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Ruling

Subject: Trust resettlement

Question 1

Will an amendment to the deed of the trust to extend the vesting date of the trust give rise to a termination of the existing trust or the creation of a new trust whereby capital gains tax (CGT) event E1 occurs?

Answer:

No

Question 2

Will the amendment to the vesting date give rise to a change in the majority underlying interests of the trust's assets whereby the trust's pre-CGT assets become post-CGT assets?

Answer:

No

Question 3

Will the amendment to the vesting date mean a beneficiary has become entitled to a trust asset for CGT purposes (CGT event E5)?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The trust is a discretionary trust as to income and capital

The beneficiaries of the trust are the grandchildren of a couple, their spouses, children and grandchildren.

The current vesting date of the trust is the earlier of three possible days. That day is in 2015-16 financial year unless the trustee chooses an earlier day.

The provisions of the trust deed allow for amendment of the deed. The operative part of clause 20 state that the trustee, with consent of the advisor may:

· "revoke add to or vary all or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made thereto…so that the law against perpetuities is not thereby infringed and so that such new or other trust powers…

· may relate to the management or control of the trust fund…"

You state that as the trust deed provides the trustee with the power to choose a vesting date prior to the day mentioned, along with a power to amend the deed which covers the definition of the vesting day, it is clear that a particular trust period is not a fundamental feature of the trust.

The trust acquired a property prior to 20 September 1985. The leases over that property have been extended by the trustee to several years in the future.

Other trust assets have been acquired, which in recent years, have accounted for up to 30-40% of trust income.

You state that given the intention of the settler was to benefit the couple's grandchildren, who are still minors, and their children and grandchildren, the current vesting date is inconsistent with that intention.

You state that the trustee intends to amend the deed so that the reference to the vesting date is removed and replaced with a date several years in the future. This would be within the 80 year perpetuity period specified in the relevant law regarding perpetuities. You state that while this would not set the vesting date as this exact 80 year period, it would allow the trustee to choose any vesting day in the period up to that date.

You state that the trust was not set up for the purposes of solely deriving rent or holding a particular property which is evidenced by the range of assets currently held by the trust. You state that this is not a trust where a change of investments would signal a change to the essential features of the trust.

You state that no new group of beneficiaries has been introduced. The assets of the trust would continue to be held for the continuing beneficiaries of the trust which do not change.

You state that the amendment to the vesting date would not be such that the assets in question would commence to be held for one or a group of objects of the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 149-30

Income Tax Assessment Act 1997 Subsection 149-15(1)

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1936 Subdivision 269-E

Income Tax Assessment Act 1936 Subsection 269-95(1)

Reasons for decision

Summary

The proposed amendment to the trust deed to allow an extension of the vesting date of the trust will not result in the termination of the original trust and the creation of a new trust, as the amendment is within the powers of the trustee and it is apparent that there is continuity of the trust estate. Therefore, CGT event E1 will not occur.

As there has been no new trust created by the change in the vesting date of the trust and the Commissioner finds it reasonable to assume that there has been no change in the majority underlying interests in the trust's asset, the pre-CGT assets of the trust will remain pre-CGT assets of the trust.

As the trust is a discretionary trust and the amendment to the trust deed will not result in a beneficiary becoming absolutely entitled to an asset of the trust as against the trustee of the trust, CGT event E5 will not occur.

Detailed reasoning

CGT event E1 - creating a trust over a CGT asset

Section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. This may occur when an existing trust is changed in such a fundamental way that although the trust has not terminated for trust law purposes, for tax purposes, a new trust has come into being.

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' 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.

This reasoning was reinforced in Draft Taxation Ruling TD 2012/D4 where it provides that unless the deed amendment causes the trust to terminate for trust law purposes, or the effect of the amendment is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust, CGT event E1 will not happen.

Therefore, provided that the trustee is acting within their powers under the trust deed (that is, making a valid amendment) to change the vesting date, and the extension to the vesting date does not extend beyond the perpetuity period declared in the relevant state based trust law, a new trust will not arise.

Based on the information provided;

· the trust deed allows for amendment to the deed

· the extension to the vesting date will not go beyond the declared perpetuity period (for the relevant state) of 80 years.

· there are no other accompanying changes to the trust property, or membership of the trust, and

· the original trust period was not a fundamental feature of the trust

Accordingly, as it is apparent that there is continuity of the trust estate, the extension to the term of the trust is considered a mere variation and will not result in the termination of the trust. As the original trust will continue, a new trust will not be created and CGT event E1 will not occur.

Majority underlying interest

Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:

· the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and

· the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset.

The expression 'beneficial interests' as used in the definition of majority underlying interests is not defined.

Taxation Ruling IT 2340 reflects an approach of determining which natural persons hold the beneficial interests. Where assets are held by the trustee of a discretionary trust, the assets are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained.

In this regard, paragraph 6 of IT 2340 requires the taxpayer to show that the trustee has administered the trust for the benefit of members of a particular family at all times during the relevant years of income. Furthermore, the trustee must not have exercised discretionary powers to appoint beneficiaries or amend the trust deed that would result in a practical change of 50% or more of the underlying interests in the trust assets.

In your case, the proposed amendment to the trust deed (change of vesting date) will not:

· add a new group of beneficiaries to the trust, or

· result in a practical change of 50% of more of the underlying interests in the trust assets.

Therefore as the trust remains for the benefit of the same family group, the Commissioner can be satisfied, or find it reasonable to assume, that more than 50% of the beneficial interests in the income and/or capital of the trust, and therefore majority underlying interests, have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985.

Accordingly, the pre-CGT assets of the trust will not stop being pre-CGT assets under section 149-30 of the ITAA 1997.

CGT event E5 - Beneficiary becoming entitled to a trust asset

Section 104-75 of the ITAA 1997 provides that CGT event E5 happens if a beneficiary of a trust becomes absolutely entitled to an asset of the trust as against the trustee of the trust.

For a person to be absolutely entitled to an asset, the interest in the asset must be complete and indefeasible and not be subject to claims by other parties. In the case of discretionary trusts, it will not usually be possible for any one beneficiary to call for the asset as their entitlement will not be to an entire asset.

Draft Taxation Ruling TR 2004/D25, at paragraph 71, provides that:

Because an object of a discretionary trust does not have an interest in the trust assets, they cannot be considered absolutely entitled to any of the trust assets prior to the exercise of the trustee's discretion in their favour.

Accordingly, the requirements for absolute entitlement within the context of the CGT provisions cannot be satisfied and therefore CGT event E5 will not occur.

Control of a non-fixed trust

Subdivision 269-E of the Income Tax Assessment Act 1936 (ITAA 1936) explains the concept of "control" of a non-fixed trust. The control test is one of the tests which must be passed by a non-fixed trust (which is not an excepted trust) before the trust can access tax losses and debt deductions.

Based on the information provided, the only change to the trust is to extend the vesting date. As the change to the vesting date of the trust will not result in the termination of the original trust and creation of a new trust and, there is no other indication that a change in the control of the trust has occurred, we consider that a new group will not begin to control the trust, as defined under subsection 269-95(1) of the ITAA 1936, merely because of a change to the vesting date of the trust.