Edited version of private advice

Authorisation Number: 1051756641581

Date of advice: 18 September 2020

Ruling

Subject: Trust deed amendments

Question

Will the proposed amendments to the Trust Deed cause a resettlement of the Trust giving rise to CGT event E1 or E2 in section 104-55 or 104-60 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

Year ending 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

The Trust was established by Deed as a discretionary trust.

The Trustee is a company since the inception of the Trust. The company trustee only acts as Trustee of the Trust. It does not trade itself as a company.

The Trust has two groups of unrelated primary beneficiaries.

The 'Primary Beneficiaries' listed in the Schedule to the Deed are Beneficiary A and Beneficiary B and the children and remoter issue of each of them.

The' Appointors' listed in the Schedule to the Deed are also Beneficiary A and Beneficiary B.

The Deed contains default provisions for the distribution of income and capital.

The default clauses are triggered if the Trustee does not resolve to distribute income by end of the income year and/ or capital upon winding up of the Trust to any of the beneficiaries.

The default beneficiaries are the 'Primary Beneficiaries' as listed in the Schedule to the Trust Deed.

The term 'Beneficiaries' means the Primary Beneficiaries and General Beneficiaries and includes any person or entity that may at any time come within the definition of a Primary Beneficiary or General Beneficiary, notwithstanding that the person or entity may not be in existence or may not have been within the definition of a class of Beneficiaries at the Date of the Deed.

The term 'General Beneficiaries' include the Primary Beneficiaries in both their individual capacity or in their capacity as trustee, and their family group including guardians; an eligible company, partnership, trust, charitable institution and any other entity nominated by the Trustee with the consent of the Appointor/s.

The Trust has been operating a business since its inception. The business has a certain number of employees at various times, including the directors of the company trustee.

The Directors of the company trustee are also the Primary Beneficiaries (Beneficiary A and Beneficiary B).

One of the directors (Beneficiary B) wants to leave the business for good. The other director (Beneficiary A) wants to remain and continue to operate the business under the current structure as a discretionary trust.

The Trust Deed provides the Trustee with powers to amend the terms of the Trust subject to written approval by the Appointors. The Trustee's powers to amend are also subject to certain restrictions.

The Trust Deed provides that an Appointor may resign by notice in writing to the Trustee.

The resigning director (Beneficiary B) will be removed, together with the children and remoter issue, as Primary Beneficiaries by executing a deed of variation.

Based on the Draft Deed of Variation provided, it is proposed that the Trustee will exercise its powers to amend the terms of the Trust by removing Beneficiary B as one of the 'Primary Beneficiaries'.

The proposed amendments will be approved by the Appointors as evidenced by their execution of the Deed of Variation.

Following the execution of the Deed of Variation, Beneficiary B will resign as Appointor of the Trust and the resignation will be documented as provided in the Trust Deed.

Beneficiary B will also resign as an officeholder of the company trustee.

Beneficiary A will become the sole officeholder of the company trustee.

It is proposed that the shares owned by Beneficiary B in the company trustee will be transferred for nominal value to Beneficiary A.

Accordingly, Beneficiary A will also become the sole shareholder of the company trustee.

All assets of the Trust remain to be assets of the Trust. There will be no change of ownership of assets other than arms-length transactions resulting from the normal running of the business.

Relevant legislative provisions

Income Tax assessment Act 1997

section 102-20

section 104-55

section 104-60

ATO references

Taxation Determination TD 2012/21

Reasons for decision

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

Section 102-20 provides that a capital gain or capital loss is made only if a CGT event happens. The relevant CGT events to be considered in this case are CGT events E1 and E2.

Section 104-55 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Section 104-60 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 as a result of the court case decision in 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).

Although 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 explains 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 the asset has been settled on terms of a different trust.

TD 2012/21 further explains:

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 where the amendments are properly supported by the power to amend and where the deed explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective, the conditions must also be satisfied. 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 facts and circumstances

The Draft Deed of Variation details the proposed amendments to the Trust Deed. It provides that the Trustee varies the terms of the Trust by removing specifically Beneficiary B as 'Primary Beneficiary', without affecting any other part of the beneficiary class itself. The Appointors will consent to the amendments by executing the Deed of Variation.

The Trust Deed provides the Trustee with the powers to amend subject to written approval by the Appointors. The Deed also provides for specific conditions for the amendments to be effective.

It is considered that the proposed amendments to the terms of the Trust as contained in the Draft Deed of Variation are within the powers of the Trustee to amend as provided in the Trust Deed. It is also considered that the conditions for the amendments to be effective are satisfied.

Therefore, the proposed amendments will not cause a resettlement of the Trust and not giving rise to CGT event E1 in section 104-55 or CGT event E2 in section 104-60.