Edited version of your private ruling

Authorisation Number: 1012073927929

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Income Tax - capital gains tax - trust resettlement

Question 1

Will the proposed arrangement trigger Capital Gains Tax (CGT) event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) due to the creation of a new trust over the CGT assets held by the taxpayer?

Answer

No.

Question 2

Will the proposed arrangement trigger CGT event A1 under section 104-10 of the ITAA 1997 due to a disposal of the CGT assets held by the taxpayer?

Answer

No.

Question 3

Broadly, will any other CGT event apply to the proposed arrangement?

Answer

No.

Question 4

Will any other income tax provisions be triggered by the proposed arrangements?

Answer

No.

Question 5

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the proposed arrangement?

Answer

No.

This ruling applies for the following period:

1 July 2011 to 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A trust was established by a Deed of Settlement ('the Principal Deed').

The Principal Deed was amended by a Deed ('the Varying Deed') to vary the trusts in the Principal Deed and to declare trusts known as 'the Trust'.

The Varying Deed contains clauses defining the general beneficiaries and the specified beneficiaries.

The 'Vesting Day' is defined in a clause of the Varying Deed to mean the first to occur of the 'Distribution Date', a day appointed by the Trustee to be the Vesting Day or the date of expiration of the 'Perpetuity Period'.

The 'perpetuity period' is defined in a clause of the Varying Deed as the period commencing on the date of the Principal Deed and expiring at the expiration of three months after the date of the death of a specified individual.

A day is specified in the Schedule to the Varying Deed as the 'Distribution Date'.

The Varying Deed contains clauses about Trusts as to income and about the trustees Power of Advancement.

A clause in the Varying Deed provides the Trustee with a power to revoke, add to or vary all or any of the trusts terms and conditions contained in the Varying Deed provided that a perpetuity is not created and provided that the changes, in the opinion of the Trustee, benefit all or one or more of the General Beneficiaries and do not result in a benefit to any member of the excluded class.

The Trustee proposes to exercise the power in the Varying Deed to amend the Varying Deed by executing a 'Deed of Variation'. The proposed amendments are as follows:

· introduce definitions of 'Class of Income' and 'Income'

· introduce a new 'Trusts as to income' clause

· introduce a new 'Power of advancement' clause

· amend the definition of 'Perpetuity period'

· amend the 'Distribution date'

Clauses defining the terms 'Class of Income' and 'Income' will be inserted. These definitions allow the trustee to differentiate between different types of income and to characterise the income as being on income or capital account.

A new clause will be inserted which allows the trustee to decide the net amount of each class of income included in the net income of the trust fund for the accounting period.

A new clause will be inserted allowing the trustee to create sub trusts.

The definition of Perpetuity period is to be amended so that it means the period commencing on the date of the Principal Deed and ending on the day immediately preceding the eightieth anniversary of the date of the Principal Deed.

The definition of Distribution Date is to be amended so that such date is a date selected by the Trustee or the date immediately preceding the eightieth anniversary of the date of the Principal Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-155

Reasons for decision

Question 1

Summary

The proposed amendments to the Varying Deed will not trigger CGT event E1 under section 104-55 of the ITAA 1997.

Detailed reasoning

CGT event E1 occurs where a trust is created over a CGT asset by declaration or settlement: section 104-55 of the ITAA 1997. A resettlement of a trust constitutes a 'settlement' for the purposes of CGT event E1. 

The Commissioner's views on when a resettlement arises are set out in the ATO publication Creation of a new trust - Statement of Principles August 2001 ('Statement of Principles'). Although this document is not a public ruling it can be used as general guidance.

In accordance with the Statement of Principles, where there is a change in the essential nature and character of the original trust relationship a new trust is created. 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.

The Statement of Principles states that changes potentially leading to a new trust can arise by several means, including variations under a power in the deed and a variation by agreement among the beneficiaries. It lists the following as some of the changes which raise the question of whether a new trust has been created:

· 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.

With respect to beneficiaries 5.1 of the Statement of Principles states:

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.

In accordance with 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. This conclusion will be reached 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.

The Statement of Principles considers changes to the terms of a trust that may result in a resettlement at 5.5 where it states that it is important to distinguish between changes which are merely procedural and those which fundamentally redefine the relationship between the Trustee and the beneficiaries in respect of the trust property. Changes to the terms of a trust that are merely procedural will not generally result in the resettlement of a trust.

Application to your circumstances

In your case the Trustee proposes to amend the Varying Deed as follows:

· introduce definitions of 'Class of Income' and 'Income'

· introduce a new 'Trusts as to income' clause

· introduce a new 'Power of advancement' clause

· amend the definition of 'Perpetuity period'

· amend the 'Distribution date'

The proposed variations to the Varying Deed raise the question of whether a new trust has been created and their combined effect must be considered.

The proposed Deed of Variation makes no changes to the trust property - there are no additions or depletions of property.

The Deed of Variation does not introduce new beneficiaries to the trust or redefine the existing class of beneficiaries. The beneficiaries as defined in the Varying Deed remain unchanged.

A beneficiary's interest is generally derived from the trust deed. Under the Varying Deed the Trust is discretionary as to income and capital with no beneficiary having a fixed entitlement. The interest each beneficiary has in the income and capital of the trust is contingent on the exercise of the Trustee's discretion.

Under the Deed of Variation, the interest each beneficiary has in the income and capital remains contingent on the exercise of the Trustee's discretion and the beneficial interest of the beneficiaries in the income and capital does not change.

A clause in the Varying Deed confers upon the trustee a general power to amend the trust instrument provided certain conditions are satisfied. If all the conditions are satisfied, the Trustee may be considered to have the power to change the Vesting Date.

The wide powers provided to the Trustee constitute an express power. This is supported by the Full Federal Courts comments in FCT 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 obligation 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 provisions in the Varying Deed do not indicate that a particular trust period was a fundamental feature of the trust. The definition of Vesting Day in the Varying Deed allows the Trustee to appoint an earlier vesting date; the express power noted above allows the contemplation of a later date. There are no specific provisions preventing the Trustee from either amending the definition of Vesting Day or extending the term of the trust.

The introduction of clauses defining the terms 'Class of Income' and 'Income' do not propose a significant change to the Trustee's powers with respect to the distribution of the income and capital of the trust and do not affect the beneficiaries' entitlements to capital and income.

Under clauses of the varying Deed the trustee has broad powers to characterise amounts received as either income or capital. The introduction of a clause defining 'Income' merely clarifies this power and introduces a requirement to 'make a written record'.

Similarly, the introduction of a clause defining 'Class of Income' merely allows income to be separately identified for the purpose of tracing the source of a distribution to a beneficiary.

The introduction of the requirement in a new clause that the trustee create sub trusts to hold income or capital distributed to a beneficiary does not alter the rights of beneficiaries and does not alter the fundamental trust relationship.

Conclusion

The proposed amendments to the Varying Deed do not substantially alter the rights of the beneficiaries or the obligations of the trustee. Nor do they represent a significant change to the intentions of the settlor. The proposed amendments go to the management of the trust's undertaking rather than the essential nature of the trust relationship and are consistent with a continuing trust.

Accordingly, the proposed amendments to the Varying Deed will not cause the cessation of one trust and the creation of a new trust and will not trigger CGT event E1 under section 104-55 of the ITAA 1997.

Question 2

Summary

The proposed arrangement will not trigger CGT event A1 under section 104-10 of the ITAA 1997.

Detailed reasoning

CGT event A1 under section 104-10 of the ITAA 1997 happens 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. The cessation of one trust and the creation of a new trust may result in CGT event A1 in section 104-10 of the ITAA 1997 happening.

For the reasons outlined above it is considered that the proposed amendments to the Varying Deed would not cause the cessation of one trust and the creation of a new trust. Accordingly, there will not be a disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997 and the proposed amendments to the Varying Deed will not trigger CGT event A1 under section 104-10 of the ITAA 1997.

Question 3

Summary

It is considered that there will be no other CGT consequences for the Trust.

Detailed reasoning

When considering the application of the CGT provisions in the context of a proposed transaction, subsection 102-25(1) of the ITAA 1997 requires that any potentially relevant CGT events be identified. It also directs that if more than one CGT event is identified as happening to the same transaction, the CGT rules which apply for the CGT event that is the most specific to the situation must be used. The application of CGT events D1 and H2 is only be considered if no other CGT events apply.

A full list of CGT events is contained in section 104-5 of the ITAA 1997. Generally, CGT events will arise from a particular transaction or occurrence involving a CGT asset.

The resettlement of a trust may result in the original trust ceasing to exist or a new trust existing independently of the original trust. The effect of such a resettlement is that there has been a disposal of the trust assets. This may result in CGT event A1 (section 104-10 of the ITAA 1997), CGT event E1 (section 104-55 of the ITAA 1997) or CGT event E2 (section 104-60 of the ITAA 1997) happening. These are the potentially relevant events.

As outlined above, the implementation of the Deed of Variation will not trigger CGT events A1 or E1.

CGT event E2 happens if you transfer a CGT asset to an existing trust. As it has been established that the proposed amendments to the Varying Deed would not cause the cessation of one trust and the creation of a new trust, the proposed amendments to the Varying Deed will not trigger CGT event E2 under section 104-60 of the ITAA 1997.

CGT event D1 under section 104-35 of the ITAA 1997 applies where contractual or other rights are created. CGT event H2 under section 104-155 of the ITAA 1997 applies where there is a receipt of money or other consideration as a result of an act, transaction or event occurring in relation to a CGT asset.

It is considered that the CGT events D1 and H2 do not apply to your situation. As a result, there will be no CGT consequences for the Trust.

Question 4

Summary

It is considered that the amendments will not result in any other income tax consequences for the Trust.

Detailed reasoning

Changes to a trust that result in the creation of a new trust can trigger income tax consequences for the trustee and for beneficiaries. As it has been determined that the proposed amendments in the Deed of Variation go to the management of the trust's undertaking rather than the essential nature of the trust relationship and are consistent with a continuing trust, the proposed amendments will not result in any income tax consequences for the Trust.

Question 5

Summary

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) has no application.

Detailed reasoning

Part IVA of the ITAA 1936 contains general anti-avoidance provisions designed to prevent the avoidance of tax.

Part IVA of the ITAA 1936 will only apply where a scheme has been entered into or carried out to obtain a tax benefit and it can be concluded that the dominant purpose of entering the scheme was to obtain a tax benefit. In such situations, the Commissioner can apply the provisions to deny the tax benefit obtained.

Subsection 177A(1) of the ITAA 1936 defines a scheme to mean:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan or proposal, action, course of action or course of conduct

Subsection 177C(1) of the ITAA 1936 stipulates that a reference to the obtaining of a tax benefit in connection with a scheme shall be read as a reference to:

(a)  an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b)  a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out, or

(ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out; or

(bb) a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out.

The determination of whether there is a tax benefit involves a comparison between the actual tax position and that which would or might reasonably be expected to have been the position if the scheme had not been entered into. The determination of whether there has been a tax benefit is made in respect of each income year.

The conclusion that the sole or dominant purpose of entering a scheme was to obtain a tax benefit must be determined with regard to the criteria set down in paragraph 177D(b) of the ITAA 1936.

Application to your circumstances

As previously determined, the implementation of the Deed of Variation does not result in any income tax consequences. Absent the implementation of the Deed, the trustee would not do anything and the status of the trust would remain unchanged. Accordingly, it cannot reasonably be concluded that a tax benefit would be obtained in connection with the proposed arrangement.

Further, as it has been determined that the proposed amendments to the Varying Deed are consistent with a continuing trust and go to the management of the trust's undertaking, it is considered that there is no basis for concluding that the taxpayer entered into a scheme for the dominant purpose of obtaining a tax benefit.