Edited version of private advice

Authorisation Number: 1051714397697

Date of advice: 9 July 2020

Ruling

Subject: Income tax - CGT events E1 and E2

Question

Does the exclusion by the trustee of a beneficiary of the trust constitute capital gains tax (CGT) event E1 or E2 under sections 104-55 or 104-60 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

An individual is a beneficiary of several trusts. The trustee for each of those trusts wishes to remove the individual as a beneficiary of the trust.

For each trust the removal is made under an already existing power contained in the applicable trust deed.

The trusts have been established for the benefit of the members of a family.

Each of the trusts is a discretionary trust.

Copies of the relevant trust deeds and proposed resolutions have been provided.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated.

CGT event E1 is the creation of a trust over a CGT asset by declaration or settlement of that trust, pursuant to section 104-55.

CGT event E2 will occur if an asset is transferred to an existing trust pursuant to section 104-60.

Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 and 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 contains the Commissioner's opinion on situations where the terms of a trust are changed such that it gives rise to CGT Events E1 or E2.

Broadly, TD 2012/21 explains that neither CGT events will occur where the terms of a trust are changed pursuant to a valid exercise of a trustee's powers.

Specifically, paragraph 1 of TD 2012/21 states that the only instances that would trigger CGT events E1 and E2 are:

·         changes that cause the existing trust to terminate and a new trust to be created, and

·         variations that lead to a particular asset being subject to a separate charter of rights and obligations such that the asset has been settled on terms of a different trust.

TD 2012/21 was issued in the light of the following two cases, Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33 (Commercial Nominees) and Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark).

Paragraph 21 of TD 2012/21 explains that:

...as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark, is authority for the proposition that, assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not result in a termination of the trust, despite the extent of the amendments that are made to the trust, and as long as the amendments are properly supported by the power.

Further, paragraph 24 of TD 2012/21 provides that:

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.

It is noted at paragraph 27 of TD 2012/21 that:

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.

From the examples in TD 2012/12, example 1 provides guidance where the trust deed is amended for the addition of new entities to, and exclusion of existing entities from, a class of objects.

It describes a situation involving a family discretionary trust whereby:

• the trust was settled to benefit the members of a family
• under the terms of the trust deed, the trustee has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries, which are defined in the trust deed
• the General Beneficiaries are defined under the terms of the trust deed as husband and wife, their children, their grandchildren, and a private company through which the family runs a business, and
• the trust deed was amended by trustee resolution in relation to the class of General Beneficiaries to:

-        remove the private company, and

-        add the following to the class of General Beneficiaries:

o   the respective spouses of the children;

o   trusts and companies in which the family has a majority controlling interest; and

o   a philanthropic charity unrelated to the family.

In relation to the above situation, the Commissioner's view is contained in paragraph 5 of TD 2012/21:

... the making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.

As in example 1 of TD 2012/21, the trust deed of each of the trusts was settled to the benefit of a class of beneficiaries. It allows for the trustee to exercise a power of amendment to exclude a beneficiary from that class of beneficiaries that is defined under the terms of each of those trust deeds.

Under the proposed trustee resolution for each of the trusts, the trustee will exercise its power to exclude the individual from the relevant class of beneficiaries.

Therefore, in these circumstances neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 will happen.