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Edited version of private advice
Authorisation Number: 1012648181162
Ruling
Subject: Variation of Trust deed and CGT
Question 1
Will the proposed variation to the trust deed result in the creation of a new trust and cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 to happen?
Answer
No.
This ruling applies for the following periods:
Income year ending 30 June 2014
The scheme commences on:
The date the deed of variation is executed.
Relevant facts and circumstances
1. The Trust was established by trust deed and has been varied by various deeds of variation.
2. The settlor of the Trust has since died and the settlor's legal personal representatives are the executors of her estate.
3. The trustee of the Trust is a company.
4. The primary beneficiaries of the trust are the children of the settlor and their children.
5. The Trust's vesting date as stated in the deed is currently 50 years from the date of the deed or such earlier date as the trustee for the time being shall determine.
6. The deed grants the Trustee a conditional power to vary the deed.
7. The trustee proposes to vary the Trust deed to extend the vesting date in accordance with the draft deed of variation.
8. The legal personal representatives of the settlor will consent to this variation of the Trust deed.
9. By an earlier deed of variation the beneficiaries of the Trust listed were expanded to include 'Non-Default Income Beneficiaries'.
10. Beneficiary A and Beneficiary B each beneficially own a 50% share in the Trustee company.
11. The settlor has no beneficial interest in the Trust.
Relevant legislative provisions
Section 104-55 of the Income Tax Assessment Act 1997
Reasons for decision
Summary
The proposed variation to the trust deed of the Trust will not result in the creation of a new trust and cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen.
Detailed reasoning
CGT event E1 in section 104-55(1) of the ITAA 1997 happens if a trust is created over a CGT asset by declaration or settlement.
Where the terms of a trust are amended the question arises as to whether the trust has been subject to resettlement, that is, the existing trust has terminated and a new trust has come into being for tax purposes, resulting in a CGT event.
According to Tax Determination TD 2012/21 a change to the terms of the trust pursuant to valid exercise of power under the deed will not cause CGT event E1 to 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 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.
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 and power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions that need to be satisfied for the exercise of the power to be effective.
Paragraphs 7-10 of TD 2012/21 provides an example where the vesting date of the trust is extended and the variation does not result in a CGT event:
7. The Lime Trust is a discretionary trust settled in 1980 to benefit the members of the Linden family. … The deed contains a clause specifying the date on which the trust is to vest as 30 September 2020.
8. Pursuant to an unfettered power of amendment in the deed, the trustee resolves in writing to amend the deed…
9. The trustee further resolves to amend the deed by changing the vesting date to 30 September 2050 or such earlier date as the trustee may determine.
10. The making of the resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.
Similar to the above example, the Trustee of the Trust proposes to vary the deed to extend the vesting date by 30 years.
Unlike the above example, the power for the trustee to amend the deed is not unfettered. The power contains the proviso that any addition, variation or amendment to the deed shall not cause the settlor or Trustee to acquire any greater beneficial interest in the income or capital of the Trust.
Under the original terms of the deed the Trustee company does not have any beneficial interest in the income or capital of the Trust. As such a change to the vesting date would not give the Trustee any greater beneficial interest in the Trust and the amendment would be properly supported by the power of amendment in the deed, having satisfied the requisite conditions.
However, by the earlier deed of variation the beneficiaries of the trust listed were expanded to include 'Non-Default Income Beneficiaries' meaning:
…any company in which any of the shares are held beneficially by any of [the beneficiaries].
Beneficiary A and Beneficiary B each beneficially own a 50% share in the Trustee company.
Potentially, this variation would give the Trustee company a beneficial interest in the Trust as a 'Non-Default Income Beneficiary.'
In our view, the earlier variation is not valid to the extent that it grants the Trustee a beneficial interest in the trust as it is not made within the conditions of the power of amendment in the deed. The variation grants the trustee a 'greater beneficial interest in the income' of the Trust than originally provided for in the Deed. Therefore, such a variation is not a valid exercise of the power of amendment under the terms of the Deed. (We do consider the variation to be valid where it relates to any company that is not a trustee of the Trust.)
Consequently, the Trustee continues to have no beneficial interest in the income or capital of the Trust.
Conclusion:
The variation to extend the vesting date does not result in the settlor or the Trustee acquiring a greater beneficial interest in the income or capital of the Trust. Therefore, the variation is made by a valid exercise of power under the deed and the conditions therein. The variation will not cause the Trust to terminate and new trust to arise for tax law purposes. CGT event E1 does not happen.