Edited version of your written advice

Authorisation Number: 1012769295827

Ruling

Subject: Capital gains tax events E1 and E2

Question 1

Will the proposed changes to the terms of the Trust cause capital gains tax (CGT) event E1 to happen pursuant to section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proposed changes to the terms of the Trust cause CGT event E2 to happen pursuant to section 104-60 of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ended 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

1. The Trust is a discretionary trust.

2. The primary beneficiary of the Trust is an individual.

3. The general beneficiaries of the Trust are defined in clause 1(b) of the Trust Deed as follows:

"General Beneficiaries" shall mean and include:-

(i) the brothers sisters spouses widows widowers children and grandchildren of the Primary Beneficiary or Primary Beneficiaries and the spouses widows widowers children and grandchildren of such brothers sisters spouses children and grandchildren;

(ii) any charity;

(iii) such other persons corporations and trusts (if any) as may be named described or defined in the Schedule as additional members;

(iv) any private company in which 100% of the issued capital is owned solely by the trustee for the benefit of the General Beneficiaries as defined in parts (i), (ii) and (iii) of Clause 1(b) provided always that:

(A) the company is authorized to issue only one class of shares; and

(B) the company has issued all of its authorized capital to the trustee.

4. Additional members of the class of general beneficiaries are listed in the Schedule to the Trust Deed as:

The grandparents, their brothers and sisters, and the parents, children, brothers, sisters, uncles, aunts, cousins, nieces and nephews of [the individual]

5. Clause 15 of the Trust Deed provides:

The Trustee for the time being may at any time and from time to time be (sic) Deed with the Consent of the Appointor revoke add to or vary all or any of the provisions of the Trust Deed or any variation alteration or addition made hereto from time to time and may by the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust Fund or any part or parts thereof but so that the law against perpetuities is not thereby infringed and so that such new or other trust powers discretions alterations or variations:-

(a) may relate to the management or control of the Trust Fund or the investment thereof or to the Trustee's powers or discretions on these presents contained:

(b) shall not be in favour of or for the benefit of the Settlor Appointor or Trustee of any of them or result in any benefit to the Settlor Appointor or Trustee or any of them but shall otherwise be for the benefit of all or any one or more of the General Beneficiaries or the next of kin of any of them or the next of kin of the Primary Beneficiaries or any of them.

(c) shall not affect the beneficial entitlement to any amount set aside to any beneficiary.

Proposed changes to the Trust Deed

6. A Deed of Variation is proposed to be executed which will broadly:

a. amend the definition of general beneficiary;

b. insert a definition of the term 'Tax Acts', and

c. insert clauses 2A and 3(d).

7. The amendment to the definition of general beneficiary expand the range of companies that will be included by removing the existing clause 1(b)(iv) and inserting a new clause which includes any company "any share in which is beneficially owned or held" by a Primary Beneficiary or any of the General Beneficiaries described in 1(b)(i) or (iii) or by any trustee of any trust or settlement under which that person is a beneficiary. A new subparagraph 1(b)(v) is further added which includes the trustees of any trust or settlement in which the same persons have "any interest, right to receive a distribution or expectancy whatsoever in its capacity as trustee of that trust or settlement".

8. The insertion of clause 2A will, among other things, give the Trustee the ability to determine whether any receipt, profit, gain, payment, loss, outgoing, provision or reserve or any sum of money will be treated as income or capital and to determine the income of the Trust Fund for each accounting period. Further, where no such determination is made prior to the end of the accounting period, clause 2A will cause the income to be calculated in the same manner as under the Tax Acts applicable for that accounting period subject to excluding deemed amounts of assessable income or deductions or the grossing up amount of income (e.g. franking credits) unless the trustee otherwise determines.

9. The insertion of clause 3(d) will give the Trustee the ability, in exercising the discretion in the existing clause 3, to pay, apply or set aside income from any category or source that it deems fit.

Relevant legislative provisions

Section 104-55 of the Income Tax Assessment Act 1997

Section 104-60 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will the proposed changes to the terms of the Trust cause capital gains tax (CGT) event E1 to happen pursuant to section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Creating a trust over a CGT asset: CGT event E1

10. Broadly, section 104-55 of the ITAA 1997 provides that CGT event E1 will occur if a trust is created over a CGT asset by declaration or settlement.

11. Guidance on the Commissioner's view of the application of section 104-55 of the ITAA 1997 is provided in 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? (TD 2012/21). It states at paragraph 1 that in these circumstances neither CGT event E1 or E2 will happen unless:

a. the change causes the existing trust to terminate and a new trust to arise for trust law purposes; or

b. the change leads to an asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset has been settled on terms of a different trust.

12. Paragraphs 24 and 27 of TD 2012/21 state that a change in the terms of a trust that is made pursuant to the exercise of an existing power (including an amendment to the deed of a trust) will not terminate the trust and will not result in CGT event E1 happening unless assets originally held as part of the trust property commence to be held under a separate charter of rights and obligations as a result of changes to the terms of the trust such as to give rise to the conclusion that those assets are now held on the terms of a different trust.

13. Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can also be found in the examples contained in TD 2012/21.

14. The Commissioner's view in TD 2012/21 is based on the principles established by Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 550 (Clark).

Application to your circumstances

15. As set out in the facts, the Trustee of the Trust proposes to resolve to amend, with the consent of the Appointor, the Trust Deed to:

a. amend the definition of general beneficiary;

b. insert a definition of the term 'Tax Acts', and

c. insert clauses 2A and 3(d).

16. As explained in paragraphs 24 and 27 of TD 2012/21, a change in the terms of a trust that is made pursuant to the exercise of an existing power (including an amendment to the deed of a trust) will not terminate the trust and will not result in CGT event E1 happening unless assets originally held as part of the trust property commence to be held under a separate charter of rights and obligations as a result of changes to the terms of the trust such as to give rise to the conclusion that those assets are now held on the terms of a different trust.

17. Where a proposed change is beyond the power conferred by the terms of the deed of a trust, it will be of no effect. Therefore it could not give rise to a resettlement of the trust and would not result in CGT Event E1 happening.

18. To the extent that the proposed changes to the Trust Deed are within the power of amendment conferred by the Trust Deed, they will not terminate the existing trust or lead to a particular asset or assets being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset or assets have been settled on a different trust. We consider that the proposed amendments are similar to those contained in examples 1 and 3 of TD 2012/21 and therefore that the proposed amendments to the Deed will not cause CGT event E1 to occur.

Question 2

Will the proposed changes to the terms of the Trust cause CGT event E2 to happen pursuant to section 104-60 of the ITAA 1997?

Transferring a CGT asset to a trust: CGT event E2

19. Section 104-60 of the ITAA 1997 broadly provides that CGT event E2 will occur if a CGT asset is transferred to an existing trust.

Application to your circumstances

20. The changes to the Trust Deed proposed to be made by the Trustee do not involve the transfer of a CGT asset to an existing trust. Rather, as explained in the facts, the amendments involve including a wider group of entities within the definition of general beneficiaries and make other changes to the Trustees powers in relation to categorising receipts and determining income of the trust estate (including a default determination of income of the trust estate). Consistent with TD 2012/21, to the extent that the proposed changes to the Trust Deed are within the power of amendment conferred by the Trust Deed, they will not cause CGT Event E2 to occur.

21. To the extent that a proposed change is beyond the power conferred by the Trust Deed it will be of no effect, and therefore, could not give rise to CGT Event E2 happening.