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Edited version of private advice
Authorisation Number: 1051626035095
Date of advice: 14 January 2020
Ruling
Subject: Trust - resettlement
Question:
Will the proposed amendments to the Trust Deed cause a resettlement of the Trust for capital gains tax purposes?
Answer:
No
This ruling applies for the following period:
Income year ending 30 June 2020
The scheme commences on:
1 July 2019.
Relevant facts and circumstances
The Trust was established by a deed of settlement (the Trust Deed) executed by the settlor and the original trustee.
The Trust Deed contains the following:
- a list of the 'Eligible beneficiaries" of the Trust which include Australian resident and foreign resident beneficiaries for taxation purposes
- that the "Trust Fund" includes the settled sum of $XX and all other moneys or property at any time transferred to, and accepted by, the Trustee as additions to the Trust Fund, as well as any accretions
- a clause outlining that the Trustee can with the consent of the Parent during their lifetime (and after their death with the consent of their legal personal representatives) by deed, can change the beneficiaries of the Trust and their interest/s in the Trust Fund.
The Trust is a discretionary trust with the 'Primary beneficiaries' being Australian residents for taxation purposes.
The Trust distributes profits to non-tax foreign beneficiaries.
It is proposed the Trust Deed be varied to exclude any foreign beneficiaries.
The Parent will consent for the Trustee to make the proposed changes to the Trust Deed in accordance with a Deed of Amendment and will join in the Deed of Amendment to confirm their consent.
No Trust asset/s will be transferred as a result of the proposed changes under the Deed of Amendment.
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1
Income Tax Assessment Act 1997 Part 3-3
Reasons for decision
Trust resettlement
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 capital gains tax (CGT) events such as CGT event E1 which is triggered when a trust resettlement occurs, that is, when one trust estate has ended and another has replaced it.
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.
Application to this situation
It is proposed that a Deed of Amendment will be prepared to reflect the changes to the Trust Deed. The 'Parent' will consent to the changes in the Trust Deed in accordance with the Deed of Amendment. The intended changes to the Trust Deed that will be contained in the Draft Deed of Amendment are within the powers provided in the Trust Deed.
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 being implemented. Therefore, neither CGT event E1 nor CGT event E2 will occur as a result of the implementation of the Deed of Amendment. It is also considered that no other CGT event will occur as a result of the implementation of the Deed of Amendment. It is viewed that resettlement of the Trust will not occur on the amendment of the Trust Deed.