Edited version of private advice

Authorisation Number: 1052074891633

Date of advice: 11 January 2023

Ruling

Subject: CGT - trust resettlement

Question

Will the proposed amendments to the Trust Deed result in a trust resettlement and cause either capital gains tax (CGT) event E1 or E2 to happen in accordance with sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust was settled on DD Month 20XX.

The Trust Deed allows the Trustee to alter, revoke or vary the provisions of the Trust Deed.

The Trustee proposes to amend the Trust Deed to remove some of the Beneficiaries.

No income or capital distributions have been made to the beneficiaries who will be removed.

The Trustee is concerned that the proposed amendments will result in a resettlement of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-55

Reasons for decision

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

CGT event E2 will happen if an asset is transferred to an existing trust pursuant to section 104-60 of the ITAA 1997.

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 a valid amendment to a trust made pursuant to a power contained in the Trust Deed will not result in CGT events E1 or E2 happening in relation to the trust as long as:

•         the amendment does not cause the trust to terminate for trust law purposes; and

•         the effect of the amendment does not 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, paragraph 24 of TD 2012/21 provides that the Commissioner accepts that the same principles can be applied in determining whether CGT event E1 or E2 has happened.

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.

Therefore, a change in the terms of a trust that is made pursuant to the exercise of an existing power including an amendment to the Trust Deed will not terminate the trust.

Paragraph 26 of TD 2012/21 provides that a change to a trust in exercise of a power under the deed is properly supported by that power is to be determined in accordance with the principles of trust law.

Paragraph 27 of TD 2012/21 provides that even where a trust does not terminate; assets may be held on terms of a distinct trust where a trust asset is held under a different charter of rights and obligations such as to give rise to a different trust.

In your circumstances

The Trust Deed gives the trustee the power to alter, vary or revoke any of the provisions of the Trust Deed.

In the case of the proposed amendments to the Trust Deed, the amendments will not cause the trust to terminate as the Trustee's amendment powers under the Trust Deed to vary any provision are sufficiently broad for the proposed Trust Deed amendments.

In conclusion, the proposed amendment to the Trust Deed is a valid exercise of the power of amendment contained in the Trust Deed and the Commissioner does not consider either CGT event E1 or CGT event E2 happen.