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Ruling
Subject: CGT event E1
Question
Will CGT event E1 (section 104-55 of the Income Tax Assessment Act 1997) happen 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
The scheme commences on:
The scheme will commence upon implementation of the proposed amendments to the trust deed.
Relevant facts and circumstances
The trust was settled in the early 2000s.
The trustee wishes to amend the trust deed to remove certain elements.
On settlement of the trust, an individual acquired units in the trust. This individual has been the sole recipient of distributions from the trust.
Relevant legislative provisions
Income Tax Assessment Act 1997, section 104-55.
Reasons for decision
Changes to an existing trust may have taxation implications. In particular, CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 happens if you create a trust over a CGT asset by declaration or settlement.
The Creation of a new trust - Statement of Principles August 2001 (Statement of Principles) outlines when the Commissioner considers that changes to a trust are such that, for income tax purposes, one trust estate comes to an end to be replaced by another trust estate. It states that a change in the essential nature and character of the original trust relationship creates a new trust and sets out changes that may raise the question of whether a new trust has been created.
However, in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5 the Full Federal Court concluded that, despite significant changes to the trust property, membership and operation, there was no loss of continuity of the trust estate.
In reaching this conclusion, the Full Federal Court indicated that so long as any amendment to the trust obligations is made in accordance with a power conferred by the trust instrument creating the obligations, and continuity of the trust property the subject of the trust obligations is established, there will be a continuing trust estate.
The Decision Impact Statement (DIS) published by the ATO in respect of that decision says the relevant focus is on whether continuity of the trust estate has been maintained. The DIS says (as decided by the High Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd (2001) 75 ALJR 1172) that the test to be applied in determining whether there has been continuity of a trust estate is whether changes to one or more of the trust's constituent documents, the trust property, and the identity of those with a beneficial interest in the trust property are such as to terminate the existence of the trust.
The Clark case concerned whether there was continuity of a trust estate such that net capital losses made before the changes to the trust relationship could be applied following those changes. However, the DIS says:
…the ATO accepts the principles set out in this case may have broader application. In particular, the case is relevant to the question of the circumstances in which CGT Event E1 may happen by reason of a new trust coming into existence consequent on changes being made to an existing trust. Therefore, the ATO will review the 'Creation of a new trust - Statement of Principles August 2001'.
Application to your circumstances
It is considered that the proposed amendments will not result in the ending of the trust and the creation of a new trust. That is, there will be continuity of the trust estate.
The amendments will be made pursuant to a power conferred by the trust instrument. There will be no changes to the trust property.
As regards those with a beneficial interest in the trust property, an individual is currently the sole unit holder of the trust and it is intended that they alone will receive the benefits of the trust's assets.
Therefore, CGT event E1 will not happen when the trustee makes the proposed amendments to the trust deed.