Edited version of your written advice

Authorisation Number: 1013075401072

Date of advice: 24 August 2016

Ruling

Subject: Trust resettlement

Question 1

Will the proposed Deed of Variation to the Unit Trust trigger capital gains tax (CGT) event E1 for the purposes of Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the proposed Deed of Variation to the Unit Trust trigger CGT event E2 for the purposes of Division 104 of the ITAA 1997?

Answer

No

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commences on

1 July 20xx

Relevant facts and circumstances

The Unit Trust

1. The Unit Trust was settled by deed.

a. There are a number of unitholders, each holding an equal number of the ordinary units of the Unit Trust.

b. You state that there have been no variations or amendments made to the deed to date.

2. Broadly, the relevant clauses of the trust deed are:

a. clause 1.1 - defines an Excluded Person as:

i. the Settlor (or any child under 18 years of age of the Settlor)

ii. any corporation in which the Settlor is a director or member in which the Settlor has a beneficial interest in any share

iii. any trust in which the Settlor has a beneficial interest, and

iv. the Settlor's legal personal representatives.

b. clause 1.1 - defines a Special Resolution as a resolution passed by the unitholders holding at least 75% of the issued Units carrying voting rights

c. clause 3 - states that the beneficial interest in the Trust Fund is vested in the unitholders and that the unitholders have beneficial interest in the Trust Fund as a whole and not to any particular asset of the Trust

d. clause 41(a) - provides that the Deed of the Unit Trust may be amended by way of deed or resolution to broadly revoke, add, release, delete, resettle or vary any of the provisions, obligations or rights in the deed

e. clause 41(c) - provides that a variation pursuant to clause 41(a) must not be exercised:

i. without the authority of a Special Resolution

ii. if it resulted in an Excluded Person becoming entitled to a beneficial interest in any part of the Trust Fund or income of the Trust Fund

iii. if it resulted in an Excluded Person becoming, or being able to become, a trustee of the Unit Trust, and

iv. if it would adversely affect the rights of a unitholder without that unitholder's consent.

f. Schedule 2 - outlines some of the rights and obligations of the unitholders. It provides that all units will be ordinary units and, amongst other things, that the trustee must not:

i. issue any units other than ordinary units

ii. issue any ordinary units subject to any other conditions or rights other than those in Schedule 2, and

iii. the trustee must not amend or vary any provision in Schedule 2.

Proposed amendments to the trust deed

3. The trustee proposes to amend the deed of the Unit Trust by deed of variation in the form of a Constitution for the Unit Trust. You state that the purpose of the proposed changes is to allow a broader investment profile and to potentially attract new investors. You state that the variation to the deed will give the trustee greater flexibility and is suited to a unit trust used for wholesale listed equity investments as a management investment scheme pursuant to the Corporations Act 2001.

4. You state that the trustee does not propose to amend the deed with regards to the:

a. ability for an Excluded Person to benefit under the deed or to become a trustee of the Unit Trust, or

b. termination of the Unit Trust.

5. Further, the proposed variation does not amend the content of original Schedule 2.

6. The unitholder's beneficial interest in the assets of the Unit Trust will not be varied as a result of the proposed changes. The terms of clause 3 will remain. Subclause 3.1.1 will provide that at the beneficial interest of the assets of the Unit Trust will be divided equally between the unitholders such that no unit entitles an interest to a particular asset of the Trust.

7. You explain that after the variation the unitholders will be identical to those before the change. You also explain that no assets will be transferred into or out of the Unit Trust as a result of the variation.

Question 1

Will the proposed Deed of Variation to the Unit Trust trigger CGT event E1 for the purposes of Division 104 of the ITAA 1997?

CGT Event E1 Creation of a Trust over A CGT Asset

8. CGT event E1 is the creation of a trust over a CGT asset by declaration or settlement of that trust, pursuant to subsection 104-55(1) of the ITAA 1997.

9. In order to determine whether CGT event E1 is triggered by a change in the terms of a trust deed, it is necessary to consider whether these amendments constitute the creation of a new trust.

10. Guidance on whether CGT event E1 occurs as a result of amendments to trust deeds can be found in Taxation Determination TD 2012/21 Income Tax: does CGT event E1 or E2 in sections 104-55 and 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). Broadly, TD 2012/21 explains that neither CGT events will occur where the terms of a trust are changed pursuant to a valid exercise of a trustee's powers.

11. Specifically, paragraph 1 of TD 2012/21 states that the only instances that would trigger CGT events E1 and E2 are:

a. changes that cause the existing trust to terminate and a new trust to be created, and

b. variations that lead to a particular asset being subject to a separate charter of rights and obligations such that the asset has been settled on terms of a different trust.

12. A number of examples are provided in TD 2012/21 to help illustrate when a trust resettlement will occur. Example 2 considers the situation where a unit trust deed is amended by the trustee, upon consent of the unitholders, pursuant to existing provisions in the deed. The amendments allow the trustee to expand the categories of investments that can be made. Paragraph 6 of TD 2012/21 concludes that as this is a valid exercise of a power to amendment in the trust deed, the amendment does not bring the existing trust to an end and does not trigger a CGT event.

13. In contrast, example 4 of TD 2012/21 considers an amendment to a trust deed which makes part of the corpus of the fund to be for the exclusive benefit of a particular beneficiary. Due to the asset now being subject to a separate charter of rights, it results in the existing trust coming to an end with regards to these particular assets and a new trust being created. A trust resettlement will occur in relation to the asset and both CGT events E1 and E2 are triggered.

14. The Commissioner's view contained in TD 2012/21 is consistent with the Full Federal Court's decision in Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd [1999] (Commercial Nominees). In this case, which concerned the deductibility of carry forward losses to an amended superannuation fund, the Court identified the three main factors indicating the continuity of a trust estate, being continuity of the constitution, trust property and membership. Specifically, the Court stated:

… the three main indicia of continuity are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity.

15. Further, in FC of T v Clark & Anor [2011] (Clark) the Court held that the three indicia identified in Commercial Nominees did not solely apply to superannuation funds, but unit trusts (and trusts more broadly). In Clark, the Court reinforced that continuity of trust property and membership could be maintained despite changes in the membership and property of the trust as long as these changes are permitted by the trust deed.

Application to your circumstances

16. Clause 41(a) of the deed of the Unit Trust broadly provides that the trustee is empowered to amend the terms of the deed to broadly revoke, add, release, delete, resettle or vary any of the provisions, obligations or rights in the deed by way of deed or resolution. The variations to the original deed put forward by the trustee, as provided in the proposed Constitution, is a valid exercise of the trustee's authority pursuant to this clause.

17. Consistent with the requirements in subclause 41(c) of the existing trust deed, the proposed amendments will be obtained with the consent of the existing unitholders by way of a Special Resolution. Consistent with TD 2012/21, the terms on the Unit Trust will be amended pursuant to an existing provision of the deed.

18. The rights and obligations of the unitholders in relation to the trust assets will remain the same under proposed subclause 3.1.1 such that the beneficial interest in the assets will be divided equally between units. No unit will confer an interest in a particular asset of the trust. As such, no new charter of rights and obligations will be established for a particular asset. This amendment will not lead to the creation of a new trust for that particular asset.

19. Further, the proposed variations to the deed of the Unit Trust are similar to that provided in example 2 of TD 2012/21 in that the variations:

a. are pursuant to provisions in the existing deed

b. will be made upon consent of the existing unitholders, and

c. are being made with the purpose of allowing the trustee to invest into a broader set of investments.

20. The three indicia for continuity of a trust, as explained by Commercial Nominees and Clark, are present in this case. Even though the proposed changes may lead to changes in the unitholders from time to time, as explained by Clark, this continuity of membership and property will be maintained for the continuity of a trust. For these reasons, the Unit Trust will not cease and a new trust will not be created as a result of the proposed changes in the deed. Subsection 104-55(1) of the ITAA 1997 will not be satisfied and therefore, CGT event E1 will not be triggered.

Question 2

Will the proposed Deed of Variation to the Unit Trust trigger CGT event E2 for the purposes of Division 104 of the ITAA 1997?

CGT Event E2 transferring A CGT Asset to a Trust

21. Pursuant to section 104-60 of the ITAA 1997, CGT event E2 will occur if an asset is transferred to an existing trust.

Application to your circumstances

22. As explained above, the proposed changes to the Unit Trust will not cause the trust to cease and a new trust to be created. In addition, you state that no new assets will be transferred to the trust. For these reasons section 104-60 of the ITAA 1997 is not satisfied and CGT event E2 will not be triggered.

Relevant legislative provisions

Division 104 of the Income Tax Assessment Act 1997