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Edited version of your written advice
Authorisation Number: 1051314238879
Date of advice: 30 November 2017
Ruling
Subject: Capital gains tax - trust - resettlement
Question:
Will the proposed Deed of Amendment result in a resettlement of the Trust?
Answer:
No.
This ruling applies for the following period
Income year ending 30 June 2018
The scheme commences on
1 July 2017.
Relevant facts and circumstances
The Trust was established by Deed (the Deed) between Company A (the Trustee) and Person X (the Settlor).
A clause in the Deed allows for the variation of the Deed by the Trustee who can at any time alter, vary, modify or otherwise amend any provision in the Deed or add to the Deed in such a manner at the Trustee’s discretion.
The Primary Beneficiaries of the Trust include Person A, who is the director of Company A.
Person A and their spouse, Person B separated and an Application for Consent Orders was lodged with the Courts after a period of time.
The Court made Orders which outlined that Person A would retain Company A.
A Draft Deed of Amendment (the Draft Deed of Amendment) has been prepared to amend the Trust Deed, with:
● the Trustee resolving to amend the Trust by removing a number of the Retiring Primary Beneficiaries as beneficiaries of the Trust and adding New Primary Beneficiaries as beneficiaries of the Trust in accordance with the terms of the Draft Deed of Amendment;
● the parties confirming and ratify that all requirements of the Deed have been complied with and all notices given, meetings held and resolutions passed entitling parties here to execute the Draft Deed; and
● each of the parties of the Draft Deed of Amendment covenants and agreeing to execute, complete, deliver, make and do all such other assurances, documents, instruments, notices and acts as may be necessary or required to give effect to the Draft Deed of Amendment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Part 3-3
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 capital gains tax (CGT) events.
The Commissioner has released Taxation Determination TD 2012/21 (TD 2012/21)which was published as a result of the court case CoT v. Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark’s case). Whilst 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.
In most cases, where a Trust Deed is varied pursuant to a valid exercise of a power contained in the Trust Deed or by a Court Order (including by the addition of new beneficiaries and the removal of existing beneficiaries), it will not be viewed that resettlement has occurred.
In this situation, a clause in the Deed allows for the Trustee to make changes to the Deed. After reviewing the changes to the Deed contained in the Draft Deed of Amendment, it is considered that the changes to the Deed are within the powers of the Trustee as outlined in the Deed. Therefore, the continuity of the Trust will be maintained for trust law purposes because the proposed changes are within the Trustee’s powers contained in the Deed.
In this case it is accepted that neither of the two exclusions mentioned above will apply as a result of the Deed of Amendment being implemented. Therefore, the implementation of the Deed of Amendment will not cause the resettlement of the Trust.