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Ruling
Subject: Capital gains tax and trust resettlement
Question:
Would the execution of the deed of amendment result in a resettlement of the trust for capital gains tax purposes?
Answer:
No.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
The Trust was created by deed several years ago.
Two units were issued at that time; one each to A and B (unit holders). The unit holdings have not changed since the issue date.
The corporate trustee is Company C (the Trustee). A and B are the directors of the Trustee.
A and B are also the sole share holders in the Trustee company. The share holding has not changed since incorporation.
It was the understanding of the unit holders that they were entitled to the income and capital of the Trust in proportion to their unit holdings; that it was a fixed trust.
In 2011, a state authority advised that the terms of the deed did not meet the definition of a fixed trust for their purposes.
The proposed deed amendment is to satisfy the state authority requirements.
The Trust deed allows the Trustee to make any amendment or addition to the trust deed with the consent of at least 75% of the unit holders providing the interests of registered holders is not prejudiced as a result.
The necessary written consent has been obtained from the unit holders for the proposed amendments.
The proposed amendments to the trust deed relate to the distributions of income - reserves. These amendments include the removal of any reference to a discretion of the trustee. There is no change to the entitlements of the unit holders, which remains in the same proportions as they hold units in the trust.
Further amendments proposed include changes to the definition of income.
Relevant legislative provisions
Income Tax Assessment Act 1997 - section 104-55
Reasons for decision
On 20 April 2012, the ATO publication, Creation of a new trust - Statement of principles August 2001, was withdrawn following the recent decision in Federal Commissioner of Taxation v. Clark and Anor (Clark) [2011] FCAFC 5 (Clark's case) and the High Court's refusal to grant the Commissioner special leave to appeal that decision.
The decision in Clark's case is relevant to the question of the circumstances in which, as a result of changes being made to an existing trust, a new trust comes into existence, triggering CGT event E1. 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 itself result in the happening of CGT event E1.
As a general proposition, it would seem that the approach adopted by the Full Federal Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42, as explained by Edmonds and Gordon JJ in Clarke's case, is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power (paragraph 17, Draft Taxation Determination TD 2012/D4).
In your case, the proposed variations to the existing Trust deed would be a valid amendment to the trust, not resulting in a termination of the trust, and will not result in the happening of CGT event E1.