Edited version of your written advice

Authorisation Number: 1051354635978

Date of advice: 29 March 2018

Ruling

Subject: Amending the beneficiaries of the trust

Question

Will amending the trust deed by removing a member of the appointed class of beneficiaries of the trust result in a CGT event happening?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The X Trust (trust) was established by the deed of settlement.

Z Pty Ltd is the trustee of the trust.

The schedule to the deed of settlement defines members of the appointed class of the trust to include:

1. L;

2. M; and

3. The children of M.

L was changed by deed poll to another name.

The appointed class are defined in the definitions section of the Deed of Settlement as

(a) individuals or corporations, or both as defined in the trust as members of the Appointed Class …….., and

(b) individuals or corporations (not being a member of the Excluded Class) as are for the time being in existence before the Vesting Day and are the subject of a nomination duly made and not withdrawn …….”.

The role of the appointed class under the trust deed include:

1. Beneficiaries of the Trust are defined by reference to their relationship with a member of the appointed class; and

2. The members of the appointed class are the persons for whom:

(a) the income of the trust for an accounting period is held in equal shares, in default of the trustee determining to pay, apply or set aside the income to any one or more general beneficiaries or to accumulate the income for the accounting period; and

(b) the trust fund is held, in equal shares, on the vesting day in default of the trustee exercising its power to appoint the trust fund to any one or more beneficiaries ……….

The Trustee proposes to vary the Trust Deed to remove M from the appointed class.

The Deed of Settlement of the Trust contains the Trustee’s powers to vary the Trust.

Clause V of the Deed of Settlement provides the trustee with absolute and uncontrolled discretion and power, subject to any express provisions to the contrary contained within the Deed of Settlement and subject to specific clauses in the Deed of Settlement.

As no guardian has been appointed to the Trust, the trustees under a specific clause of the Deed of Settlement may unless otherwise expressly provided in the schedule, exercise all the reserved powers and the restricted powers in their absolute and uncontrolled discretion and without notice to any other person. The reserved powers of the trustee include the powers to revoke, add to or vary all or any of the trust terms and conditions of the trust.

The schedule to the Deed of Settlement provides that the perpetuity date shall be the date of this deed.

The vesting day is defined as the day specified as the distribution date in the schedule. The schedule provides for the distribution date to be 20XX.

The variation of the Deed of Settlement does not change the property of the trust immediately prior to the making of the proposed variation and the property of the trust immediately after making the proposed variation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Summary

The proposed amendment to the Deed of Settlement which involves removing a member of the appointed class of beneficiaries will not result in a resettlement of the trust and therefore no CGT event will occur.

Detailed reasoning

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.

The identity of those for whose benefit the trust exist is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amounting to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust.

Taxation Determination 2012/21 accepts that there are changes in the membership of a continuing class when:

● an existing power to nominate new beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which could be reasonably inferred that the trust was intended to benefit, and

● it can be shown from the deed and surrounding circumstances that the actual objective purpose or theme of the trust was to benefit that wider group.

In your case, the Deed of Settlement allows the Trustee to make changes to the trust including revoking, adding to or varying beneficial interests. Such variations are in conformity with the conditions within the deed of settlement, that is, the variations are made at a time prior to the vesting day and do not result in any benefit to any member of an excluded class.

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 of settlement.

Therefore, it is considered that the Trustee’s amendment to remove one of the existing beneficiaries will not result in a discontinuation of the trust or create a new trust while it is also a valid exercise of a power of amendment. Therefore the amendments are not a trust resettlement and do not trigger any CGT events.