Edited version of private advice

Authorisation Number: 1052104971555

Date of advice: 1 May 2023

Ruling

Subject: Trust deed amendments

Question 1

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

Answer

No.

Question 2

If property is held on revenue account, would a disposal occur as a result of the proposed amendments to the Trust Deed that could result in an assessable amount or a deductible amount under section 6-5, section 8-1 or Division 40 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.     Company B (the Trustee) is the trustee for the Trust (the Trust).

2.     The Trust was established by a deed in 20XX (the Trust Deed).

3.     The Trust is part of a wider group of entities which comprise of both corporate entities and trusts (the Group).

4.     The Trustee of the Trust is proposing to execute a deed of variation (Proposed Deed of Variation) which will change a number of the clauses of the Trust Deed.

5.     The Trustee has the appropriate power to enable the proposed amendments to be made under the Trust Deed.

6.     These amendments are being made in order to ensure consistency, comply with particular legislative requirements and simplify the interpretation of trust deed clauses across the Group.

Assumption

7.     The Trust Deed will not be amended or varied prior to the execution of the Proposed Deed of Variation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

Question 1

Summary

1.     The proposed changes to the Trust Deed will not cause CGT event E1 or E2 in section 104-55 or

section 104-60 of the ITAA 1997 to happen.

Detailed Reasoning

2.     CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement - subsection 104-55(1) of the ITAA 1997.

3.     CGT event E2 happens if a CGT asset is transferred to an existing trust - subsection 104-60(1) of the ITAA 1997.

4.     Case law guidance on when amendments to an existing trust instrument may lead to the creation of a new trust by declaration or settlement can be found in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220 (Commercial Nominees) where the Full Federal Court stated:

55....in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust.

56. So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the 'taxpayer' for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself. [emphasis added]

5.     The 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 (Clark) also adopted the decision in Commercial Nominees as authority of the principle that assuming that 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 pursuant to the trust deed will not result in a termination of the trust.

6.     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? was issued in response to the decision in Clark's case.

7.     TD 2012/21 sets out the Commissioner's view on whether, as a result of changes being made to an existing trust, a new trust comes into existence causing CGT event E1 of the ITAA 1997, or an asset is transferred to another trust causing CGT event E2 to happen.

8.     TD 2012/21 expresses the view that CGT event E1 or E2 of the ITAA 1997 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.

9.     Paragraph 21 of TD 2012/21, in part, notes that:

...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 result in a termination of the trust, despite the extent of the amendments that are made to the trust, and as long as the amendments are properly supported by the power.

10.  Paragraph 24 of TD 2012/21 further explains that:

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,⁴ 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.

11.  It is however highlighted in paragraph 27 of TD 2012/21 that:

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.

12.  TD 2012/21 provides a number of examples. Of particular relevance to the current circumstances are Example 1 (paragraphs 2 to 5) and Example 3 (paragraphs 7 to 10), which read follows:

Example 1: addition of new entities to, and exclusion of existing entities from, class of objects

2.    The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists.

3.    Having decided to get out of the flower industry, the Squirrel Family disposes of their interest in Oak Pty Ltd to an unrelated third party.

4.    The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:

•          the respective spouses of the children;

•          trusts and companies in which the family has a majority controlling interest; and

•          a philanthropic charity unrelated to the Squirrel Family.

5.    The making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.

Example 3: addition of definition of income, power to stream, and extension of vesting date

7.    The Lime Trust is a discretionary trust settled in 1980 to benefit the members of the Linden family. The trust deed contains no definition of income nor does the deed contain a provision permitting the trustee of the trust to stream income. The deed contains a clause specifying the date on which the trust is to vest as 30 September 2020.

8.    Pursuant to an unfettered power of amendment in the deed, the trustee resolves in writing to amend the deed to insert two clauses:

•          the first defining the income of the trust to equal the net income of the trust as calculated under subsection 95(1) of the Income Tax Assessment Act 1936 (ITAA 1936), excluding franking credits, unless the trustee otherwise determines; and

•          the second authorising the trustee to separately identify and label various sources of income or receipts that form part of the income of the trust estate and to deal with those amounts by reference to their labelling (that is, to 'stream' particular sources of income to particular beneficiaries).

9.    The trustee further resolves to amend the deed by changing the vesting date to 30 September 2050 or such earlier date as the trustee may determine.

10.  The making of the resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.

Application to your circumstances

13.  As detailed in the Relevant facts and circumstances, although subject to several conditions, the Trust Deed provides the Trustee with broad powers to revoke, add to or vary all or any of the provisions of the Trust Deed at any time by deed.

14.  In this case, the Trustee is proposing to vary the Trust Deed.

15.  In the current circumstances, the proposed key amendments are considered comparable to the situations described in Example 1 and Example 3 of TD 2012/21, where the making of such resolutions was deemed a valid exercise of a power of amendment contained within the applicable trust deed.

16.  The proposed changes to the Trust Deed are also considered to fall within the scope of the Trustee's power of amendment provided for in the Trust Deed. In this regard, it is noted that the Proposed Deed of Variation specifically addresses meeting the conditions required, to execute the Proposed Deed of Variation, as set out in the Trust Deed. In addition, the proposed amendments are not considered to fall within the specific restrictions on the powers of variation set-out in the Trust Deed. Accordingly, execution of the Proposed Deed of Variation is considered a valid exercise of the Trustee's powers of amendment.

17.  As the proposed amendments are within the Trustee's powers contained in the Trust Deed, the Commissioner considers that, following the execution of the Proposed Deed of Variation to amend the terms of the Trust Deed, there will be continuity:

•         of the Trust property;

•         in the membership of the Trust (apart from the exclusion of various potential beneficiaries under the Trust Deed); and

•         in the operation of the Trust.

18.  The underlying principles encapsulated in paragraphs 21 and 24 of TD 2012/21 provide that, assuming there is some continuity of property and membership of a trust, an amendment to the trust that is made in a proper exercise of a power of amendment contained under the trust deed will not result in a termination of the trust - regardless of the extent of the amendments, so long as the amendments are properly supported by the power.

19.  On this basis, as continuity in the membership, operation and property of the Trust would be maintained following the execution of the proposed amendments to the Trust Deed pursuant to a valid exercise of the amendment power in the Trust Deed, such amendments would not result in a termination of the Trust. This is consistent with the decisions in both the Commercial Nominees and Clark cases.

20.  Having regard to paragraph 27 of TD 2012/21, the Commissioner is also satisfied that the proposed amendments would 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 would be settled on the terms of a different trust.

21.  Therefore, in accordance with paragraph 1 of TD 2012/21, executing the Proposed Deed of Variation to amend the Trust Deed pursuant to a valid exercise of the amendment power in the Trust Deed would not cause either CGT event E1 or CGT event E2 of the ITAA 1997 to happen.

Question 2

Summary

22.  The proposed amendments to the Trust Deed will not cause a disposal to occur that could result in an assessable amount or a deductible amount under section 6-5, section 8-1 or Division 40 of the ITAA 1997 if property is held on revenue account.

Detailed Reasoning

23.  For the reasons outlined above with respect to CGT events E1 and E2 of the ITAA 1997, it is considered that the proposed amendments to the Trust Deed will not cause a termination of the Trust (and the creation of a new trust) nor the Trust asset's being subject to a separate charter of rights and obligations.

24.  Accordingly the proposed amendments to the Trust Deed will not cause a disposal of the Trust's assets that could result in an assessable amount or a deductible amount under section 6-5, section 8-1 or Division 40 of the ITAA 1997 for the Trustee.