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Ruling

Subject: Proposed variations to the trust deed

Question

Will the proposed variation to extend the trust's vesting day result in a trust resettlement and a capital gains tax (CGT) event E1 under 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 the terms of the trust and your conditions as the trustee.

The trust deed identifies the trust's vesting date. Unless the beneficiaries otherwise agree in writing, the trust's vesting date is a specific date in the future.

The trust deed requires you to hold the trust property for the benefit of the specified beneficiaries, and on the terms of the trust deed.

The trust deed explains how each beneficiary determines their beneficial interest in the trust's property.

The trust deed identifies the duration of the trust. The trust deed requires you to terminate the trust on the vesting day. However, you are entitled to select an earlier vesting day.

The trust deed explains a number of rules and conditions which must be satisfied before the vesting date can be extended.

A clause in the trust deed allows you to amend any clause in the trust deed. However, you must obtain the written consent of all beneficiaries before you can amend the trust deed. In addition, no amendments may divert or alter beneficiaries' entitlement to trust income or trust property.

There are no other amendments to the current trust deed.

You intend to amend the trust deed. You have prepared and submitted a draft copy of the amending deed.

The amending deed will extend the current vesting day to a specific date in the future.

You will obtain the beneficiaries' consent to amend the trust deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 104-55, and

Income Tax Assessment Act 1997 - Section 104-60.

Reasons for decision

Summary

Will the proposed variation to extend the trust's vesting day result in a trust resettlement and CGT event E1 under section 104-55 of the ITAA 1997?

Your amendments to the relevant vesting day clauses will be exercised under an existing amendment clause in the trust deed. In addition, your amendments will not result in a change to the trust's 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 no CGT event will happen when you make the proposed amendments to the trust deed. It follows that there will be no CGT consequences in relation to the trust's 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.

Similarly, CGT event E2 in section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust. You make a capital gain if the capital proceeds from the transfer are more than the asset's cost base.

A CGT asset includes any kind of property under subsection 108-5(1) of the ITAA 1997.

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 amend the trust deed. The changes will extend the vesting day date to a specific date in the future. In addition, you will obtain the beneficiaries' consent to amend the trust's vesting day.

Your amendments to the relevant vesting day clauses will be exercised under an existing amendment clause in the trust deed. In addition, your amendments will not result in a change to the trust's property.

The proposed changes will not affect the current beneficiary membership or the beneficiaries' interests in the trust's 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 resettlement of a trust over the trust's property. The amendments will ensure there is continuity of the trust estate.

This means CGT event E1 in section 104-55 of the ITAA 1997 and CGT event E2 in section 104-60 will not happen when you make the proposed amendments to the trust deed. It follows that there will be no CGT consequences in relation to the trust's property.