Edited version of your written advice

Authorisation Number: 1012728213027

Ruling

Subject: Trust resettlement

Question 1

Will the proposed variation to the Trust Deed result in the creation of a new trust and cause CGT event E1 or E2 in sections 104-55 and 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2015

The scheme commences on:

During the year ending 30 June 2015

Relevant facts and circumstances

1. The trust deed (the Deed) has been varied twice.

2. The appointer of the Trust is Individual 1. Individual 1 is also a beneficiary under the Deed.

3. Individual 1 is the test individual of the Trust for the purposes of the family trust election.

4. The First Schedule of the Deed outlines the general beneficiaries of the Trust, including Individual 2, Individual 3 and various family members related to them.

5. Clause 2(c) of the Deed gives the trustee the power to distribute the income of the Trust in its discretion to any of the beneficiaries listed in the First Schedule where it has not been accumulated to capital under clause 2(b).

6. Clause 2(c) of the Deed further provides that any income of the Trust not validly dealt with by the trustee under clause 2(b) and not distributed to the beneficiaries in the First Schedule, will be held for the beneficiaries listed in the Second Schedule of the Deed, being Individual 2 and Individual 3, or the survivor of them, as tenants in common in equal shares.

7. Clause 4 of the Deed gives the trustee the power to appoint the capital of the Trust in its discretion to any beneficiaries listed in the First Schedule. Clause 4 further provides that in default of any appointment by the trustee, the capital of the Trust will be held for the beneficiaries listed in the Third Schedule of the Deed, being Individuals 2 and 3, or the survivor of them, as tenants in common in equal shares.

8. The named beneficiaries in the First Schedule, Individuals 2 and 3, are Individual 1's sibling and sibling-in-law respectively.

9. Individuals 2 and 3 have never received a distribution of income or capital from the Trust. The trustee has always made valid distributions to Individual 1, their children and their child.

10. Clause 9(c) of the Deed provides the trustee power of variation.

11. Clause 11 states further general conditions.

12. Proposed variations to the Deed:

• Remove Individuals 2 and 3 as named beneficiaries in the Schedules and replace with Individual 1.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55(1)

Income Tax Assessment Act 1997 section 104-60(1)

Reasons for decision

Summary

The proposed amendments to the Deed of the Trust will not result in the creation of a new trust and CGT events E1 or E2 in section 104-55 and 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) do not happen.

Detailed reasoning

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.

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. CGT event E2 happens if a taxpayer transfers a CGT asset to an existing trust.

According to Tax Determination TD 2012/21 a change to the terms of a trust pursuant to a valid exercise of power under the deed will not cause CGT event E1 or E2 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.

Drawing on the decisions of Clark and Commercial Nominees, paragraph 21 of TD 2012/21 explains 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 result in terminating the trust, so long as the amendments are properly supported by the power.

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 that need to be satisfied for the exercise of the power to be effective.

Paragraphs 2-5 of TD 2012/21 provide an example where the adding of new entities to and exclusion of existing entities from a class of objects does not result in a CGT event. In the example the resolution to amend the deed to specifically remove named beneficiaries from the class of general beneficiaries is a valid exercise of a power of amendment contained within the deed and does give rise to the happening of a CGT event.

Similar to the example above, the proposed variations to the Deed will change the named beneficiaries under the Trust.

The Trustee's powers to amend the terms of the Trust are stated in clause 9 of the Deed, with further general conditions in clause 11.

The Trustee may vary the terms of the Deed on the condition that any variation relating to the corpus of the Trust is for the benefit of persons or corporations in existence at the time of the Deed or who will come into existence before the vesting date. The variation must not confer a benefit on the Settlor or any other person who has paid money into the Trust as described in clause 11.

The proposed variations seek to remove Individuals 2 and 3 as named beneficiaries listed in the First, Second and Third Schedules of the Deed and replace them with Individual 1. Individuals 2 and 3 will still be beneficiaries of the Trust as part of the class of beneficiaries mentioned in the amended First Schedule, as Individual 2 is the sibling of Individual 1 and Individual 3 is the spouse of Individual 2. However, they will no longer be default beneficiaries of the Trust income under clause 2(c) and will no longer be default beneficiaries of the trust fund (capital) under clause 4.

The power of variation under clause 9 contemplates a change to beneficiaries as indicated by the wording. Therefore, the proposed changes to the beneficiaries are considered within the scope of the power.

We accept that the variation to the terms of the Trust is made by a valid exercise of power under the Deed and the conditions therein. The power to amend provided in the Deed is very broad, and the changing of beneficiaries under the Deed is made within the scope of that power. The variation will not cause the Trust to terminate and new trust to arise for tax law purposes. Therefore, CGT events E1 and E2 do not happen.