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Edited version of your written advice
Authorisation Number: 1012900714112
Date of advice: 3 November 2015
Ruling
Subject: Income Tax: Capital gains tax - CGT events - CGT events - E1 and E2 - trusts
Question 1
Will the proposed changes to the Trust, as stated in the Deed of Variation, cause capital gains tax (CGT) event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2016.
The scheme commences on:
1 July 2015.
Relevant facts and circumstances
The Trust was created by Trust Deed in 19XX (Original Deed) by the Settlor.
It was amended by Deed of Amendment in 199X (First Amendment) and by further Deed of Amendment in 20XX (Second Amendment).
The Original Deed, First Amendment and Second Amendment will be collectively known as the Trust Deed.
Trustee Company Pty Ltd is the trustee (Trustee).
Pursuant to the powers contained in sub-clause 9.2 of the Trust Deed, the Trustee wishes to vary the provisions of the Trust Deed in the manner contained in the proposed Deed of Variation.
The Deed of Variation proposes to replace the definition of "Tertiary Beneficiaries".
"Tertiary Beneficiaries" is currently defined in the Schedule to the Original Deed to mean:
(a) TB 1
(b) TB 2
(c) The children of the said TB 2 whether born at the date hereof or prior to the Perpetuity Date.
The proposed definition of "Tertiary Beneficiaries" is:
(a) The great-grandchildren of the said PB 1 and PB 2 whether born at the date hereof or prior to the Perpetuity Date.
Sub-clause 9.2 of the Trust Deed provides that:
AMENDMENT OF DEED
The Trustee may by Deed revoke add to release or vary all or any of the trusts or powers hereinbefore declared or any trusts or powers declared by any variation, alteration or addition made hereto from time to time and may by the same or any other Deed declare any new or other trusts or powers concerning the Trust Fund or part or parts thereof PROVIDED THAT the Trustee shall not have any power to revoke add to or vary any of the trusts or powers hereof so that the Settlor or the Trustee may acquire a beneficial interest in the Trust Fund or any part thereof nor to affect the beneficial entitlement of any Beneficiary to any amount applied for him prior to the date of revocation or alteration PROVIDED FURTHER THAT no such addition variation or amendment shall be valid if it would have the effect of infringing the law against perpetuities. Any other person or persons upon whom any power is conferred by this Trust may release and revoke any power or powers so conferred on him or them and upon the exercise of any release or any revocation pursuant to this clause the power or trust so released and revoked shall be absolutely and irrevocably determined. The expression "trusts or powers" where used in this sub-clause shall be deemed to include all the provisions of this Trust Deed or of any other Deed varying or altering or adding to such Trust Deed.
"Beneficiaries" is defined in the Second Amendment to mean the Primary Beneficiaries, Secondary Beneficiaries and Tertiary Beneficiaries or any one of them.
The Tertiary Beneficiaries, as currently defined, are not presently entitled to any income or capital from the Trust and they do not have a beneficial entitlement to the Trust Fund.
Relevant legislative provisions
Income Tax Assessment Act 1997
Section 104-55
Section 104-60.
Reasons for decision
Question 1
Summary
The proposed changes to the Trust, as stated in the Deed of Variation, will not cause capital gains tax (CGT) event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen.
Detailed reasoning
CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).
CGT event E2 happens if a CGT asset is transferred to an existing trust (subsection 104-60(1) of the ITAA 1997.
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 the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent documents, or varied with the approval of a relevant court? (TD 2012/21) states that neither CGT event E1 nor CGT event E2 happens in these circumstances 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 or court approved variation 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.
Paragraph 24 of TD 2012/21 states:
… 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,4 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.5
5 Where an asset is instead transferred to an existing trust, CGT event E2 will be the relevant event (subsection 104-60(1)).
Paragraphs 26 and 27 of TD 2012/21 provide the:
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.6 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.
Paragraph 2 to 5 of TD 2012/21 provides the following example:
Example 1: addition of new entities to, and exclusion of existing entities from, class of objects
2. The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists.
3. Having decided to get out of the flower industry, the Squirrel Family disposes of their interest in Oak Pty Ltd to an unrelated third party.
4. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:
• the respective spouses of the children;
• trusts and companies in which the family has a majority controlling interest; and
• a philanthropic charity unrelated to the Squirrel Family.
5. the making of these 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.
In your case, the Trust Deed at sub-clause 9.2 contains a power that allows the Trustee to revoke, add to, release or vary all or any of the trusts or powers declared in the Trust Deed.
Since the amendments were, in effect, contemplated in the existing Trust Deed by virtue of sub-clause 9.2, the continuity of the Trust will be maintained for trust law purposes.
Therefore, the proposed changes to Trust, as stated in the Deed of Variation, will not cause CGT event E1 or E2 in sections 104-55 or 104-60 of the ITAA 1997 to happen.