Edited version of private ruling

Authorisation Number: 1011796920170

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Ruling

Subject: Trust deed change

Question 1

Will the proposed amendment to the trust deed resulting in a change of 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

Relevant facts and circumstances

A trust was created by a deed of settlement. 

The purpose of the establishment of the trust was to provide benefits for the beneficiaries. The beneficiaries of the trust are defined to include the classes of persons specified under the trust deed.

The rulee is the trustee of the trust.

The trustee has operated the trust with the same intent since its establishment; that is, to operate the trust in such a way that will provide benefits by way of income and or capital to the beneficiaries.

A clause in the deed provides the trustee with the power to modify the trust in any way that he or she sees fit. 

The definition of vesting day is defined in the trust deed to include a future date. In addition, the vesting day can be on an earlier day determined by the trustee.

In absence of the trustee exercising their power to appoint an earlier vesting day, the vesting day is the date specified in the trust deed.

The trustee is proposing to extend the term of the trust and to replace it with one that would enable the trust to continue for an additional period of time, subject to the trustee determining to vest the trust at any time if the trustee so determines. 

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55.

Reasons for decision

Summary

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

The proposed amendment to the trust deed is consistent with a continuing trust estate. The proposed changes to the existing trust deeds will not result in a resettlement or the creation of a new trust.  

As no new trust has been created, CGT event E1 will not occur.

Detailed reasoning

Generally a capital gain or loss is made when a CGT event happens to a CGT asset acquired after 20 September 1985. CGT 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 uses the term resettlement to describe when changes to a trust are such that, for income tax purposes, one trust estate comes to an end and is replaced by another trust. For convenience these situations are sometimes referred to as resettlements, although resettlements in the technical sense may be only one way in which such terminations occur. The consequences of terminating the trust can include:

· realisation at trustee level of the trust property and the loss of carried forward tax benefits; and

· disposal by beneficiaries of their interests in the terminating trust and acquisition of interests in the new trust.

In other situations, although the original trust estate may continue, changes may lead to the creation of one or more new and separate trust estates for taxation purposes. 

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 states: 

Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the power of the trustee. The original intentions of the settlor must be considered in determining whether a new trust has been created.

Furthermore, 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;

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

Application to your circumstances

In this case, the rulee is proposing to alter the trust deed to extend the term of the trust. 

The trust deed does confer an express power to alter the termination date, but only to reduce it (not increase it). However, a clause in the trust deed does provide the trustee with the power to modify the trust in any way that he or she sees fit. 

The trust deed does not indicate that the original trust duration was a fundamental feature of the trust as the trustee was given the express authority to shorten the period. 

The proposed change will merely extend the duration of the trust by an additional period of time. All other aspects of the trust will remain the same. There will be no changes to the classes of beneficiaries, or any of the powers conferred on the trustee. 

Conclusion

The proposed amendment to the trust deed is consistent with a continuing trust estate. The proposed changes to the existing trust deeds will not result in a resettlement or the creation of a new trust.  

As no new trust has been created, CGT event E1 will not occur.