

"The Trust Funds" means … all moneys investments and property acquired by and/or paid for and/or transferred top and accepted by the Trustee as additional to the Trust Fund and the investments, assets and property from time to time representing the said moneys, investments and property and any part thereof respectively and without in any way limiting the generality of the foregoing the property know as…'

The Trust is for the benefit of the beneficiaries and 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.  

3. Fundamental change to the trust

The 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 at least one of the beneficiaries once the Trust ends.  

In Stein v. Sybmore Holdings Pty Ltd [2006] NSWSC 1004; 2006 ATC 4641; 64 ATR 325 (Stein's case), an application was made to the New South Wales Supreme Court for an order under section 81 of the Trustee Act 1925 (NSW) empowering the Trustee to defer the vesting date.

The Court was aware that the effect of the extension of the vesting date would be to change the beneficial interests in the Trust Fund from what they were at the time of the application. Campbell J considered, at page 4747, that section 81 of the Trustee Act 1925 (NSW) could be used in a way that altered beneficial interests and the fact that the extension of the vesting date would likely to alter who ultimately had beneficial interests in the Trust Fund, was not necessarily fatal to the application. 

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 who might ultimately take. 

In your case the extension of the vesting date will potentially vary the beneficial interests. The question is whether this potential change to beneficial interest is fundamental enough to cause a resettlement of the Trust.  

It is the Commissioners 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. 

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 extension of the Vesting Date will not be treated as giving rise to a new trust estate. Therefore, the extension of the vesting date in these circumstances will not give rise to CGT Event E1 under section 104-55 of the ITAA 1997. 

CGT Event A1

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

As it has been determined in this ruling that the extension of the vesting date in this case will not cause a trust resettlement, there will not be a disposal of a CGT Asset under subsection 104-10(2) of the ITAA 1997 as there has been no change in ownership of the Trust Property. Therefore the extension of the vesting date in these circumstances will not give rise to CGT Event A1 under section 104-10 of the ITAA 1997.

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