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Ruling

Subject: Proposed amendments to the Trust deed

Where the proposed amendments, contained within the Amending Deed, to the Trust Deed of the Trust are undertaken, does CGT event E1 (section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)) happen?

Advice/Answers

No

Relevant facts

Scheme

· The Trust is a discretionary trust.

· The Trust has been established as an investment entity to provide assets for the benefit of the X Family Members (the Beneficiaries) in the long term.

· The Trust holds investment properties with a combined current market value in excess of several million dollars.

· The proposed variations to the Trust Deed will amend the Trust Deed to provide rights to the Trustee to transfer property as an in-specie distribution; and raise money on property and pay that money to a beneficiary.

· The Trustee intends to exercise a discretion to make a distribution in-specie from the Trust Fund of a property to a beneficiary.

· The property is one of a number of assets of the Trust.

· The Trustee of the Trust is A Pty Ltd (the Trustee) of which B is a director, shareholder and the Appointor.

· The Trust Deed permits the Trust Deed to be amended and allows the Trustee to release and revoke any power in the Trust Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20
Income Tax Assessment Act 1997 section 104-55

Reasons for decision

Issue 1

Question 1

Summary

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.

Detailed reasoning

Discussion of law

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

Section 104-55 of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT event E1 may apply 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 creation of a new trust - Statement of Principles August 2001 (Statement of Principles) gives guidance as to when the Commissioner will treat changes to a trust as giving rise to a new trust estate.

The consequence of terminating the trust can include:

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

· Disposal of beneficiaries of their interests and an acquisition of interests in the new trust.

In Commissioner of Taxation v Commercial Nominees of Australia Limited [2001] HCA 33 (Commercial Nominees), the High Court stated that the three main indicia of continuity of a superannuation entity are:

· The constitution of the trust under which the fund operates;

· The trust property; and

· Membership.

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.

The Statement of Principles provides that a change to the essential nature and character of the original trust relationship creates a new trust and identifies some situations which may raise the question of whether a new trust has been created. Those situations include:

· 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;

· Depletion of the trust property;

· A change to the trust that is not contemplated by the terms of the original trust; and/or

· A change in the essential nature and purpose of the trust.

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.

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.

Application of the law to your circumstances

In the present case, the Trust is a discretionary Trust established as an investment entity to provide assets for the long term benefit of Family Members (the Beneficiaries).

The Trust holds investment properties with a combined current market value in excess of several million dollars. The Trustee intends to exercise a discretion to make a distribution in-specie of one of the properties from the Trust Fund to a beneficiary.

The Trustee of the Trust is A Pty Ltd (the Trustee) of which B is a director, shareholder and the Appointor. The Trust Deed permits the Trust Deed to be amended and allows the Trustee to release and revoke any power in the Trust Deed.

The Trustee has absolute discretion to distribute the net income of the Trust prior to vesting to beneficiaries pursuant to the Trust Deed. Also, pursuant to the Trust Deed, the Trustee has absolute discretion to raise sums from the capital of the Trust Fund and distribute to any of the Beneficiaries prior to vesting as the Trustee thinks fit.

The proposed variations to the Trust Deed of the A Trust will amend the Trust Deed to provide rights of the Trustee to transfer property in the Trust Fund in its actual state; and raise money on property in the Trust Fund and pay that money to a beneficiary.

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 retain that same contingent interest.

It is clear from the Trust Deed that the Settlor intended the income and capital of the Trust to be applied for the benefit of the Beneficiaries at the discretion of the Trustee. The proposed amendments do not compromise the intention of the Settlor.

Conclusion

The proposed amendments are considered to be within the purpose of the Trust. The same class of beneficiaries will still benefit and the proposed amendments do not impinge on the essential relationship between the Trustee and the Beneficiaries, nor do they amount to a change in the essential nature and character of the Trust relationship.

Furthermore, the intended distribution in-specie of the Property will still leave significant property remaining within the Trust ensuring that the fundamental nature and purpose of the Trust will not be compromised. Therefore the proposed amendments are not considered to cause a resettlement of the Trust.

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.