Edited version of your private ruling

Authorisation Number: 1012497096209

Ruling

Subject: CGT implications relating to the change to the terms of a trust

Question 1

Will capital gains tax (CGT) event E1 or E2 happen if the proposed amendments to The Trust are executed?

Answer

No

Question 2

Will there be any other taxation consequences if the proposed amendments to The Trust are executed?

Answer

Decline to rule

This ruling applies for the following periods:

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

1. The Trust was established by deed of settlement in 19XX (19XX Deed). The Trust was established for the benefit of a parent and their children (The Children).

2. The parent died in 200X. The Children were appointed executors and trustees of their will and estate.

3. After The parent's death there was unhappiness about the division of assets between The Children. As a result of mediation between family members a deed of agreement (Deed of Agreement) was signed by The Children in 200Y, which established an agreed basis for distribution of the family assets.

4. At the time the Deed of Agreement was executed in 200Y, The Children were all sui Juris (of age).

5. The Deed of Agreement specified that child Z's (Child Z) share of the family assets were the assets of The Trust.

6. To allow Child Z to obtain control and benefit of The Trust in accordance with the Deed of Agreement it is proposed that the terms of The Trust be amended by:

§ removing Child Z's siblings from the specified class of beneficiaries of The Trust,

§ including Child Z's spouse and children in the specified class of beneficiaries of The Trust, and

§ replacing Child Z as the appointer of The Trust.

7. The variation clause of the 19XX Deed which provides is expressed in the following terms:

At any time prior to the vesting day the Trustee may from time to time in its absolute discretion notwithstanding anything to the contrary herein contained express or implied by deed or by oral resolution of its Board of Directors (sic) vary the trusts or any provisions whatsoever hereof in any manner whatsoever PROVIDED HOWEVER that no share of or benefit from or interest in or under the Trust Fund shall by virtue of such variation be acquired by or passed to the Settlor and moreover that any such alteration shall in so far as it affects the beneficial interest in the Trust Fund be only for the benefit of any one of the specified class living at the time of such alteration. The Powers created by this clause shall not be constructed as trusts or powers or as fiduciary obligations but may be exercised by the Trustee as they in their absolute discretion sees fit subject however and such power shall be exercisable only within the periods of any such manner permissible from time to time under the law in relation to perpetuities and accumulation of income.

8. The Specified Class is defined by the 19XX Deed to mean:

… the following persons:-

The parent and The Children

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-55

Income Tax Assessment Act 1997, section 104-60

Taxation Administration Act 1953, schedule 1 subsection 357-110

Reasons for decision

Issue 1

Question 1

Summary

CGT event E1 occurs when a trust is created over a CGT asset and CGT event E2 occurs when a CGT asset is transferred to an existing trust. If a valid variation to the terms of a trust is made in accordance with a power of amendment contained in the trust deed or in accordance with trust law this will not amount to a resettlement of the trust.

It is accepted that the proposed amendments to the terms of The Trust to add to the Specified Class of beneficiaries and remove others from the Specified Class is a valid variation under trust law, as such it does not constitute a resettlement of The Trust and it will not trigger CGT event E1 or E2.

The proposed change to the appointer of The Trust is a valid exercise of the power of amendment contained within the 19XX Deed it does not constitute a resettlement of The Trust so it will not trigger CGT event E1 or E2.

Detailed reasoning

CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happens when you create a trust over a CGT asset by declaration or settlement.

CGT event E2 in section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust.

Paragraph 24 of Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 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? states:

…. 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 [or CGT event E2] happening.

Paragraphs 26 and 27 of TD 2012/21 clarify that:

§ the validity of purported changes to a trust are to be determined in accordance with principles of trust law, and

§ in instances where a pre-existing trust does not terminate, the assets may commence to be held under a separate charter of obligations as a result of the variation such as to lead to the conclusion that those assets are now held on terms of a different trust.

Example 1 contained in TD 2012/21 (paragraphs 2-5) demonstrates that a valid change to the objects of a discretionary trust, in accordance with the power of amendment contained within the deed, does not result in resettlement of the Acorn Trust. Similarly a valid alteration to the objects of a discretionary trust pursuant to the principles of trust law would not result in resettlement.

Changes to the discretionary objects of The Trust

While clause 11 of the 19XX Deed gives the trustee a broad power to vary any provision of the deed, it is restricted by the condition that:

...any such alteration shall in so far as it affects the beneficial interest in the Trust Fund be only for the benefit of any one of the specified class living at the time of such alteration.

The term 'benefit' is not defined in the deed. However, the term is likely to be read in the context of the preceding part of the paragraph, which talks in terms of:

….no share of or benefit from or interest in or under the Trust Fund...be acquired by or passed to the Settlor…

In this context, it would appear that 'benefit' means 'interest in the income or capital of the trust'.

On this interpretation, it would appear that The Trustee has no power to add beneficiaries to the Specified Class, as that would benefit (in the relevant sense) persons who were not one of the Specified Class prior to variation. It may be that the addition of beneficiaries might benefit the Specified Class in a general sense (by way of adding beneficiaries to whom income can be streamed). However, this does not appear to be the intention of the Settlor. It appears from the terms of the deed that it is the intention of the settlor that no person, other than those in the Specified Class may benefit financially from the trust property.

Even if 'benefit' is construed more widely to include the addition of beneficiaries being for the benefit of one or more of the Specified Class, it is doubtful that it would be only for their benefit. It must surely also be for the benefit of the added members of the class. Thus, on balance it is considered that adding objects to the Specified Class is beyond the power of variation contained in clause 11 of the 19XX Deed.

Approval of the variation by the beneficiaries - the rule in Saunders v. Vautier

In Saunders v. Vautier (1841) 1 CR & Ph240; 41 ER 482 (Saunders v. Vautier) it was established that, where all the beneficiaries of a trust are adults with full legal capacity and are in agreement, they can act together to require the trustees to terminate the trust and transfer the trust property to them to distribute as they see fit.

In the case of a fixed discretionary trust with several beneficiaries, where the trustees have a discretion regarding how much (if anything) each beneficiary receives, but the whole of the trust fund must be divided somehow for those beneficiaries, the rule can apply, if all the beneficiaries are legally capable adults and consent to the revocation or variation (Re Smith (1928) Ch 915 at 918; Sir Moses Montefiore Jewish Home v. Howell and Co (No 7) Pty Ltd [1984] 2 NSWLR 406).

In New Zealand the High Court has allowed beneficiaries to use the rule to confer new powers upon trustees or deviate from, or vary, the terms of the trust where the trustees are in agreement. In Re Philips New Zealand Ltd [1997] 1 NZLR 93, Justice Baragwanath stated the position in the following terms:

The rule in Saunders v. Vautier … points the way: while all beneficiaries sui juris cannot direct trustees who bona fide oppose a particular course of action - Re Brockbank [1948] 1 Ch 206 - their power to put an end to the trust is the ultimate exercise of unanimous consent. Since they can together use their possession of the total bundle of proprietary rights to terminate the trust it is difficult to see why they cannot use the same rights to permit the trustees to modify it.

This is also the position in the United Kingdom (IRC v. Holmden [1968] AC 685 (HL) at 713, Goulden v. James [1997] 2 All ER 239 (CA) at 247 and Wyndham v. Egremont [2009] EWHC 2076).

This extension is consistent with the policy behind the rule in Saunders .v Vautier. Those with the right of enjoyment in the property should be able to dictate the manner of enjoyment.

In Australia, the rule has been stated in the following terms in Bowmil Nominees Pty Ltd [2004] NSWSC 161 (Bowmil Nominees), at paragraph 9:

First, variation by the court is not necessary where the beneficiaries who are all ascertained and sui juris agree to the variation. This is a consequence of what is known as the rule in Saunders v. Vautier (1841) 1 Cr & Ph 240; 41 ER 482 which has the effect that, where beneficiaries are all ascertained and sui juris, they may call on the trustee for the transfer to them of all the assets of the trust, which transfer will terminate the trust. It is a corollary of this rule that beneficiaries who are all sui juris may agree that the trust should be varied or reconstituted and continued as varied or reconstituted and that it may not be alleged that a trustee who acts on that basis is guilty of a breach of trust.

Thus, in line with the application of the Saunders v. Vautier rule in Bowmil Nominees it is accepted that where all the objects of a trust can be ascertained and are of age, they can agree to vary the terms of the trust in circumstances where the power to vary is not provided by the trust instrument.

It is accepted that a change to the class of beneficiaries will not, of itself, amount to a resettlement of a trust providing it is a valid exercise of a power of amendment contained in the deed or a court approved variation. Following on from this it is reasonable conclude that variation in line with Saunders v. Vautier as outlined above would also be accepted as a valid variation and not amount to a trust resettlement.

In the present case, as explained above, it is considered that the variation clause of the 19XX Deed does not give the Trustee of The Trust the power to amend the Specified Class. However given that all members of the Specified Class are of age and by virtue of the Deed of Agreement are willing to agree to the variations to the objects of the trust it is accepted that the proposed variations would amount to a lawful variation of the Trust. This does not amount to a resettlement of The Trust and would not trigger either CGT event E1 or E2.

Nomination of Child 4 as appointer of The Trust

It is accepted that the proposed amendment to nominate child Z as the appointer of The Trust is in accordance with the variation power of The Trustee contained in the 19XX Deed. As this change is a valid exercise of a power of amendment contained within the trust deed it does not give rise to CGT event E1 or E2.

Conclusion

As explained the proposed variations to The Trust do not amount to a resettlement as such they would not give rise to the happening of CGT event E1 or E2.