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Edited version of private advice
Authorisation Number: 1012641197755
Ruling
Subject: Variations of terms of trust deed and CGT event E1
Question 1
Will the Variation cause the creation of a new trust and give rise to CGT event E1 pursuant to section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following periods:
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The Trust was established by a trust deed between the Settlor and the Trustee (Trust Deed).
Under the terms of the Trust Deed the Trustee has the power to amend and vary all or any of the trusts, powers or provisions declared or included in the Trust Deed.
The Trustee proposes to exercise the power conferred under the Trust Deed to add a new class of beneficiaries and to insert definitions of new terms to the Trust Deed.
The Trustee also proposes to insert an additional clause to the Trust Deed in respect of distributions of capital to the new class of beneficiaries and to place restrictions and conditions on the Trustee's power to make such distributions in the event of a matrimonial dispute.
The above amendments are referred to as Variation.
The purpose of the above Variation is to reduce the risks if a beneficiary is involved in a matrimonial property dispute.
Relevant legislative provisions
Section 104-55 of the Income Tax Assessment Act 1997
Reasons for decision
When a variation is made to the terms of a trust deed CGT event E1 under section 104-55 of the ITAA 1997 or CGT event E2 under section 104-60 of the ITAA 1997 may happen.
CGT event E1 happens when a trust over a CGT asset is created by declaration or settlement.
CGT event E2 happens if a CGT asset is transferred to an existing trust.
The effect of a change to the terms of an existing trust might lead to a termination of the trust. Even where the trust does not terminate in some circumstances it may be concluded that a new trust has been created over a particular trust property to which the change relates.
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 that CGT event E1 and CGT event E2 will not generally happen if the terms of a trust are changed pursuant to a valid exercise of a power contained in the trust's constituent document, or are varied with a court's approval. However, a CGT event will occur if the change:
• causes the existing trust to terminate and a new trust to arise for trust law purposes; or
• results in 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 24 of TD 2012/21 states that:
…. 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:
26. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective.
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.
The Trust Deed gives the Trustee the powers to amend the trust powers and provisions. The proposed Variation, therefore, is made within these powers and pursuant to a valid exercise of the Trustee's powers contained within the Trust Deed. The Variation will not cause the creation of a new trust and will not give rise to CGT event E1 under section 104-55 of the ITAA 1997.