Edited version of your written advice

Authorisation Number: 1013120215762

Date of advice: 8 November 2016

Ruling

Subject: CGT consequence of variation to trust deed

Question 1

Will the execution of the proposed Deed of Amendment which will amend the Trust Deed to name a new Appointor, change the name of the Trust and extend the vesting date of the Trust, result in the application of CGT Events A1, E1 or E2 under sections 104-10, 104-55 and 104-60 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

Background

The Trust

● The Trust in question ('Trust') is a discretionary trust.

● The Trust Deed establishing the Trust was executed between a Settlor and a Trustee.

● The Trustee has been the sole trustee of the Trust since its establishment.

Relevant Clauses of the Trust Deed

● Clause X of the Trust Deed gives the Appointor the power to remove and appoint a trustee.

● Clauses X and X of the Trust Deed deal with the distribution of the income and corpus of the trust up to, upon and after the date of distribution (i.e. the vesting date).

● Clause X of the Trust Deed provides that the date of distribution shall be the date specified in the Schedule to the Trust Deed or such earlier date as the Trustee shall at any time by deed, revocable or irrevocable, appoint. It also provides that, for the purposes of the dispositions made by the Trust Deed, the perpetuity period shall, pursuant to section 5 of the Perpetuities and Accumulations Act 1968, be eighty years.

● The Schedule to the Trust Deed specifies the Date of Distribution (i.e. the vesting date).

● Clause X of the Trust Deed deals with the powers of the Trustee to amend the Trust Deed and states:

The Trustee may at any time alter or amend any of the provisions of this Deed provided however that:

(i) no such alteration or amendment shall affect any payment or appropriation which has previously been made, or any right which has vested and is not subject to being divested;

(ii) no such alteration or amendment shall be exercised so as to enable the Settlor or Trustee to acquire (directly or indirectly) any beneficial right or interest in or in relation to the income or corpus of the Trust Fund, or any benefit or advantage therefrom whatsoever; and

(iii) Neither Clause X nor the name of the Appointor shall be altered without the consent of the Appointor.

● A Deed of Variation amended clause X of the Trust Deed to expand the class of 'Beneficiaries'.

● The original Appointor has died. Their power of appointment under clause X of the Trust Deed was not invested in a specific person under their Will. Consequently, their legal personal representatives became the present Joint Appointors of the Trust and continue to perform this role.

Proposed Amendment

● Pursuant to clause X of the Trust Deed, the proposed Deed of Amendment will when executed:

● extend the date of distribution to a date nearer to the conclusion of the statutory perpetuity period (clause X);

● change the name of the trust (clause X); and

● name a new Appointor, in the Schedule to the Trust Deed (clause X).

● The proposed Deed of Amendment will be executed by the Trustee, the Joint Appointors and the proposed Appointor.

● Clause X of the proposed Deed of Amendment provides that the present Joint Appointors are giving consent to name a new Appointor in the Schedule to the Trust Deed upon execution of the proposed Deed of Amendment.

● The parties to the proposed Deed of Amendment acknowledge and agree that the amendments effected by the Deed are in accordance with clause X of the Trust Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Subsection 102-25(1)

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

Question 1

Summary

The proposed variations to the Trust Deed, being naming of a new Appointor, changing the name of the Trust and extending the vesting date of the Trust will not result in CGT Events A1, E1 & E2 under sections 104-10, 104-55 and 104-60 happening.

Detailed reasoning

CGT event A1 happens if you dispose of a CGT asset to someone else (section 104-10). CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement (section 104-55). CGT event E2 happens if you transfer a CGT asset to an existing trust (section 104-60). However, none of these events happen merely because of a change of trustee.

If more than one CGT event can happen, then you use the one that is the most specific to your situation (subsection 102-25(1)).

Where the particular facts involve a trust, CGT event E1 or CGT event E2 of the ITAA 1997, if relevant, will be the more specific CGT events rather than CGT event A1 because they are specifically directed to trusts [Taras Nominees Pty Ltd v. Federal Commissioner of Taxation - (28 January 2015) - [2015] FCAFC 4; (2015) 2015 ATC 20-483 - Federal Court of Australia; Healey v. Federal Commissioner of Taxation - (23 March 2012) - [2012] FCA 269; (2012) 2012 ATC 20-309; (2012) 208 FCR 300; [2013] ALMD 3073; [2013] ALMD 3074; (2012) 87 ATR 848 - Federal Court of Australia Healey v. Federal Commissioner of Taxation - (21 December 2012) - [2012] FCAFC 194; (2012) 208 FCR 333; (2012) 2012 ATC 20-365; (2012) 91 ATR 671 - Federal Court of Australia].

The Commissioner, as per Taxation Determination TD 2012/21, is of the view that CGT event E1 and CGT Event E2 will not happen if the terms of a trust are changed pursuant to a valid exercise of power contained with the trust deed, unless:

● the amendment causes the trust to terminate for trust law purposes, or

● the effect of the amendment is 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.

This Taxation Determination (TD 2012/21) was issued following the decision in Federal Commissioner of Taxation v. Clark and Anor [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark) and the High Court's refusal to grant the Commissioner leave to appeal that decision. The explanation to TD 2012/2 explains the Commissioner's view as follows:

24. 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.

…………….

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. 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.

[footnotes removed and emphasis added]

Taxation Determination TD 2012/21 further explains that the scope of the relevant power is determined by the construction of the words of the trust deed, the surrounding context and any relevant admissible evidence. Where a trustee is found not to have power to vary the trust in the manner contended, such invalid amendments, being of no effect, would not of themselves result in CGT events E1 or E2 happening.

Application to your circumstances

Clause X of the Trust Deed gives the Trustee the ability to alter or amend any of the provisions of the Deed provided that it does not affect any payment or appropriation previously made, or any vested right not subject to being divested, or enable the Settlor or the Trustee to acquire (directly or indirectly) any beneficial right or interest in or in relation to the income or corpus of the Trust Fund, or any related benefit or advantage. It further provides that the Trustee can change the Appointor with the consent of the Appointor.

Clause X of the proposed Deed of Amendment provides that the existing Appointors are giving consent to name a new Appointor in the Schedule to the Trust Deed upon execution of the proposed Deed of Amendment.

Although clause X does not expressly provide for a change of the name of the Trust and an extension of the vesting day, it provides a general variation power, in that wide discretionary powers are conferred to the trustee to amend any of the provisions of the Trust Deed.

In your case, we accept that the proposed amendment to the Trust Deed will be a valid exercise of power contained within the Trust Deed, because it will comply with clause X of the Trust Deed.

The proposed amendment to change the Appointor, the name of the Trust and to extend the vesting day will not terminate the Trust for trust law purposes, as it does not impact on the continuity of the trust, as set out in Clark. Furthermore, the proposed amendment will not 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.

Conclusion

The variation to the terms of the Trust is made by a valid exercise of power granted to the Trustee under the Trust Deed. It will not cause the Trust to terminate and new trust to arise for tax law purposes. Therefore, CGT events A1, E1 & E2 under sections 104-10, 104-55 and 104-60 will not happen.