Edited version of your written advice

Authorisation Number: 1012866824357

Date of advice: 26 August 2015

Ruling

Subject: Income tax: Trusts Trust resettlement

Question 1

Does CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if the vesting date of the Trust is changed pursuant to a valid exercise of a power contained within the Trust's constituent document?

Answer

No

This ruling applies for the following period:

1 July 2014 to 30 June 2055

The scheme commences on:

1 July 2014

Relevant facts and circumstances

1. The Trust was settled by deed (the Original Deed of Settlement) between the Settlor and the Trustee.

2. The Vesting Day is defined in the Original Deed of Settlement to mean:

(a) the first to occur of the following dates namely -

(i) the day specified as "the Vesting Day" in the Schedule;

(ii) such date being earlier than the day so specified as the Trustees may with the consent of the Guardian if there is a Guardian on the date of appointment and if there is no Guardian without any consent appoint; or

(b) such date being later than the day specified in the Schedule as the "Vesting Day" as the Trustee may subject to clause 10 hereof and subject to the same being within the perpetuity period appoint;

PROVIDED HOWEVER that where the date of expiration of the perpetuity period is earlier than the Vesting Day determined under the foregoing provisions that date shall be the Vesting Day and PROVIDED FURTHER that notwithstanding anything to the contrary herein contained all powers and dispositions made by or pursuant to or contained in this Deed which but for this provision would or might vest take effect or be exercisable after the expiration of the perpetuity period shall vest and take effect on and be exercisable only until the last day of the perpetuity period;

3. The Original Deed of Settlement names a Guardian and Appointer.

4. Perpetuity period is defined in the Original Deed of Settlement to mean:

… the perpetuity period applicable to dispositions effected by this Deed under the rule known as the Rule against Perpetuities (as modified by Statute) (which rule as so modified is hereinafter in this Deed called "the rule against perpetuities") and that period shall be the period specified in the Schedule and if no period is so specified shall be the period of eighty years commencing on the date of this Deed;

5. The Schedule to the Original Deed of Settlement does not specify a perpetuity period.

6. The Trustee and Guardian (the Parties) executed a deed of variation (the Deed of Variation) in accordance with the Original Deed of Settlement, which amended the vesting day specified in the Schedule of the Original Deed of Settlement (Amended Vesting Date).

7. The Amended Vesting Date is earlier than the Perpetuity Period.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-55

Income Tax Assessment Act 1997, section 104-60

Reasons for decision

Issue 1

Question 1

Summary

Because you have varied the Trust in accordance with a power contained within the constituent document you have not caused a resettlement and CGT event E1 will not be triggered.

Detailed reasoning

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?, provides the Commissioners view relating to trust resettlement in the context of capital gains tax (CGT). Fundamentally the view expressed in TD 2012/21 is that providing a trust is changed by a valid exercise of a power contained within its constituent document the trust will not be resettled.

This principle is explained in paragraphs 20 and 21 of TD 2012/21 in the following way:

20. It is clear following Clark that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purposes. As such, in the absence of termination, tax losses being carried forward by a trustee will as a general rule remain available to be recouped against relevant trust income derived in future years of income.

21. Furthermore, 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, 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. Relevantly, in Commercial Nominees the Full Federal Court had stated that:

55. ...in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust.

56. So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the 'taxpayer' for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself.

CGT event E1 in section 104-55 of the ITAA 1997 deals with the creation of a trust over a CGT asset and CGT event E2 in section 104-60 of the ITAA 1997 deals with transferring a CGT asset to an existing trust. In light of this, paragraph 24 of TD 2012/21 goes on to explain that:

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, 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.

Ultimately whether a purported change to a trust is in exercise of a power under the deed is to be determined in accordance with the principles of trust law having regard to the scope of the power properly construed. This will depend on whether the deed itself explicitly specifies the conditions (including procedural conditions) that need to be satisfied for the exercise of power to be effective.

For completeness it should be noted that paragraph 27 of TD 2012/21 refers to the situation where the assets of an existing trust are subjected to a separate charter of obligations as a result of a change to the terms of the trust such as to lead to the conclusion that those assets are now held on terms of a distinct, or different, trust. In these circumstances, depending on the facts, it may be concluded that a particular asset has been settled on a different trust because it has been made subject to a separate charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

Thus in circumstances where a trust is varied in accordance with the valid exercise of a power contained within its constituent document, and particular assets of the trust have not been subjected a separate charter of rights and obligations, the change will not cause the existing trust to cease and a new trust to be created. That is the trust will not be resettled. If the trust has not been resettled then neither CGT event E1 or E2 will be triggered.

In your instance you have executed the Deed of Variation in accordance with a power to vary the vesting date of the Trust contained in the Original Deed of Settlement.

In essence the power of variation in the Original Deed of Settlement permits the Trustee to change the Vesting Day of the Trust with the consent of the Guardian provided the new vesting day is earlier than the Perpetuity Period. In your case:

• the Schedule to the Original Deed of Settlement does not specify a perpetuity period so the perpetuity period of the Trust (in accordance with clause 1(13) of the Original Deed of Settlement) will be 80 years from the date of settlement,

• the Deed of Variation specifies a new vesting date which is earlier than the Perpetuity Period ending,

• the Deed of Variation was executed by the Trustee and the Guardian.

Based on the above, the conditions specified in the Original Deed of Settlement are met resulting in a change of the Vesting Day of the Trust.

As you have varied the Vesting Day of the Trust in accordance with the terms contained in the Original Deed of Settlement, then the Vesting Day of the Trust will be varied in accordance with a power contained in the constituent document, the Trust will not be resettled and CGT event E1 will not be triggered.