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Edited version of your written advice
Authorisation Number: 1013133631589
Date of advice: 29 November 2016
Ruling
Subject: Income Tax - Capital Gains Tax - Resettlement of Trust
Question
Will the proposed variations to the Trust's Deed give rise to capital gains tax events E1, E2 or A1 under sections 104-55, 104-60 or 104-10 of the Income Tax Assessment Act 1997?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Trust is a discretionary family trust.
The Trustee can, at its discretion, benefit persons and entities related to the family that are Beneficiaries of the Trust (and not in the Excluded Class), as defined in the deed.
The Trust proposes to exercise its power to vary the Deed as follows;
(a) To extend the Vesting Date of the Trust to the maximum period this does not breach the rule against perpetuities;
(b) Amend provisions regarding the Appointer and Guardian;
(c) Simplify the provisions in the Deed under which the income of the Trust Fund is determined by the Trustee;
(d) Insert provisions to allow the classification and allocation of income to the beneficiaries for the purposes of Division 115-C and Division 207-B of the ITAA 1997.
The proposed variations will be made with the consent of the Guardians and Appointers of the Trust.
The proposed variations are also made within the scope of the variation powers of the Deed.
Relevant legislative provisions
Section 104-10 of the Income Tax Assessment Act 1997
Section 104-55 of the Income Tax Assessment Act 1997
Section 104-60 of the Income Tax Assessment Act 1997
Reasons for decision
A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various CGT events.
The Commissioner has released Taxation Determination TD 2012/21 which was published as a result of a recent court case CoT v. Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark's case). Whilst the case of Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application. TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or CGT event E2 happening 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.
The Trust Deed in question allows for the Trustee to amend the deed and in this case it is accepted that neither of the two exclusions mentioned above apply. Consequently, neither CGT event E1 nor CGT event E2 arises in relation to the changes proposed. No other CGT events are considered to arise. It is considered the changes proposed do not alter the rights of any beneficiaries, and are merely administrative in nature.