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Edited version of your private ruling
Authorisation Number: 1012498592459
Ruling
Subject: Court agreed variation to trust Appointors
Question 1
Will a court approved variation to amend the appointors of the Trust resettle The Trust?
Answer
No
This ruling applies for the following period:
1 July 2013 to 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
1. The Trust is a testamentary trust.
2. The terms of the will (The Deed) provides to the effect that the Appointors of The Trust in succession are each of the children of the deceased and then the eldest natural nephew or niece of the deceased eldest child.
3. The Deed gives the Appointor power to appoint and replace the trustee.
4. The current Appointor, the eldest child of the deceased, wishes to make the next two children of the deceased joint alternative Appointors rather than successive alternative Appointors.
5. The Deed does not contain a provision allowing the terms of the Trust to be amended.
6. As the power to amend The Trust does not exist in The Deed the proposed amendment will need to be authorised by a relevant court.
Relevant legislative provisions
Income Tax Assessment Act 1936, Division 6
Income Tax Assessment Act 1997, section 104-55
Reasons for decision
Summary
The proposed variation to alter the Appointors of The Trust do not amount to a resettlement of The Trust because they would be carried out in accordance with the principles of trust law and it could not be concluded that The Trust property would be subject to a separate charter of rights or obligations.
Detailed reasoning
In certain circumstances the amendment of a trust deed could cause a trust estate to come to an end and a new trust to commence, this is often referred to as a resettlement of the trust. If a trust estate is resettled it can impact on the identity of the trust estate under Division 6 of the Income Tax Assessment Act 1936 (relating to the taxation of trust income).
An example of the impact of the resettlement of a trust estate is that it would trigger capital gains (CGT) event E1 contained in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997). CGT event E1 happens when you create a trust over a CGT asset by declaration or settlement. Essentially a resettled trust amounts to the creation of a trust over a CGT asset by settlement because an existing trust comes to an end and a new trust to commences, resulting in CGT event E1 happening.
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 happening.
Paragraphs 26 and 27 of TD 2012/21 go on to 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.
It is proposed by you that because the terms of The Deed do not contain the power to vary The Trust you will seek approval from the relevant court to vary The Appointors of The Trust. If you were to receive a court approved variation to change the Appointors of The Trust, this variation would be in accordance with the principles of trust law. Also, changing the Appointors will have no impact on The Trust property or the beneficial interests of The Trust, leading to the conclusion that The Trust assets are now held on terms of a different trust creating a separate charter of rights or obligations. As such, a court approved variation to the Appointors of The Trust would not resettle the trust.
Conclusion
As explained the proposed variations to The Trust, if approved by a relevant court, would not amount to a resettlement of The Trust, as such the applicable trust estate under Division 6 of the ITAA 1936 would remain the same.