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Edited version of your written advice
Authorisation Number: 1051425805355
Date of advice: 7 September 2018
Ruling
Subject: Income tax - resettlement of a trust
Question
Will the proposed Deed of Variation to the Z Trust deed result in a termination of the Z Trust or creation of a new trust for income tax purposes and the application of CGT event E1 or CGT event E2?
Answer
No
This ruling applies for the following periods:
Income year ended 30 June 20XX
Income year ended 30 June 20XX
The scheme commences on:
Execution of the Deed of Variation
Relevant facts and circumstances
Background
The Z Trust was settled as a hybrid trust.
The settled sum of $X was paid in consideration for the issue of units and to establish the Z Trust.
Upon settlement of the Z Trust, units were issued in equal proportions to three separate unit holders.
Terms of the trust deed
The trust deed defines beneficiaries of the trust as being a unit holder and specific trusts, companies and individuals with a prescribed relationship with a sole or joint unit holder.
The trust deed provides that together with all persons defined by the deed as beneficiaries by reason of a relationship with an effective unit holder and any charity are a separate class of beneficiary.
The trust deed provides the Trustee with discretion to distribute income to any beneficiary in any proportion, so long as the distribution of net income is made among the classes of beneficiaries in proportion to the number of units held by unitholders.
The trust deed provides the Trustee with the discretion to distribute capital to any beneficiary in any proportion, so long as the distribution of capital is made among the classes of beneficiaries in proportion to the number of units held by the unitholders.
The trust deed contains a variation clause which requires the consent of the unitholders.
Proposed variations to trust deed
A draft Deed of Variation of the Z Trust has been provided.
The necessary consents and conditions to vary the trust deed are satisfied.
Relevantly, the draft Deed of Variation:
● amends the definition of “beneficiary” to include all unit holders of the trust, and
● provides any distribution of net income or capital must be made among the unit holders in proportion to the number of units held by the unit holders.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-55
Income Tax Assessment Act 1997 section 104-60
Reasons for decision
CGT event E1 occurs when a trust is created over a CGT asset by declaration or settlement as detailed in section 104-55 of the ITAA 1997.
CGT event E2 occurs when a CGT asset is transferred to an existing trust as detailed in section 104-60 of the ITAA 1997.
Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust’s constituent document, or varied with the approval of a relevant court? (TD 2012/21) sets out the Commissioner’s view in respect of trust resettlements and whether or not a resettlement has occurred.
TD 2012/21 draws upon comments made in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5 (Clark case) in forming the ATO View.
TD 2012/21 asserts that a valid amendment to a trust deed will not result in the termination of a trust for income tax purposes provided:
● the amendment is made pursuant to an existing power
● the amendment does not cause the trust to terminate for trust law purposes, and
● the effect of the amendment does not 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.
Amendment is made pursuant to an existing power
The proposed amendments will be made pursuant to an existing power.
Amendment does not cause the trust to terminate for trust law purposes
Where there is continuity of property and membership of the trust, an amendment to the trust made in proper exercise of a power contained under the deed will not result in the termination of the trust.
The proposed amendments to the trust will be made in proper exercise of a power expressly provided for in the trust deed. There will be continuity of property and membership of the trust.
As there is continuity of property and membership of the trust, the proposed amendments to the Z Trust will not result in the termination of the Z Trust for trust law purposes.
Asset subject to separate charter of rights and obligations
The proposed amendments to the trust do not lead to a particular asset being subject to a separate charter of rights and obligations and therefore it cannot be concluded conclusion that any asset has been settled on terms of a different trust.
As the three conditions listed in TD 2012/21 are satisfied, there has been no termination of the trust for income tax purposes and no creation of a new trust. CGT event E1 and CGT event E2 will therefore have no application.