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Edited version of your written advice
Authorisation Number: 1051398095441
Date of advice: 11 July 2018
Ruling
Subject: Capital gains tax
Question
Will the proposed amendments to the Trust Deed cause a resettlement of the trust so that CGT event E1, E2 or any other CGT event will happen?
Answer
No.
This ruling applies for the following period:
Financial year ending 30 June 2019
The scheme commences on:
1 July 2018
Relevant facts and circumstances
The Trust was created by a Trust Deed.
The trustee is, and has always been, the trustee company.
The beneficiaries and default income beneficiaries named in the schedule to the Trust Deed are the children of XX.
The trust owns a farming property and operates a farm business on the property.
As part of the family’s farm business succession plant, one of the siblings (YY) has taken over the operation of the farming business and is now the only family member who has an involvement in the business.
All of the siblings intend to renounce any interest in the Trust as the family as a whole want YY and his family to be the long term beneficiaries of the Trust.
The Deed contains a wide power of amendment.
The trustee of the Trust proposes to amend the Deed via the execution of a Deed of Amendment to:
(a) extend the term of the Trust to the maximum term allowed by law;
(b) add YY’s spouse and children and other descendants as potential beneficiaries of the Trust; and
(c) allow the appointor to nominate replacements.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-55
Income Tax Assessment Act 1997 Section 104-60
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 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 Trust Deed allows for the trustee to amend the Trust Deed and in this case it is accepted that neither of the two exclusions mentioned above will apply as a result of the proposed Deed of Amendment. Consequently, neither CGT event E1 nor CGT event E2 will arise in relation to the change proposed. It is also considered no other CGT event will occur as a result of the proposed amendment.