Edited version of private advice

Authorisation Number: 1052160255252

Date of advice: 24 August 2023

Ruling

Subject: CGT and 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 of the Trust?

Answer

No

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Trust was created by deed in XXXX.

The Trust Deed defines the vesting date.

The Trust Deed provides the state within which it shall be construed and whose law it shall take effect in accordance with.

The Trustee and the Settlor have discussed the succession difficulties arising from the vesting date and family situations of the Beneficiaries. It is proposed to change the governing law of the Trust to another state. This will be achieved by proposed amendments to the Trust Deed.

The Trust Deed permits the Trustee to amend the terms of the trust as per its clauses.

Assumptions

The proposed amendment to the Trust Deed that will change the governing law of the Trust to another state is effective. That is, the amendment validly causes the Deed to be construed and take effect in accordance with the law of that state.

Where the proposed amendment to the Trust Deed is taken to be beyond the power conferred by the terms of the deed of a trust, and not otherwise authorised by a court under relevant trust legislation, it will be of no effect,[1] and would not result in either CGT event E1 or CGT event E2 happening.[2]

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 otherwise stated.

Question

Will CGT event E1 or CGT event E2 in sections 104-55 or 104-60 happen as a result of making proposed amendments to the Trust Deed of the Trust?

Summary

Neither CGT event E1 or CGT event E2 will happen when the proposed amendments to the terms of the Trust is implemented pursuant to a valid exercise of a power by the Trustee contained within the Trust Deed.

Detailed reasoning

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

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

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).

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.

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. This view is confirmed in paragraph 21 of TD 2012/1:

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.

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 CGT event E2 has happened.

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.

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.

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. Examples 3 and 3A present a case where the deed permits extension of the vesting date. They both conclude 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. Example 3A makes reference to the power not infringing upon the rule against perpetuities.

In the present case, the amendments to the Trust Deed will change the governing law of the Trust to a state where the need for a vesting date has been removed, thus avoiding an infringement upon the rule against perpetuities.

The Trust Deed gives the Trustee the power to add to, vary or revoke any of the provisions of the Trust Deed, including the vesting date.

The proposed amendments to the Trust Deed 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 to occur.

In conclusion, the proposed amendments to the Trust Deed are a valid exercise of the power of amendment contained in the Trust Deed and neither CGT event E1 or CGT event E2 will happen as a result.

[1] Example 1 in TR 2018/6

[2] Footnote 6 of TD 2012/21