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Ruling

Subject: Proposed variations to the trust deed

Question:

Will the variations to the trust deed in the amending deed result in a capital gain under capital gains tax (CGT) event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

This ruling applies for the following periods:

Financial year ended 30 June 2012, and

Financial year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are the trustee of a trust. The trust deed defines your terms as the trustee and the terms of the trust.

The trust deed provides you with a number of discretionary powers and terms when determining trust income and trust property distributions to the beneficiaries.

The trust deed provides for a number of specified beneficiaries. You are entitled under the trust deed to include or exclude other specific additional entities as beneficiaries. To the current date, no other entities have been appointed as beneficiaries.

The trust's vesting day occurs on the day specified in the trust deed. However, you may determine an earlier vesting day under the trust deed.

The trust deed allows you to amend the clauses in the trust deed. However, you are prevented from amending certain clauses, such as the vesting day.

The trust deed's administrative clauses have been previously amended. These changes did not affect the beneficiaries' discretionary interests in the trust property or the current vesting day.

You intend to amend a number of clauses in the trust deed. For this reason, you have prepared and submitted a draft copy of an amending deed.

The changes to the trust deed will allow you to:

· make additional discretionary trust property distributions to beneficiaries,

· make a declaration from a specified date that you will hold some or all of the trust property on the terms of another trust,

· make any amendments to extend the vesting day up to a specified limit, and

· extend the current vesting day to a specified date.

You will apply to the court for approval to extend the vesting date. In addition, you will obtain the beneficiaries' consent to the proposed changes.

Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 104-55

Income Tax Assessment Act 1997 - Section 104-60

Reasons for decision

Summary

Will the variations to the trust deed in the amending deed result in a capital gain under CGT event E1 in section 104-55 of the ITAA 1997?

You intend to change a number of clauses in the trust deed. The amendments will be made pursuant to a power in the trust deed, and will not result in a change to the trust property.

Your proposed amendments will not result in the termination of the trust for trust law purposes or the creation of a new trust over the trust property. The amendments will result in the continuity of the trust estate.

This means CGT event E1 in section 104-55 of the ITAA 1997 will not happen when you make the proposed amendments to the trust deed. It follows that there will be no capital gains in relation to the trust property.

Detailed reasoning

CGT event E1 in section 104-55 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement. You make a capital gain if the capital proceeds from the creation are more than the asset's cost base.

CGT event E2 in section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust.

In Federal Commissioner of Taxation v. Clark (2011) 2011 ATC 20-236; [2011] FCAFC 5; (2011) 190 FCR 206; [2011] ALMD 2737; (2011) 79 ATR 550 (the Clark case), the Full Federal Court concluded that, despite significant changes to a trust estate's 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 are made in accordance with a power conferred by the trust instrument creating the obligations, and continuity of the trust property and the subject of the trust obligations are established, there will be a continuing trust estate.

Our Decision Impact Statement in respect of the Clark Case (the DIS) 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 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. In that context the ATO accepts that the reasoning of the court has the effect that a valid amendment to a trust, not resulting in a termination of the trust will not of itself result in the happening of CGT event E1. On this basis the 'Creation of a new trust - Statement of Principles August 2001' was withdrawn on 20 April 2012.

Draft Taxation Determination TD 2012/D4 represents our preliminary view about the way in which CGT events E1 and E2 in sections 104-55 and 104-60 of the ITAA 1997 applies, or would apply, to entities in relation to a defined scheme or class of schemes (TD 2012/D4).

TD 2012/D4 identifies at paragraph one that neither CGT event E1 or E2 will happen where, pursuant to a valid exercise of a power contained within a trust's constituent document, the terms of the trust are changed. However, CGT event E1 or E2 will happen if the terms of the trust are changed, such that the changes:

· cause the trust to terminate for trust law purposes, or

· lead to a trust asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset has been settled on the terms of a different trust.

Application to your circumstances

You intend to change a number of clauses in the trust deed. The amendments will be made pursuant to an amended power in the trust deed, and will not result in a change to the trust property.

The trust deed and amended trust deeds provide the beneficiaries with discretionary interests in distributions of trust income and distributions of trust property. The proposed changes will not affect the current beneficiary membership or the current beneficiaries' discretionary interests in the trust property.

According to the DIS and paragraph one of TD 2012/D4, your proposed amendments will not result in the termination of the trust for trust law purposes or the creation of a new trust over the trust property. The amendments will result in the continuity of the trust estate.

This means CGT event E1 in section 104-55 of the ITAA 1997 will not happen when you make the proposed amendments to the trust deed. It follows that there will be no capital gains in relation to the trust property.