Edited version of private ruling

Authorisation Number: 1011773567179

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Ruling

Subject: Trust Resettlement

Question

Do the proposed amendments of the trust deed constitute the creation of a new trust and therefore trigger CGT Event E1 under section 104-55 of the Income Tax Assessment Act 1997 or any other CGT event?

Answer

No.

Relevant facts and circumstances

The Trust was created by a deed of settlement after September 19XX. 

The trustee of the trust is a corporate trustee.  

The purpose of the establishment of the Trust was to provide benefits for the beneficiaries.

The trust has primary beneficiaries and general beneficiaries as listed in the trust deed.

The Trustee is empowered by the Trust Deed to add to, vary or amend any provisions of the Trust Deed in any manner subject to certain provisos.

The trustee proposes to amend the Trust Deed by a Deed of Amendment under the power in the relevant Clause.

The amendment proposed is as follows:

1. Insert administrative and general powers as an additional clause of the deed.

2. Insert a new clause clarifying the net income of the trust.

3. Add to the definitions in the relevant clause the several definitions.

4. Wherever the words 'income' or 'net income' appear it shall mean "Net Income"

Reasons for decision

A capital gain or loss is made only if a CGT event happens. Event E1, as provided at section 104-55 of the Income Tax Assessment Act 1997 (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 one trust comes to an end to be replaced by another trust.

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 estate. 

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 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.

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. 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 change that is particularly relevant to this case is changes in the terms of the trust or the rights or obligations of the trustee. 

The Statement of Principles, at paragraph 5.5, considers changes to the terms of a trust that may result in a resettlement, and 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. However:

· it is sometimes unclear whether a variation of terms is fundamental or merely procedural;

· extensive procedural changes may be taken into account along with other changes in considering whether there is a new trust; and

· in some circumstances new trusts have been held to arise even though their terms have been very similar to a prior arrangement.

Changes to the terms of a trust that are merely procedural will not of themselves generally result in the resettlement of a trust. The Statement of Principle elaborates on what might be considered a procedural change: 

Changes which are merely procedural or administrative could include:

· changes in the person acting as trustee or manager; or

· changes which merely affect administrative and housekeeping procedures without substantially altering the rights of the beneficiaries in respect of the trust property. 

It should be noted that changes may substantially alter beneficiary's rights even though their interests are not adversely affected. What is important is the extent and nature of the change to the bundle of rights making up the beneficiaries respective interests.

Administrative and procedural changes will be taken into account when other features point towards the creation of a new trust.

These factors must be considered against the particulars of this case.

Application to the taxpayer's circumstances

The proposed amendment to the deed will include additional administrative and general powers of the trustee and also update and clarify calculation of the net income of the trust.

The proposed changes will have a minimal effect on the trust, as no essential features of the trust relationship will be altered. The future administration of the trust may be affected, but the interests of the beneficiaries and the essential trust relationship will remain the same. The proposed change does not have any effect on the rights and interests of the beneficiaries, or on the relationship between the trustee and the beneficiaries. The change is considered to be procedural in nature, and implemented on its own will not result in a resettlement of the trust.  

Conclusion 

The proposed amendment will not introduce changes to the essential nature and character of the trust relationship. It will not alter the rights of the beneficiaries or the powers of the trustee, and will merely amount to a variation of a continuing trust. There will be no resettlement of the Trust, and consequently no CGT event or other income tax consequences of the proposed amendment.