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Ruling

Subject: CGT event E1

Question

Will CGT event E1 occur if the trust deed of the trust is amended in the manner specified?

Answer

No

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

Relevant facts and circumstances

The trust was executed in the 1970s.

The trustee proposes to amend the deed to remove certain powers.

The trustee proposes to redefine certain definitions, as well as insert new definitions to be aligned with modern terminology.

The trustee proposes to redefine their powers.

The necessary notice of intent to modify the trust deed has been given. The necessary consent to remove certain powers has been obtained.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-55.

Reasons for decision

Changes to an existing trust may have important taxation implications. In particular, capital gains tax (CGT) event E1, contained within section 104-55 of the Income Tax Assessment Act 1997 occurs when a trust is created over a CGT asset. This will occur if the changes to an existing trust result in the resettlement of the trust.

In August 2001, the Commissioner issued Creation of a new trust Statement of Principles (Statement of Principles) to clarify his views on when changes to a trust are such that for income tax purposes, one trust estate comes to an end to be replaced by another. These situations are termed resettlements.

The Statement of Principles sets out the Commissioner's view as to when a new trust estate arises from a trust resettlement. A change to the essential nature and character of the original trust relationship creates a new trust for the purposes of tax law.

The Statement of Principles outlines a number of different changes that may result in the resettlement of a trust; however, whether or not a new trust is created will depend on the nature and extent of any changes as well as the factual circumstances surrounding the trust. These changes include:

§ 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, 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. In the latter case, the original trust will come to an end and a new trust will be created.

The creation of a new trust will depend 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.

Part 5.5 of the Statement considers changes to the terms of a trust. 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 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 examples provided in the Statement on this point demonstrate that it is the interests of the beneficiaries, not necessarily their rights, which are integral to determining whether or not there is a fundamental change to the trust relationship.

The Statement of Principles further states:

Changes which are merely procedural or administrative generally will not in themselves amount to the creation of a new trust. These 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.

The Statement 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.

Example 5.1.2 of the Statement of Principles provides that it is ordinarily accepted there has been a change in the membership of a continuing class (as opposed to a redefinition of a membership class) when:

§ an already existing power to nominate new [or exclude] beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which it could be reasonably inferred that the trust was intended to benefit; and

§ it can be shown from the deed and surrounding circumstances that the actual objective purpose or theme of the trust was to benefit that wider [or narrowed] group.

In determining the existence of these two factors, and in deciding whether or not there has been a resettlement generally, we must also look to the Settlor's original intentions in creating the trust. The intentions of the Settlor will help show the intended beneficiaries of the trust (and whether or not those who may be excluded under the proposed changes are included amongst the intended beneficiaries), and the purpose and theme of the trust.

Application to your circumstances

In this case the Settlor's intention is for the trust to benefit the beneficiaries.

The proposed amendments will not change the beneficial interest in the trust.

The beneficiaries of the trust were, and continue to be a family. These proposed changes will only result in a change to the membership of a continuing class, not the redefinition of the membership class.

The insertion or variation of any definitions in a trust deed can alter the rights of beneficiaries. Although inserting or varying definitions may materially change the rights of beneficiaries, it may not in itself alter the essential nature and character of the trust relationship so as to result in a new trust estate.

We consider that the purpose and effect of the new definitions is to clarify rather than significantly redefine entitlements.

The amendments to remove powers are made in accordance with the power the trustee has to amend the trust deed.

We consider your proposed amendment of the trustee's powers is the clarification of already existing powers rather than the redefinition of powers or modification of entitlements.

The proposed amendments amount merely to the variation of a continuing trust, rather than the creation of a new trust.

This indicates that there has not been a change in the essential nature and purpose of the trust and so the proposed changes to the trust deed will not cause a new trust to come into existence. Subsequently, CGT event E1 will not be triggered by the amendments.