Edited version of your private ruling

Authorisation Number: 1012607964363

Ruling

Subject: Trust - resettlement

Question

Will the proposed amendments to the deed of the Trust give rise to a termination of the existing trust or the creation of a new trust and trigger the happening of a capital gains tax (CGT) event?

Answer

No

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• Application for a private binding ruling

• Deed of Trust

• Draft proposed Deed of Trust

The trust is a non-fixed unit trust established by deed for investment purposes.

Changes to the trust property and unit holders are clearly contemplated by the Deed.

Under the Deed:

• all units must be allotted at a price determined on the basis of net asset value under Australian accounting principles at the time of the allotment;

• the trustee may redeem any unit at the request of a unit holder at a price determined on the basis of net asset value under Australian accounting principles at the time of the redemption;

• The trust deed may be amended by a further deed by the Trustee at any time in any way with the unanimous approval of unit holders;

• unit holders are entitled to pro rata share of both income and capital whether during the trust's lifetime or on winding up;

• the trustee holds the trust fund for the unit holders as tenants in common in proportion to the number of units held; and

• by unanimous resolution, the unit holders can require the trustee to transfer the assets to them as tenants in common in proportion to their unit holdings.

Under the proposed amendments there is no change whatsoever to the property of the trust nor its unit holding. The amendments will facilitate the subsequent investment by additional unit holders, but this will be for market value.

After the changes, the same trustee will hold the same property for the same unit holders and any amendments are within the very broad power of amendment.

The trust would at all times remain a trust for investment purposes for the benefit of unit holders from time to time.

The proposed amendments are well within the scope of the original Deed and will not constitute a fraud on the Trustee's power.

Relevant legislative provisions

Income Tax Assessment Act 1936 Pt III Division 6

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Paragraph 97(1)(a)

Income Tax Assessment Act 1997 104-10

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-70

Reasons for decision

A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various CGT events.

Tax Determination TD 2012/21 sets out the Commissioner's view in respect to trust resettlements and whether or not a resettlement has occurred for tax purposes following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5 (Clark).

Clark highlighted circumstances in which it may be concluded, for income tax purposes, that the nature of a trust has fundamentally changed such that the trust that originally incurred losses is not the same trust as that which has derived gains against which losses are sought to be recouped.

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 various CGT events.

The Commissioner also considers that the decision in Clark does not change the basic proposition that, based on the authority in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455, the relevant test to be applied looks to whether changes to one or more of the trust's constituent documents, the trust property, and the identity of those with a beneficial interest in the trust property are such as to terminate the existence of the trust.

TD 2012/21 asserts that a valid amendment to a trust will not result in the termination of a trust as long as:

• the amendment is made pursuant to a valid exercise of power contained within the trust's constituent document;

• the amendment does not cause the existing trust to terminate and a new trust to arise for trust law purposes; and

• the effect of the amendment does not 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.

In your case, based on the information provided, the most relevant CGT event relating to your circumstances would be CGT event E1, as that event considers whether a trust has been created over a CGT asset or assets by settlement or declaration. Therefore, there is no need to consider whether CGT event E2, A1 or any other CGT event would apply.

Accordingly, as the trustee will be acting with their powers, 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 therefore will not result in the happening of CGT event E1.