Edited version of your private ruling

Authorisation Number: 1012456689295

Ruling

Subject: Trust deed variation and appointment of new trustee

Question 1

Will a change to the trust deed of the Unit trust cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

Answer

No

Question 2

Will CGT event A1 (section104-10 of the ITAA 1997), CGT event E1 (section 104-55), CGT event E2 (section 104-60) or CGT event H2 (section 104-155) happen if, in the circumstances outlined in the scheme, a new trustee is appointed to CGT assets forming part of the property of the Unit Trust and those assets are transferred to the new trustee?

Answer

No

This ruling applies for the following periods:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Introduction

1. The trust (Unit Trust) is a unit trust.

2. Trustee Pty Ltd (Trustee) has been the trustee of Unit Trust at all relevant times.

3. Unit Trust was established in the 2010 income year.

Summary of proposed arrangement

4. The Unit Trust trust deed will be amended to facilitate changes to the trust deed. The name of the trust will not change, nor will the entitlements of unit holders. The trust will continue to operate as a single trust with consolidated tax reporting.

Varying the trust

5. The Unit Trust trust deed will be amended.

6. The Unit Trust trust deed permits the trustee to vary the terms and conditions set out in the deed. The reference to 'vary' includes 'revoke add to or amend'.

Appointment of New Trustee

7. Immediately following this amendment to the Unit Trust trust deed a Deed of Appointment of New Trustee will be executed.

8. Under the Deed of Appointment of New Trustee, the directors and shareholders of New Trustee will be the same as for Trustee.

9. New Trustee will agree to be bound by and observe and administer the trust powers, duties, discretions and obligations conferred by the Unit Trust trust deed (as if it were named as the trustee in the deed and was a party to it).

10. The Unit Trust trust deed provides that the trustees shall be entitled to be indemnified out of the trust fund for liabilities incurred by them in execution of the trust (But they shall not be entitled to be indemnified by any unit holder, except in respect of any duty or tax imposed on them by statute which they are entitled to recover from a unit holder by law).

11. However, New Trustee will agree to indemnify and exonerate the existing trustee from all debts, liabilities and other obligations of the trust incurred after execution of the Deed of Appointment of New Trustee.

12. Trustee will remain liable for all obligations incurred by it prior to execution of the Deed of Appointment of New Trustee.

13. The Deed of Appointment of New Trustee will state that nothing in it will affect or change any interest of the unit holders in the assets.

Operation of Unit Trust following appointment of New Trustee

14. After the appointment of New Trustee there will be consolidated tax reporting.

15. Under the scheme the rights of unitholders to income and capital in respect of the Trust Fund will not be limited and no new classes of units will be created with preferred, deferred or other special rights.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 102-20

subsection 102-25(1)

section 104-10

section 104-55

paragraph 104-55(1)(a)

section 104-60

section104-70

section 104-155

Taxation Administration Act 1953

section 358-5

Reasons for decision

Question 1

Summary

16. The execution of the draft Deed of Variation of Trust, in accordance with the carrying out of the scheme the subject of this private ruling application, will not cause CGT event E1 to happen.

Detailed reasoning

17. CGT event E1 happens when a trust is created over an asset by declaration or settlement (section 104-55 of the ITAA 1997).

18. The proposed Deed of Variation of Trust will amend the Unit Trust deed pursuant to an existing power of amendment contained in the Unit Trust trust deed. The proposed amendments will comply with and are within the power set out in the relevant clause in the trust deed.

19. Following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5 (and the High Court's refusal to grant the Commissioner leave to appeal that decision) the Commissioner issued Taxation Determination TD 2012/21, which says in part:

24. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

…………….

27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

[footnotes removed and emphasis added]

20. It is therefore considered that the execution of the draft Deed of Variation of Trust, in accordance with an existing power in the Unit Trust deed, will not result in the termination of the Unit Trust. Further, as the proposed amendments do no more than clarify the circumstances in which trustees may be appointed they will not, of themselves, cause any assets held as part of the trust property of the Unit Trust immediately before the execution of the deed to commence to be held under a separate charter of obligations.

21. Therefore, a change to the Unit Trust trust deed in the form proposed will not cause CGT event E1 in section 104-55 of the ITAA 1997 to happen.

Question 2

Summary

22. The appointment of the new trustee and the transfer of assets to it will not cause CGT event A1, E1, E2 or H2 to happen.

Detailed reasoning

23. A capital gain or loss is made only if a CGT event happens (section 102-20 of the ITAA 1997).

24. CGT event A1 happens if you dispose of a CGT asset to someone else (section 104-10 of the ITAA 1997). CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55 of the ITAA 1997). CGT event E2 happens if you transfer a CGT asset to an existing trust (section 104-60 of the ITAA 1997). However, none of these events happen merely because of a change of trustee.

25. CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (section 104-155 of the ITAA 1997).

26. If more than one CGT event can happen, then you use the one that is the most specific to your situation (subsection 102-25(1) of the ITAA 1997).

27. In determining whether CGT event A1, E1 or E2 happen, the issue is essentially whether the CGT assets in respect of which the new trustee is appointed will be settled on a new trust or transferred to a different trust.

28. Taxation Determination TD 2012/21 provides the ATO view on whether CGT event E1 or E2 in section 104-55 or 104-60 of the ITAA 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court. However, it is considered that TD 2012/21 also provides some guidance on the circumstances in which the exercise of a power by a trustee in accordance with the terms of the trust causes an asset of the trust to be held on a separate charter of rights and obligations - such as to lead to the conclusion that the assets are now held on the terms of a different trust.

29. TD 2012/21 provides an example of when changes in respect of trust assets result in those assets being held on a distinct and different trust:

28. In Commissioner of State Revenue v. Lam & Kym Pty Ltd [2004] VSCA 204; 2004 ATC 5058; (2004) 58 ATR 60 the Supreme Court of Victoria considered a scenario in which by deed of settlement a trustee stood possessed of a fund on discretionary trust for two classes of objects (the Primary Beneficiaries and the Discretionary Beneficiaries). By deed poll the trust was amended giving the trustee the power to transfer the whole or any portion of the fund to or for the advancement of any of the Discretionary Beneficiaries. The trustee subsequently executed an instrument in which it declared that it 'hereafter held separately in trust' particular real estate for certain beneficiaries. Nettle JA (with whom Vincent JA and Hansen AJA agreed) held that the exercise of the power of appointment had the result of the real estate being held on separate trust.

29. Analogously, depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

30. In the scheme, following execution of the Deed of Appointment of New Trustee, the Unit Trust assets will continue to be held on the terms of (and subject to) the Unit Trust deed. There will be no change in the rights of unit holders in respect of those assets. In that sense, it cannot be said that the Unit Trust assets will be held on a charter of rights and obligations separate from those on which the Unit Trust assets were held before the scheme.

31. Further, it has been accepted that, at least in some circumstances, a new or additional trustee may be appointed in respect of a distinct part of the trust property. In Re the Estate of Shaun James Robbins (Dec); Ex Parte Robbins ([2008] WASC 243) Heenan J said:

It is accepted that there may be the appointment of a new or additional trustee of a will in respect of a distinct part of the trust property - In re Paine's Trusts (1885) 28 Ch D 725; In re Hetherington's Trusts (1886) 34 Ch D 211. It is also accepted that such a trustee may be appointed under provisions equivalent to s 7 of the Trustees Act - In re Moss's Trusts (1888) 37 Ch D 513.

32. The difficulty in determining whether assets held by separate trustees are held on separate and distinct trusts is discussed by Lord Wilberforce in Roome v Edwards (Inspector of Taxes) [1982] A.C. 279 at pp 292-293:

There are a number of obvious indicia which may help to show whether a settlement, or a settlement separate from another settlement, exists. One might expect to find separate and defined property; separate trusts; and separate trustees. One might also expect to find a separate disposition bringing the separate settlement into existence. These indicia may be helpful, but they are not decisive…….there are so many possible combinations of fact that even where these indicia or some of them are present, the answer may be doubtful, and may depend upon an appreciation of them as a whole.

33. In this scheme the terms of the Unit Trust trust deed will continue to apply to the trust assets to which the new trustee is appointed.

34. The existing trustee will continue to have a right to be indemnified out of the Unit Trust assets in respect of liabilities incurred before implementation of the scheme. In that sense, there is no change in any indemnity interest the existing trustee might have in the Unit Trust assets immediately before implementation of the scheme.

35. It is also noted that the name of the trust will not change and there will continue to be a single trust fund comprising the assets of the Unit Trust. This will be reflected in the reporting of a consolidated tax position by lodgement of a single income tax return. Further, all other provisions of the ITAA 1936 and the ITAA 1997 will apply on the basis that the Unit Trust assets are the assets of a single trust fund and the unit holders are both beneficiaries of that same (single) trust.

36. On balance it is considered that the appointment of a new trustee will not result in the Unit Trust assets being settled on the terms of a trust different from the existing Unit Trust or made subject to a separate charter of rights and obligations. This conclusion necessarily precludes CGT event A1, E1 or E2 happening.

37. For CGT event H2 to happen, paragraph 104-155(1)(a) of the ITAA 1997 requires that an act, transaction or event occurs in relation to a CGT asset that you own. In the current circumstances it is considered that no such relevant act, transaction or event occurs for the purposes of CGT event H2. The Unit Trust assets will not be made subject to a separate charter of rights and obligations. Therefore, as paragraph 104-155(1)(a) does not apply in respect of the scheme CGT event H2 will not happen.