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Ruling
Subject: CGT event E1
Question 1
Will CGT event E1 (section 104-55 of the Income Tax Assessment Act 1997) happen if the Trust Deed is amended in the manner specified in the scheme description?
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 enactment of the proposed amendments to the trust deed.
Relevant facts and circumstances
The trust was executed in the late 1990s.
The trust deed specifies that the beneficiaries are those specified in the schedule to the trust deed, plus the grandparents parents uncles aunts brothers sisters spouses widows widowers children and grandchildren of the Specified Beneficiary or Specified Beneficiaries and the spouses widows widowers children and grandchildren of such brothers sisters spouses children and grandchildren and the parents and grandparents of any spouses uncles and aunts abovementioned, any entities and any relative by blood or marriage of those beneficiaries specified in the schedule.
The trustee has a broad power to amend the trust deed. The trustee proposes to amend the schedule to the trust deed to remove a number of beneficiaries.
Relevant legislative provisions
Income Tax Assessment Act 1997, section 104-55.
Reasons for decision
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.
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. Those who were originally intended to benefit from the trust will continue to do so.
Therefore, CGT event E1 will not happen when the trustee makes the proposed amendments to the trust deed.