Edited version of private advice

Authorisation Number: 1051967589841

Date of advice: 1 April 2022

Ruling

Subject: CGT - trust deed variation

Question 1

Will CGT event E1 happen as a result of the execution of the Proposed Deed of Variation?

Answer

No.

Question 2

If the answer to question 1 is no, will CGT event E2 happen as a result of the execution of the Proposed Deed of Variation?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

The Trust was established 30 October 19XX by deed (Trust Deed) with XYZ Pty Ltd as trustee (the Trustee).

Cl 18 of the Trust Deed gives the Trustee the power to revoke, add to or vary all or any of the provisions of the Trust Deed by deed, provided that the law against perpetuities is not infringed, no benefit is conferred on the settlor, guardian, appointor or trustee (unless named as a Specified Beneficiary) and it does not affect any interest which has previously vested.

Proposed Trust Deed Variations

The Trustee wishes to amend the Trust Deed pursuant to the terms of the Proposed Deed of Variation.

The Trustee wishes to adjust the default mechanisms of the Trust Deed.

The Trustee wishes to delineate five distinct subgroups of beneficiaries such that all distributions of income and capital are to be made equally to those groups following given the death of particular beneficiaries. It is intended that flexibility will be maintained to stream income and capital to distinct beneficiaries within each of the Beneficiary Groups.

The Trustee wishes to introduce Group Guardians for each Beneficiary Group, each of whom will be responsible for nominating a beneficiary or beneficiaries within that Beneficiary Group to receive distributions of income and/or capital.

The Trustee wishes to improve the income streaming powers contained in the Trust Deed.

Assumption

"The amendments as set out in the proposed Deed of Variation constitute a valid exercise of the Trustee's amendment power contained in clause 18 of the Trust Deed."

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection104-55(1)

Income Tax Assessment Act 1997 Subsection104-60(1)

Reasons for decision

Question 1

Summary

On the basis of the assumption relied on to make this ruling, the execution of the Proposed Deed of Variation will not result in CGT event E1 happening.

Detailed reasoning

Subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 97) provides:

CGT event E1 happens if you create a trust over a * CGT asset by declaration or settlement.

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) provides at paragraph 1 that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen 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 provides at paragraph 21:

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,[3] 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.

In accordance with the assumption made for this ruling, the execution of the Proposed Deed of Variation will constitute a proper exercise of the power of amendment contained in the Trust Deed.

While the class of beneficiary some of the individuals fall within will change as a result of execution of the Proposed Deed of Variation, they will nonetheless continue to be beneficiaries of the Trust. As a result, it is considered that there is continuity of membership of the trust. It is considered that the Trust will therefore not terminate on execution of the Proposed Deed of Variation.

TD 2012/21 provides at paragraph 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.

TD 2012/21 provides at paragraph 29:

...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

It is not considered that execution of the Proposed Deed of Variation has the effect of assets of the Trust being held to a separate charter of rights or obligations causing those assets to be held on terms of a distinct trust, or cause continuity of property to cease.

Conclusion

Based on the assumption that the execution of the Proposed Deed of Variation will be a valid exercise of the Trustee's amendment power, CGT event E1 will not happen on execution of the Proposed Deed of Variation.

Question 2

Summary

On the basis of the assumption relied on to make this ruling, the execution of the Proposed Deed of Variation will not result in CGT event E2 happening.

Detailed reasoning

Subsection 104-60(1) of the Income Tax Assessment Act 1997 (ITAA 97) provides:

CGT event E2 happens if you transfer a * CGT asset to an existing trust.

The Commissioner's approach to whether CGT event E2 happens in relation to the variation of a trust deed is contained in TD 2012/21 and is outlined above.

As outlined above, this is not a situation where the changing of the terms of a trust pursuant to a valid exercise of a power contained within the trust's constituent document will result in CGT event E1 or E2 happening.

Conclusion

Based on the assumption that the execution of the Proposed Deed of Variation will be a valid exercise of the Trustee's amendment power, CGT event E2 will not happen on execution of the Proposed Deed of Variation.