Edited version of private advice

Authorisation Number: 1051583205177

Date of advice: 19 September 2019

Ruling

Subject: Trust resettlement

Question

Will the proposed amendment(s) to the Trust Deed (extension of the Vesting Date, amendment to the definition of Appointer and amendment to the definition of Guardian) give rise to CGT event E1 under section 104-55 or CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), such that there is a resettlement of the trust?

Answer

No

This ruling applies for the following period:

1 July 2019 to 30 June 2020

The scheme commences on:

The date the proposed Deed of Amendment is executed

Relevant facts and circumstances

The trust deed for the Trust was settled in 1975 between the Settlor, and a Corporate Trustee

The Trust is a discretionary trust

The Vesting Date for the Trust Deed is 30 June XXXX

The Perpetuity Period is 80 years from the date of commencement of the Deed

According to the Schedule:

Guardian: Named and spouse after death

Appointer: Named and spouse after death

Specified Beneficiaries: The children of the Guardian and spouse

General Beneficiaries: Specified beneficiaries

Clause 28 of the Trust Deed provides the Trustee with a general power to vary the terms of the Trust.

Subclause 1(12)(b) of the Trust Deed provides an express power to the Trustee to appoint a date later than 30 June XXXX as the "Vesting Day" subject to the consent of the Guardian on condition that such date is later than the date specified in the Schedule, and also being within the period of perpetuity.

The Trustee of the trust is proposing the following amendments to the Trust Deed:

1. Vesting Day

The Vesting Day of the Trust shall be 17 May ZZZZ

2. "Appointer"

The definition of 'Appointer' shall be amended by including after the word "Schedule" in the second line of the definition the words "or any other person appointed by the current Appointer, either by deed or will, whether during the lifetime of the current Appointer or after his or her death".

3. "Guardian"

The definition of "Guardian" shall be amended by including after the word "Schedule" in the second line of the definition the words "or any other person appointed by the current Guardian, either by deed or will, whether during the lifetime of the current Guardian or after his or her death."

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-55

Reasons for decision

A capital gain or loss is made only if a CGT event happens (section 102-20 of the ITAA 1997). The CGT events at issue are CGT events E1 and A1.

CGT Event E1

Section 104-55 of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

CGT Event A1

CGT Event A1 under section 104-10 of the ITAA 1997 happens when you dispose of a CGT asset. You are deemed to dispose of a CGT asset if a change of ownership happens from you to another entity, whether because of some act or event or by operation of law.

Subsection 102-25(1) of the ITAA 1997 provides that if more than one CGT event can happen, then you use the one that is the most specific to your situation. In this case CGT event E1 is the most specific event, and is considered firstly.

Overview

CGT event E1 will happen where changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created.

As a result of the Full Federal Court decision in FCT v. Commercial Nominees of Australia Ltd [1999] 43 ATR 42 the Commissioner published a Statement of Principles regarding trust resettlements. The basic proposition underlying the Statement was that a new trust arises where there was a 'fundamental change' to the trust relationship and that a change in the 'essential nature and character' of the trust relationship can result in the creation of a new trust.

However, in January 2011 the Full Federal Court handed down a decision in the Commissioner of Taxation v. David Clark (2011) 79 ATR 550 and as a result the Commissioner published Taxation Determination 2012/21 (TD 2012/21) to clarify when CGT event E1 or E2 happens.

Whether a new trust is created will depend, among other things, on the terms of the original trust, the powers of the trustee and the original intentions of the Settlor.

General Observations

The beneficiaries of the Trust have a contingent interest in the income and capital of the Trust and following the proposed amendments to the trust deed, the beneficiaries will still have that contingent interest in the income and capital of the Trust. There are no changes being made to the rights or obligations of the trustee nor is there any addition or depletion of the trust property.

Extending the Vesting Day

The proposed amendment to the Vesting Day of the Trust will extend the date from 30 June XXXX to 17 May ZZZZ.

The issue of extending a vesting date is considered in Example 3A of TD 2012/21. It states:

10A. The Wombat Family Trust is a discretionary trust settled on 31 March 1981 to benefit the members of the Wombat family. The eligible beneficiaries of the trust are defined as Mr William Wombat, his spouse Wanda, any of his children or grandchildren born before the trust's vesting date and any spouse of his or his children or grandchildren born before the vesting date. The deed contains a clause specifying the vesting date as 31 March 2021.

10B. The trust deed also contains a clause granting the trustee a power of variation that can be exercised prior to the vesting date, and which includes enlarging any category of eligible beneficiaries so far as the power shall not infringe the rule against perpetuities.

10C. The trustee wishes to extend the vesting date of the trust so as to enlarge the class of eligible beneficiaries that may benefit under the trust to include children, grandchildren or spouses of children or grandchildren born after the vesting date.

10D. The trustee resolves to extend the vesting date to 31 March 2051. Extending the vesting date to 31 March 2051 will not infringe the rule against perpetuities.

10E. The clause governing the trustee's powers to vary the trust deed contemplates that enlarging the category of eligible beneficiaries may involve extending the vesting date of the trust, given the specific limitation of the trustee's powers to not infringing the rule against perpetuities. The trustee's resolution is a valid exercise of the amendment power.

10F. The making of the resolution, being a valid exercise of a power of variation contained within the trust deed, does not give rise to the happening of a CGT event. The result would be the same if the vesting date was extended with the approval of a relevant court rather than under the trust deed.

Clause 28 of the Trust Deed provides the Trustee general powers to vary the Trust Deed. Subclause 1(12)(b) of the Trust Deed provides an express power to the Trustee to appoint a later Vesting Day, subject to the agreement of the Guardian and the date is within the perpetuity period. Both of these requirements will be met by the proposed new Vesting Day.

Stein v Sybmore Holdings Pty Ltd NSWSC 1004 notes that the effect of an extension to a vesting date will be to change the beneficial interests in the Trust Fund; however having regard to the particular circumstances of this case, the express power of amendment of the Vesting Date combined with the short extension to the Vesting Date to align with the perpetuity period, the potential change in beneficial interests is not of a fundamental nature and is consistent with changes in the membership of a continuing beneficiary class.

Overall, it is considered that the proposed change to the Vesting Date of the Trust is an extension of the term of the trust and is consistent with a continuing trust estate.

Changes to definitions of Guardian and Appointor

Currently the respective definitions of Guardian and Appointor refer to the Schedule to the Deed for the occupier of those positions and their specified next in line. The proposed changes to the definitions are to allow the existing Guardian and Appointor to nominate a substitute, either during their lifetime or by a will.

Paragraphs 24 and 27 of the Appendix 1 Explanation to TD 2012/21 states:

24. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, the ATO accepts that a change in the terms of the trust pursuant to exercise of an existing power (including an amendment to the deed of a trust), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

The proposed changes to the definitions do not alter either the rights of beneficiaries or the assets of the Trust and the Commissioner, in the absence of any other factors, accepts they are changes of an administrative nature.

Cumulative changes

The combined effect of the proposed amendments namely the changes to the Vesting Date and the definitions of Guardian and Appointor are indicative of a continuing trust estate. Accordingly, the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created.

CGT event E1

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, CGT event E1 under section 104-55 of the ITAA 1997 will not happen.

CGT event A1

As the proposed amendments do not cause a change in the trust relationship such that one trust ceases and a new trust is created, there is no change in ownership of the Trust Property and no disposal of a CGT asset under subsection 104-10(2) of the ITAA 1997. Therefore CGT event A1 under section 104-10 will not happen.