Edited version of your written advice

Authorisation Number: 1051385616623

Date of advice: 20 June 2018

Ruling

Subject: Income tax – Capital Gains Tax – CGT Events – CGT Events E1 to E2

Question

Will the proposed amendments give rise to a trust resettlement or creation of a new trust for the purposes of capital gains tax (CGT) event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), or the transfer of a CGT asset to a trust for the purposes of CGT event E2 in section 104-60 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Overview of the Trust

The Trust Deed was executed in State AA and does not contain any clause specifying a governing law. Therefore it is currently governed by the law of State AA and is a valid perpetual trust under the Perpetuities Act 1984 (State AA).

The Trust does not have a “vesting” or end date.

The Trust is characterised as a non-complying superannuation fund for income tax purposes, and pays tax on this basis.

The Trust Deed provides that the eligible beneficiaries of the trust extend to employees, former employees and wives, widows and dependents of employees and former employees of certain additional companies.

The Trust Deed additionally provides that the income of the fund shall be applied by the Trustees, subject to any rules, as the Trustees thinks fit for the benefit of the eligible beneficiaries in the form of payments of gratuities pensions or allowances by way of loan, retirement allowances and payments to assist in the maintenance education or advancement of any of the children of the eligible beneficiaries or for the relief of distress whether caused by bereavement sickness employment or other misfortune or for the alleviation of hardship.

There is no clause expressly permitting a distribution of capital of the trust fund, where the Trust Deed states that the capital shall be invested by the Trustees.

The Trust Deed provides that the trusts of the deed may be altered in any respect if the majority in number of the Trustees and of the Directors are of the opinion, as expressed by a resolution of that Board or otherwise, calculated to benefit past, present or future employees.

Proposed Trust Deed Amendments

The Trust is a valid perpetual trust under the Perpetuities Act 1984 (State AA), which impose legislative restrictions on the nature of benefits it can provide to its beneficiaries.

In particular, the Perpetuities Act 1984 (State AA), restricts the trust to being a “provident, superannuation, sick, accident, assurance, unemployment, pension or co-operative benefit fund, scheme, arrangement or provision or other like fund, scheme, arrangement or provision.”

Since the establishment of the Trust, formal superannuation schemes have been established for all employees and the Trustees are finding it difficult to distribute all the income while the restrictions under the Perpetuities Act 1994 (State AA) apply.

The Trustees wish to amend the Trust Deed so as to remove the restrictions placed upon it by the Perpetuities Act 1984 (State AA).

All of the clauses of the current deed are to be replaced under the proposed deed of amendment other than clause X. However, other than inserting a new definition of governing law specifying the laws of State AB, the changes to the Trust Deed could be described as primarily modernising the language of the deed.

The key proposed amendments are as follows:

● Specifically include a provision stating that the Trust Deed is governed by the laws of State AB, where perpetuities legislation has been abolished. The effect of this is that the legislative limitation imposed by State AA perpetuities law, on the nature of the benefits the trust can provide would no longer apply.

● General updates to modernise the language and drafting of provisions contained in the Trust Deed.

● Permit the Trustees to accumulate income as capital, define the “Trust Fund” to include both income and capital, and continue to make payments or outgoings to beneficiaries out of income only.

● Removal of gender specific language in respect of the potential beneficiaries, for example reference to “wives” is updated to “spouses”, and de facto partners are also included.

● Delete the non-exhaustive list of possible benefits previously referred to in the Trust Deed.

● Subject to the CGT and stamp duty implications, a general winding up provision may also form part of the Proposed Amendments to the Trust Deed.

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

Summary

The proposed variations are a valid exercise of an amendment power contained in the Trust Deed and do not terminate or discontinue the Trust.

Therefore, a trust resettlement has not occurred and CGT events E1 or E2 have not been triggered for the purpose of sections 104-55 and 104-60 of the ITAA 1997.

Detailed reasoning

A trust resettlement is a trust law concept and occurs 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, CGT could accrue to the trustee and beneficiaries as a result of various CGT events.

Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if you create 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 you transfer a CGT asset to an existing trust.

In FCT v Commercial Nominees of Australia Limited [2001] ATC 4336 (Commercial Nominees), the Court held in favour of the taxpayer and concluded that significant changes to the Trust Deed of a superannuation fund did not create a new trust. This was so despite the amendments to the Trust Deed which included:

● changing the name of the trust;

● the appointment of a new trustee to the trust;

● the appointment of a new administrator of the trust;

● introducing a new category of beneficiaries;

● a change in the nature of the fund from a defined benefit fund (under which benefits were calculated by reference to salary and period of membership) to an accumulation fund (under which benefits were calculated according to the contributions made by each member); and

● allowing membership in the fund to be promoted to the public.

In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark’s case), a trust will not be terminated provided that there is some degree of continuity established towards the trust and any amendment to the trust is made in accordance with a power of amendment afforded to the Trustee.

Following Clark’s case, the Commissioner issued Taxation Determination TD 2012/21, which provides that a valid amendment to a trust pursuant to a valid exercise of an existing power will not result in the termination of the trust and therefore will not result in CGT events E1 or E2 happening.

Paragraph 1 of the TD provides that neither CGT events E1 or E2 in sections 104-55 and 104-60 of the ITAA 1997 happens 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

Change to governing law

Two decisions of the English courts suggest that the change of the proper law under which a trust is governed triggers the revocation of the existing trust and the settlement of a new trust.

The first of these is Duke of Marlborough v Attorney General [1945] CH 78. That case considered whether the proper law of a marriage settlement was England or New York. In obiter comments by Lord Green MR it was observed that a change of the proper law of settlement would be in effect the making of a new settlement.

The other case is In re Seale’s Marriage Settlement [1961] CH 74. In this case a marriage settlement was made in England and the beneficiaries moved to Canada and permission was sought to transfer the trust assets to a new corporate trustee in Canada. It was proposed to draft a new settlement on substantially similar terms but in compliance with Canadian law.

Validity of the proposed deed of amendment

The current Trust Deed provides a power to vary the “trusts of this deed”. Clauses in Trust Deeds conferring powers of amendment were considered in the WA Supreme Court case of Mercanti v Mercanti [2016] WASCA 206 (Mercanti v Mercanti). At paragraph 80, Le Miere J noted:

The words of cl 28 of the deed, as with all words have to be read in the context of the document as a whole. The words should as far as possible be given their ordinary meaning. When attempting to discern the true meaning of the power conferred in the trust deed the court must have regard to the nature of the deed and the purpose for which the power appears to have been granted - though this will depend to a large extent on the terms of the deed itself.

Later at paragraph 87 they concluded in respect to the MMF Trust that:

The crucial words in cl 28 are 'the Trustees … may … vary … the trusts terms and conditions hereinbefore contained'. In the course of argument Mr Penglis suggested that the words 'trusts terms and conditions' might mean the trusts and the terms and the conditions contained in the trust deed or they might mean the terms and conditions of the trusts. In my opinion the natural and ordinary meaning of the words is that the trustees may vary the trusts, the terms, and the conditions contained in the trust deed.

Conversely, at paragraph 101 they concluded in respect to the FW Trust:

In my opinion the natural and ordinary meaning of the words 'the Trustee may … vary … the trusts hereinbefore provided' does not extend to varying the terms and conditions of the trust deed dealing with the office of Appointor as distinct from the trusts created by the trust deed. The FW Trust Deed distinguishes between 'the trusts' and 'the trusts powers and provisions' of the trust deed…

Application to Taxpayer

In applying the circumstances set out in Paragraph 1 of TD 2012/21, it is considered that the Trustees’ proposed amendments will not result in a discontinuation of the trust. This is consistent with the decisions in Commercial Nominees and Clark’s case.

Whilst English case law suggests a change in the governing law would trigger a revocation of the trust and settlement of a new trust, it is considered that the facts in those cases are substantially different to the facts in the circumstances relating to the Trust.

Further, the proposed changes, not including the change in governing law, are largely administrative in nature, with the intention to modernise the language of the Trust Deed.

Therefore, it is considered that these proposed changes will not cause a resettlement of the trust in this case.

In considering whether the proposed amendments are within the scope of the power of amendment given the extent of the changes and the specific referral to a power to amend the “trusts” of the deed, there is no indication that the drafter of the deed drew a distinction between the trust and powers contained within the deed in the same manner as was highlighted by Le Miere J at paragraph 101 of his decision in Mercanti v Mercanti.

Consequently, it is considered that the proposed amendments are within the powers contained in the existing Trust Deed and are therefore a valid exercise of a power of amendment.

Accordingly, the proposed variations are not a trust resettlement and do not trigger CGT event E1 and CGT even E2.