Edited version of private advice

Authorisation Number: 1012625922081

Ruling

Subject: CGT event E1

Question 1

Will the execution of the Amending Deed cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Trust was established by deed (Trust Deed) in 2011.

Pursuant to a power contained in the Trust Deed, the Trustee wishes to vary the provisions of the Trust Deed in the manner contained in the proposed Amending Deed.

The Amending Deed proposes to insert 'distributor provisions' into the Trust Deed to facilitate estate planning for certain beneficiaries of the Trust.

The proposed amendment will give the Appointor of the Trust the power to:

n direct the Trustee to divide the income and capital of the Trust into such shares as the Appointor thinks fit;

n appoint one or more Distributors in respect of each of those shares; and

n remove a Distributor from office.

While there is a Distributor in office, the Trustee must pay, apply or set aside the income of the Trust and must:

n divide the income of the Trust into the shares in accordance with the latest direction of the Appointor; and

n pay or apply each of those shares to the beneficiaries of the Trust in such proportions as the relevant Distributor may direct.

Corresponding provisions apply in relation to the capital of the Trust.

Nothing in the Amending Deed will operate to affect the interests of the beneficiaries of the Trust, or their right to the proper administration of the Trust.

The class of beneficiaries to whom the Trustee may make distributions, whether in the Trustee's sole discretion or at the direction of a Distributor, will remain the same.

The Distributors will be bound to select from the same class of beneficiaries as the trustee would have been bound to consider had Distributors not been in office.

The Amending Deed will not result in a redefinition of, or alteration to, the class of beneficiaries of the Trust.

The Amending Deed merely changes the administrative procedures of the trust.

No material change to the rights of the beneficiaries will occur as a result of the execution of the Amending Deed. The rights of the beneficiaries (as a class) to distributions of the income will not be affected by the changes, as the potential entitlements of the beneficiaries will remain the same (that is, the beneficiaries may receive anywhere from 0% to 100% of the income or capital, both before and after the proposed changes).

There will be no change to the Trust property, or additions or depletions of Trust property as a result of the Amending Deed.

The changes proposed by the Amending Deed, and future appointment of Distributors, will not result in the splitting of the Trust into two or more trusts.

In this regard, the Amending Deed, states that it is not intended to create a new trust or resettle the Trust.

The proposed distributor provisions do not require the Trustee to actually segregate the property of the Trust. A discretion remains with the Trustee as to the property of the Trust that is to be used to satisfy the directions of the Distributors. Notwithstanding that there may be certainty as to the quantum of the shares there is no certainty as to the nature of the property that will be the subject of a new trust. The property of the Trust remains subject of that continuing trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Reasons for decision

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).

Taxation Determination TD 2012/21 considers whether CGT event E1 in section 104-55 of the ITAA 1997 happens if the terms of a trust are changed pursuant to a valid exercise of power contained within the trust's constituent document. It is considered that CGT event E1 does not happen unless:

• the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

• the effect of the change or court approved variation is such as 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.[Paragraph 1]

On 21 January 2011, the Full Federal Court (Edmonds and Gordon JJ, Dowsett J dissenting) handed down its judgment in Clark. That case raised squarely for consideration the circumstances in which the nature of a trust has so changed that it might be concluded that the trust that originally incurred capital losses is not the same trust for income tax purposes as that which has derived gains against which the losses are sought to be recouped.

Clark was decided adversely to the Commissioner.

Paragraph 21 of TD 2012/21 states:

21. …, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark ,³ is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power.

This final point is expanded at paragraph 24:

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,⁴ 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.⁵

In the case of this Trust, the Trust Deed contains a power to vary the trust Deed. Consequently, the Amending Deed is a valid exercise of power.

Since the amendments were, in effect, contemplated in the existing Trust Deed, the principles of Clark apply and continuity of the Trust will be maintained for trust law purposes.

Furthermore, there is 'some continuity of property and membership of the trust' as per paragraph 21 of TD 2012/21. The Amending Deed introduces the position and role of a 'distributor' to the administration of the Trust. Essentially, the distributor provisions give the Appointor of the trust the power to:

• direct the Trustee to divide the income and capital of the Trust into such shares as the Appointor thinks fit;

• appoint one or more Distributors in respect of each of those shares; and

• remove a Distributor from office.

When a distributor is in office, the trustee must distribute the income and/or capital of the trust by:

• dividing the income of the Trust into shares in accordance with the latest direction of the Appointor; and

• pay or apply each of those shares to the beneficiaries of the Trust in such proportions as the Distributor may direct.

No changes will be made to the trust property or the beneficiaries of the trust.

Under the existing Trust Deed, distributions of income or capital to individual beneficiaries are dependent on the Trustee's discretion. After the implementation of the proposed Amending Deed, such distributions will still depend on the Trustee's discretion, except where there is a distributor in office. Where a distributor is in office, the Trustee is bound to deal with the income or capital as directed by the Distributor. The distributions to individual beneficiaries will therefore be dependent on the Distributor's discretion.

It is considered that the original intention of the settlor was for the Trust to benefit the beneficiaries (as defined in the Trust Deed). This intent will not change as a result of the distributor provisions being inserted, since each beneficiary's right to distributions of either income or capital remains the same.

In the context of the Trust and surrounding circumstances, the proposed changes are consistent with a continuing trust and do not materially alter the rights of the beneficiaries with respect to the trust property. The distribution of income and capital by the Trustee will continue to be discretionary in nature. The same beneficiaries will be entitled to income and capital of the trust both before and after the Amending Deed.

Conclusion

The proposed amendments contained within the Amending Deed for the Trust do not alter or create a new class of beneficiaries or make any material change to the beneficial interests in the trust property. The proposed amendments do not amount to a variation of a continuing trust and will not fundamentally change the essential nature and character of the original trust relationship. Accordingly CGT Event E1 in section 104-55 of the ITAA 1997 will not happen because the Amending Deed is executed.