Edited version of private advice

Authorisation Number: 1051840271879

Date of advice: 11 June 2021

Ruling

Subject: CGT event E1 and CGT event E2 happening as a result of trust deed amendment

Question

Will CGT event E1 or CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of making proposed amendments to the Trust Deed?

Answer

No

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            The Trust is a unit trust and is an Australian resident for tax purposes.

2.            The Trust was established by a Deed that is binding on the Trustee and all Members.

3.            Since the Trust was established, no amendments had been made to the Trust Deed.

4.            The Trust Deed permits the Trustee to amend the terms of the trust.

5.            In implementing a restructure of the Trust, it is proposed that the terms of the Trust be amended to give the Trustee power to reconstruct the capital of the Trust. The purpose of the proposed amendments is also to update the Trust Deed and clarify any matters in the deed regarding fixed entitlement.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-55

Income Tax Assessment Act 1997, subsection 104-55(1)

Income Tax Assessment Act 1997, section 104-60

Income Tax Assessment Act 1997, subsection 104-60(1)

Reasons for decision

All legislative references are to the ITAA 1997 unless stated otherwise.

1.            Subsection 104-55(1) states 'CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.'

2.            Subsection 104-60(1) states 'CGT event E2 happens if you transfer a CGT asset to an existing trust.'

3.            The Commissioner's view on the application of subsections 104-55(1) and 104-60(1) is set out in 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).

4.            Paragraph 1 of TD 2012/21 states that CGT event E1 and CGT event E2 will not happen where 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.

5.            The Commissioner's view in TD 2012/21 is based on the principles established in Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark [2011] FCAFC; 2011 ATC 20-236; (2011) 79 ATR550 (Clark). Paragraph 21 of TD 2012/21 states:

Furthermore, 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 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.

6.            Paragraphs 24 and 27 in TD 2012/21 state that a change in the terms of a trust that is made pursuant to the exercise of an existing power (including an amendment to the deed of a trust) will not terminate the trust and will not result in CGT event E1 happening, unless assets originally held as part of the trust property commence to be held under a separate charter of rights and obligations as a result of changes to the terms of the trust such as to give rise to the conclusion that those assets are now held on the terms of a different trust.

7.            Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can also be found in the Examples in TD 2012/21. Example 2 presents a case where the deed permits amendment of the deed with the consent of all the of the Unitholders. It states that the making of the resolution, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.

8.            Based on the established principle, where 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 the termination of the trust, so long as the amendments are properly supported by the power.

9.            In the present case, the Trust Deed permits the terms of the Trust to be amended similar to Example 2 in TD 2012/21 in that the amendments:

•                     are pursuant to provisions in the existing deed, and

•                     will be made upon consent of the existing unitholders (by Special Resolution).

10.          The proposed amendments will be implemented pursuant to a valid exercise of a power contained within the Trust Deed.

11.          There will be no change in the property that the Trust holds immediately before and immediately after the proposed amendments are implemented.

12.          The Members will be beneficiaries of the Trust immediately before and immediately after the proposed amendments are implemented.

13.          All the assets of the Trust are subject to the same charter of rights and obligations.

14.          As the proposed amendments will be made pursuant to a valid power under the Trust Deed and there is a continuity of property and membership, the trust will not terminate or be resettled or cause any of the assets to be transferred to a separate and existing trust as a result of the amendments.

15.          Therefore, in accordance with TD 2012/21, CGT event E1 or CGT event E2 will not happen when the proposed amendments are implemented to change the terms of the Trust that is made pursuant to a valid exercise of a power contained in the Trust Deed.