Edited version of private advice

Authorisation Number: 1051726596162

Date of advice: 24 July 2020

Ruling

Subject: Unit trust deed amendments - CGT events E1 and E2

Question 1

Will the proposed amendment of the trust deed give rise to capital gains tax (CGT) events 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(s)

Year ended 30 June 2021

The scheme commences on

1 July 2020

Relevant facts and circumstances

The Trust was established by Unit Trust Deed (the Trust Deed).

The Trustee proposes to amend the Trust Deed.

The proposed amendments to the Trust Deed are stated in the Draft Special Resolution.

The proposed amendments are intended to enable the trustee to issue Income Units. The existing units in the trust will be designated as 'Ordinary units' and will have the same rights to vote and to the capital of the Trust but the rights to the income of the Trust will be reduced if and to the extent that a distribution is made on the income units.

It is intended the Income Units may be issued to certain employees to potentially enable them to participate in profits of the business.

The existing unit holders will remain the same, the Trust property will remain the same and the majority of the rights of the existing unit holders (including rights to vote, rights on redemption and rights to the capital of the Trust) will continue unaffected by the creation of a new class of units.

The following documents form part of the facts:

·        Trust Deed

·        Draft Special Resolution

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Summary

The proposed amendments are considered to be within the powers of the Trustee to amend as contained in the Trust Deed and therefore will not cause CGT event E1 in section 104-55 or CGT event E2 in section 104-60 to happen.

Detailed reasoning

A capital gain or loss is made only if a CGT event happens (section 102-20 of the ITAA 1997). The relevant CGT events to be considered in this case are CGT events E1 and E2.

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.

Section 104-60 of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

The Commissioner has issued 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? (TD 2012/21). TD 2012/21 was published as a result of the court case Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen 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 states that the principles set out in Clark's case have broader application.

TD 2012/21 expresses the view that CGT event E1 or E2 does not happen if the terms of the 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, 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.

TD 2012/21 explains further:

21. .......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 have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power...

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.

26. Whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective.

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.

In summary, CGT events E1 or E2 will not happen if the terms of the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document. The amendments must be properly supported by the power and where the deed explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective these must be met. The amendments must not cause the existing trust to terminate and a new trust to arise or lead to a particular asset being settled on terms of a different trust.

Application to the Trust

The Draft Special Resolution details the proposed amendments to the Trust Deed.

The proposed amendments will enable the Trustee to issue Income Units which are intended to be issued to certain employees to enable them to participate in the profits of the business. The existing Unit Holders will remain the same and the majority of their rights will continue unaffected by the creation of a new class of units. The existing units will be redesignated as Ordinary Units and will have the same rights to vote and to the capital of the Trust, but their rights to the income of the Trust will be reduced if and to the extent that a distribution is made on the Income Units.

The clauses in the Trust Deed allows the Trust Deed to be varied by resolution of the Trustee. For those matters specified in Trust Deed a special resolution of the Unit Holders must be passed to approve the variation.

It is considered that the proposed amendments to the Trust Deed as stated in the Draft Special Resolution are within the powers of the Trustee as specified in the Trust Deed and will satisfy the conditions specified for the exercise of the power to be effective.

The Trustee has the power to amend the Trust Deed and the proposed amendments are within the Trustee's powers. The proposed amendments will not terminate the Trust and will not create a new trust. That is, the continuity of the Trust will be maintained. It is also considered that the proposed amendments will not result in a particular asset being settled on terms of a different trust. Therefore, implementation of the proposed amendments to the Trust Deed will not cause CGT event E1 pursuant to section 104-55 to happen, or CGT event E2 pursuant to section 104-60 to happen.