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Edited version of private advice
Authorisation Number: 1051622415977
Date of advice: 20 December 2019
Ruling
Subject: Capital gains tax - trust resettlement - CGT events E1 and E2
Question
Will:
(a) the resignation of A as the contingent non-general appointer of the Trust or
(b) the removal of A as a nominee of the Trust in relation to the Property or
(c) the resignation of A as a trustee of the Trust or
(d) the resignation of A as a 'remover' of the Trust or
(e) A and B entering into an agreement with the Trustee(s) of the Trust whereby Mr A forfeits all his future income and capital distribution rights in the Trust by declaring no income or capital is required by A or
(f) the combination of any or all of the above
cause capital gains tax event E1 or E2 in sections 104-55 and 104-60 of the ITAA 1997, respectively, to happen to the assets of the Trust?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2020
The scheme commences on:
01 July 2019
Relevant facts and circumstances
Overview
In 20XX, the agreement known as the XX Trust was settled with C as the Settlor and A and B as trustees.
The appointers, trustees and removers of the Trust are both A and B. There are no successor officeholders in relation to A and B in their capacity as appointers, trustees and removers.
No independent trustees previously been appointed.
The primary beneficiaries of the Trust are A and B. Further, additional beneficiaries can include A's and B's descendants, spouses of A's and B's descendants, a spouse of A's and B's descendants or charitable organisations, as well as trustees of another trust for the principal benefit of one or more of these entities.
The agreement was entered into on XX in relation to the Trust whereby, among other things, it was agreed that the Property would be legally held solely in A's name on behalf of the beneficiaries of the Trust.
After the actions proposed in this ruling application have been completed, the Property will continue to be held on trust for the beneficiaries of the Trust.
The actions proposed in this ruling application do not give rise to a resettlement under the foreign law, which is the governing law of the Trust deed.
The Trust deed has not previously been amended or varied and there is no additional 'surrounding context or any relevant admissible evidence' (unless otherwise referred) in relation to the Trust (i.e., further trust instruments or agreements) which are relevant.
The deed for the Trust has been provided.
Reasons for decision
Summary
The changes to the trust arrangement do not cause either CGT event E1 in section 104-55 or CGT event E2 in section 104-60 of the ITAA 1997 to happen.
Detailed reasoning
Relevant legislation
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 E2.
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 E2
Section 104-60 of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.
Commissioner's public rulings
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? The Commissioner states that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT events E1 and E2 does not happen 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 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.
In relation to continuity of a trust estate, paragraph 20 of the TD 2012/21 refers to the decision made in the Clark case that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purpose.
Furthermore, paragraph 24 of the TD 2012/21 recognises the principles established by the Clark case and the Commercial Nominees case, which are ' ... 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,4 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 happening5.'
The consideration in paragraph 27 of the TD 2012/21 is that, '[e]ven 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 ...... such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.'
In the present case, pursuant to its powers conferred under the trust deed, the Trustee wishes to make a number of changes to the trust arrangement.
On the facts, the making of the proposed changes would not cause termination of the Trust or give rise to any asset under the Trust estate being settled on terms of a distinct trust, and nothing indicates otherwise. The proposed changes to the administration of the trust are within the terms of the trust deed. Therefore, it is considered that, the proposed changes would not give rise to the happening of a CGT event E1 or E2 under sections 104-55 or 104-60.