Edited version of your written advice

Authorisation Number: 1051441955741

Date of advice: 24 October 2018

Ruling

Subject: Change of appointor and change of beneficiaries of a trust

Question 1

Does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA1997) happen if the Appointor of the trust is changed?

Answer

No. The change of Appointor will not result in the creation of a new trust and will not trigger a CGT event.

Question 2

Does CGT event E1 or E2 in sections 104-55 or 104-60 of the ITAA1997 happen if the beneficiaries of the trust are changed?

Answer

No. As there is no change to the class of beneficiaries, the appointment of different ‘principal beneficiaries’ will not result in the creation of a new trust and will not trigger a CGT event.

This ruling applies for the following period:

1July 2018 to 30 June 2019.

Relevant facts and circumstances

The ZYX Family Trust was recently established. The Appointor is Mr Z. The principal beneficiaries are Mr Z, his wife Mrs Z and their son Mr Y. It is proposed to:

Remove Mr Z and Mrs Z as beneficiaries;

Remove Mr Z as Appointor;

Appoint Mr Y and his wife, Mrs Y, as the Appointors

Add Mrs Y and Mr X, the son of Mr Y and Mrs Y, as beneficiaries.

The current Appointor, Mr Z, set up the family trust in Australia as he was hoping to migrate here. However, due to a change of circumstances Mr Z and Mrs Z will not qualify for entry into Australia on a long term basis. As Mr Z and Mrs Z will not be able to settle in Australia, Mr Y and his wife will be the new Appointors for the effective control of the Australian resident trust.

The relationship of the current beneficiaries to the proposed new beneficiaries is as follows.

Mr Z & Mrs Z – Husband and wife (foreign residents)

Mr Y – son of Mr Z & Mrs Z

Mrs Y– Wife of Mr Y

Mr X – son of Mr Y and Mrs Y

The Trust Deed gives the Trustee the power to exclude beneficiaries, subject to the approval of the Appointor.

According to the trust deed, the meaning of Beneficiary:

(i) any child, grandchild or great-grandchild of the Principal Beneficiaries or their parents;

(ii) any Spouse of the Principal Beneficiaries

can be a beneficiary of the Trust.

According to the Trust Deed (meaning of Appointor):

(a) a person nominated as a replacement or Additional Appointor by will or notice to the Trustee, by the Appointor or other Appointor (appointed to a prior operation of this definition)

Relevant legislative provisions

Income Tax Assessment Act 1997

Part 3-1

Section 104-55

Section 104-60

Reasons for decision

Question 1 - Change of Appointor

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 Federal Commissioner of Taxation 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.

A change of appointor is not a resettlement of the trust for CGT purposes, provided the trust deed permits it.

Clause xxx of the trust deed (definitions) provides:

Appointor means initially the person or persons named in the Schedule and subsequently the following persons:

(a) a person nominated as a replacement or additional Appointor by will or notice to the Trustee, by the Appointor or other Appointor (appointed to a prior operation of this definition); or

(b) if an Appointor or other Appointor dies or becomes incapable of acting as the Appointor without appointing another person as Appointor leaving no other persons as an Appointor, then the legal personal representative of or administrator of the estate of the Appointor or other Appointor

The current Appointor of the trust Mr Z is an overseas resident and was hoping to migrate to Australia. However he and his wife have been denied permission. Therefore his son, Mr X and Mrs X, residents of Australia, will be the Appointors.

The change of Appointor amounts to a variation of a continuing trust with the original trust maintaining the same trust purpose or theme. The proposed change would not give rise to a CGT event in relation to the trust property.

Question 2 - Addition of new entities to, and exclusion of existing entities from, class of objects

Clause xxx of the trust deed gives the trustee the power to exclude beneficiaries:

xxx Trustee may exclude

With the written consent of the Appointor, the Trustee may by written resolution or deed (and either revocably or irrevocably) declare that any Beneficiary will no longer be included as a Beneficiary and from the time of the execution of the deed those excluded will no longer have any interest in the Trust Fund. No declaration to exclude a Beneficiary affects their entitlement to any amount set aside for them absolutely before the declaration taking effect.

Clause xxx of the Trust Deed defines ‘beneficiary’ as:

(b) the Principal Beneficiaries;

(c) the mother and father of the Principal Beneficiaries;

(d) if born before the termination date:

(iii) any Child, Grandchild or Great-Grandchild of the Principal Beneficiaries or their parents;

(iv) any Spouse of the Principal Beneficiaries;

(v) any brother, sister, cousin, niece, nephew, uncle or aunt of the Principal Beneficiaries;

…

The Schedule to the Trust Deed lists the following as the Principal Beneficiaries: Mr Z, Mrs Z and Mr Y. It is proposed to ‘add’ as principal beneficiaries Mrs Y and Mr X. As these beneficiaries are already in the class of general beneficiaries, there is effectively no change to the beneficiaries as defined in the Deed. Members of the same family group will continue to control the trust after the changes are made. Therefore a CGT event will not be triggered as the trust is not being terminated. The removal of two beneficiaries is a valid exercise of the Trustee’s powers as provided for in clause xxx of the Trust Deed.