Edited version of private advice

Authorisation Number: 1051857173357

Date of advice: 25 June 2021

Ruling

Subject: Trust resettlement

Question

Will the execution of the proposed Deed of Variation result in a trust resettlement and trigger CGT event A1, CGT event E1 or CGT event E2?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 202x

The scheme commences on

1 July 202x

Relevant facts and circumstances

The Trust was constituted by a deed. The Original Deed provided broad powers to the Trustee to revoke, add to or vary all or any of the provisions of that deed.

The Trustees amended the Original Deed in accordance with their powers and replaced these clauses with new clauses (the Current Deed).

The only asset of the Trust is a parcel of real property.

The Trustee proposes to amend the Current Deed in accordance with their powers under the Current Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

Summary

Execution of the proposed Deed of Variation is a valid exercise of the Trustee power in accordance with the Current Deed. No CGT assets are being disposed of and it will not result in a trust resettlement or trigger any of the CGT events A1, E1 or E2.

Detailed reasoning

Subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event A1 happens where there is a disposal of a CGT asset such that there is a change of beneficial ownership from one entity to another entity.

Amendments to a trust instrument that result in the disposal of an asset, the creation of a trust over an asset by declaration or settlement or result in the transfer of an asset to another trust may trigger CGT event A1.

Whether there is a resettlement of a trust will depend on the actions undertaken, the terms of the trust deed and the trustee's powers.

Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust.

The Commissioner's view on whether CGT event E1 or E2 happens when the terms of a trust are changed is discussed 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 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?.

Paragraph 1 of TD 2012/21 provides that CGT events E1 and E2 do not happen if the terms of a trust are changed pursuant to a valid exercise of power contained within the trust's constituent document 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.

This view was developed in light of the decisions by the Full Federal Court in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 and Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42, where it was held that amendments to a trust that are made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, assuming there is some continuity of property and membership of the trust.

Whilst these cases concerned whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying losses, the Commissioner accepts that the same principles can be applied in determining whether CGT event E1 or E2 has happened (see paragraph 24 of TD 2012/21).

As explained by paragraph 21 of TD 2012/21, the approach adopted by the Full Federal Court in Commercial Nominees, as made clear by Edmonds and Gordon JJ in their joint reasons for judgment 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.

The Commissioner is satisfied that the proposed changes will not cause the Trust to terminate for trust law purposes.

The Commissioner is satisfied that the proposed changes do not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust has been settled on the terms of a different trust.

The proposed changes will be made pursuant to the power of amendment provided in the current Trust deed.

The Trustees of the Trust have not disposed of a CGT asset and therefore CGT event A1 has no application. The proposed amendments to the deed will be a valid exercise of the power conferred pursuant to the Current Trust Deed. CGT event E1 or E2 will not occur.

Conclusion

CGT events A1, E1 or E2 will not happen as a result of the proposed changes because:

•         the variation will not result in a change of ownership of any of the Trust assets

•         the amendment is a valid exercise of the Trustee's powers

•         the proposed changes will not cause the Trust to terminate for trust law purposes, and

•         the proposed changes will not result in an asset of the Trust being settled on the terms of a different trust.