Edited version of your written advice

Authorisation Number: 1051345027024

Date of advice: 5 March 2018

Ruling

Subject: Trust resettlement

Question 1

If the terms of the Deed constituting the Trust (the Deed), as amended by the Deed of Variation (Variation Power), are amended by the Deed of Variation (Primary Beneficiaries), will a ‘resettlement’ occur in respect of the Trust?

Answer

No

Question 2

If the terms of the Deed, as amended by the Deed of Variation (Variation Power), are amended by the Deed of Variation (Primary Beneficiaries), will CGT event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT event E2 under section 104-60 of the ITAA 1997 happen?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 20XX

Relevant facts and circumstances

The Primary Beneficiaries are defined in clause x of the Deed by reference to the Schedule to the Deed. The Schedule defines the Primary Beneficiaries as person 1, their spouse, children and parents, as follows:

Person 1 and any spouse of person 1 and any child or children of person 1 whether born or unborn at the date of execution hereof and any parent of person 1.

The General Beneficiaries are defined in clause x of the Deed, to include the Primary Beneficiaries, and by reference to a person or entity’s relationship with the Primary Beneficiaries.

A person or entity who is a General Beneficiary may become entitled to distributions of income or capital at the Trustee’s discretion.

In addition, the Primary Beneficiaries are default beneficiaries, and may receive distributions of capital on the vesting of the trust in default of the Trustee’s discretion, under clause x of the Deed.

Person 2 is a Primary Beneficiary because they are person 1’s spouse. They are also General Beneficiary under clause x of the Deed because they are a Primary Beneficiary (under the Schedule, as person 1’s spouse) and because they are person 1’s spouse (under clause x of the Deed, as the spouse of a Primary Beneficiary).

Clause XX of the Deed sets out a power in favour of the trustee of the Trust to revoke, add to or vary the Deed.

In exercise of its powers under clause XX of the Deed, the Trustee proposes to expand its existing power to revoke, add to or vary the Deed in the manner described in the Deed of Variation (Variation Power).

In exercise of its powers under clause XX of the Deed, the Trustee further proposes to subsequently amend the description of “Primary Beneficiaries” in the Schedule to the Deed, so that person 2 is named as a Primary Beneficiary in the manner described in the Deed of Variation (Primary Beneficiaries).

Once amended under the Deed of Variation (Primary Beneficiaries), the Schedule to the Deed will read:

Person 1 and Person 2 and any child or children of Person 1 and Person 2 whether born or unborn at the date of execution hereof and any parent of Person 1.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 subsection 104-55(1)

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 subsection 104-60(1)

Reasons for decision

Question 1

Summary

A resettlement will not occur in respect of the Trust upon execution of the Deed of Variation (Primary Beneficiaries).

Reasons for Decision

A trust resettlement is the settlement of all (or part) of an existing trust, by varying the terms of the existing trust to the extent that it has the effect of creating a new trust over that trust property to which the resettlement relates. At law, the resettlement is treated as a notional disposal of the trust’s assets by the trustee to the trustee (as if from the existing trustee to a new replacement trustee) to hold on different trusts.

As explained by Edmonds and Gordon JJ in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark), the approach adopted by the Full Federal Court in Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42 (Commercial Nominees) is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made as long as the amendments are properly supported by the power (paragraph 21 of TD 2012/21).

The trust property and the trust beneficiaries do not need to be static, and can change from time to time without causing a break in the continuity of a trust. What is required is a continuum of property and membership of the trust, which can be identified at any time, even if different from time to time.

The change to be made as a result of the Deed of Variation (Primary Beneficiaries) will be to amend the identity of the persons who are Primary Beneficiaries and, as a result, the persons or entities who may be General Beneficiaries. Person 2 will be named as a Primary Beneficiary, rather than being a Primary Beneficiary as a result of being person 1’s spouse. Additional persons or entities may come within the class of General Beneficiaries as a result of the change to be made under the Deed of Variation (Primary Beneficiaries), due to their relationship to the amended Primary Beneficiaries.

These changes to the identity of the beneficiaries of the Trust:

● will, following the earlier amendment made pursuant to the Deed of Variation (Variation Power), be made pursuant to a proper exercise of a power of amendment provided for by clause 23 of the Deed;

● will not impact on the beneficiaries’ identification with sufficient certainty at any time before or after the Deed of Variation (Primary Beneficiaries) is executed;

● will not be so severe as to result in a severance of the continuum of membership of the trust (even if different from time to time); and

● will not create a new charter of rights and obligations in respect of the trust property such that it creates a new trust.

The changes to the identity of the beneficiaries of the Trust will therefore not lead to a resettlement of the trust.

Question 2

Summary

CGT event E1 and CGT event E2 will not happen upon execution of the Deed of Variation (Primary Beneficiaries).

Reasons for Decision

Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement.

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if a taxpayer transfers a CGT asset to an existing trust.

In TD 2012/21, the Commissioner acknowledges that the principles established by Clark and Commercial Nominees are relevant to the question of the circumstances in which CGT event E1 and E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of power in a deed (including a power to amend), and states that CGT event E1 or E2 does not happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust’s constituent document, 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 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 the asset has been settled on terms of a different trust.

A change in the terms of the Trust pursuant to a valid exercise of a power contained in clause XX of the Deed (as amended by the Deed of Variation (Variation Power)):

● will not give rise to a CGT event E1 under section 104-55 of the ITAA 1997 as it will not, for the reasons set out in explanation to the response to question 1 of this ruling, result in the resettlement of that trust and the creation of a new trust by declaration or settlement; and

● will not give rise to a CGT event E2 under section 104-60 of the ITAA 1997 as it will not, for the reasons set out in explanation to the response to question 1 of this ruling, cause the Trustee to begin to hold (by transfer) a particular trust asset on the terms of a different, but existing trust.