| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012928025721
Date of advice: 17 December 2015
Ruling
Subject: Will trusts resettle upon variations to the trust deed to exclude beneficiaries and extend vesting date
Question 1
Will any CGT event occur upon the proposed variations to the trust deed to exclude beneficiaries and extend the vesting date?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
Overall purpose of transaction
It is desired to resolve some uncertainty as to the appropriate perpetuity period applicable to the XYZ Family Trust ('the Trust') and extend the vesting date to dd/mm/yyyy (being 80 years after the trust was settled).
Background and existing arrangement
The Trust is a discretionary trust.
The Trust's beneficiaries are:
• four named primary beneficiaries, as well as
• any spouses and issue of the primary beneficiaries.
The beneficiaries include a number of underage persons, and there may be additional beneficiaries born in the future.
The trustee has power under the deed to amend the deed.
The trust deed specifies the vesting date as dd/mm/yyyy or such earlier date as the trustee determines.
There is uncertainty as to whether the current trust deed validly engages legislation in relation to the rule against perpetuities.
The clause specifying the vesting date cannot be amended without a court order, because the consent of the beneficiaries is required, and some of the beneficiaries are underage or not yet born, and therefore cannot provide consent themselves. The proposed variations avoid the need to go to court.
Proposed variations
Two deeds will be executed:
• The first variation, executed by the trustee of the Trust, will vary the trust deed to exclude all beneficiaries other than the current adult beneficiaries.
• The second variation, executed by the trustee of the Trust plus the remaining beneficiaries, will amend the trust deed to specify a new vesting date (being 80 years after the trust was settled).
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 104-55 and
Income Tax Assessment Act 1997 Section 104-60.
Reasons for decision
Summary
A trust does not resettle when the list of discretionary beneficiaries is changed to exclude some beneficiaries nor when the vesting date is extended.
Therefore, there is no disposal of a CGT asset (CGT event A1), creation of a trust over an asset (CGT event E1), nor transfer of a CGT asset to an existing trust (CGT event E2).
Detailed reasoning
The key issue is whether the proposed variations to the trust deed constitute a resettlement of the trust. A resettlement means that the effect of the transaction is that the existing trust settles its assets upon a distinct, newly-created trust which would be a separate entity for tax purposes. As a result, one or more of CGT events A1, E1 or E2 would occur and all unrealised capital gains would be crystallised for tax purposes.
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? contains the ATO's views on this issue. These views are informed by the judgment in Commissioner of Taxation v Clark [2011] FCAFC 5.
A resettlement does not occur unless the trust is terminated or a new trust created, such as if the trustee of a discretionary trust declares a specific asset to be held on trust for a specific beneficiary.
A variation to the trust deed which adds to the list of beneficiaries or excludes some beneficiaries does not terminate the trust: TD 2012/21, paragraphs 2-5 (Example 1). Nor does a variation which extends the vesting day of the trust: TD 2012/21, paragraphs 7-10 (Example 3).
The proposed variations fall squarely within what is described in examples 1 and 3 in TD2012/21. The proposed variations in this case do not constitute the termination of the Trust, nor do they constitute the creation of a new trust. Therefore no CGT event will occur upon the making of the proposed variations.