Edited version of private advice

Authorisation Number: 1052198124079

Date of advice: 24 January 2024

Ruling

Subject: CGT - trust resettlement

Question

Will capital gains tax (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 periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

24 January 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust was settled by the Settlor by the Deed over one hundred years ago.

Present position

The Deed has been amended several times over the years.

The Deed is now outdated in numerous respects and needs to be modernised in terms of structure, language, definitions, statutory references, governance rules, trustee powers, composition and appointment of Trustees and for general use.

Moreover, such changes are necessary to enable the Trustees to adhere to current legislative requirements, current trustee duties and good governance standards.

The Trustees wish to amend the Deed.

The Deed allows the Company with the consent of the Trustees to revoke, alter or vary any of the trusts and provisions of the Deed and to declare in lieu thereof new or other trusts and provisions provided that such new or other trusts or provisions concerning the Trust Property or the income thereof shall be in favour of the employees or former employees of the Company, or the dependants of such employees or former employees, or some of such persons.

Proposed changes

The proposed changes to the Deed are set out by 'Deed of Amendment', which incorporates changes to modernise language and structure and to include updated definitions and updated statutory references.

Assumptions

The Trustee has the power to amend the clauses of the Trust Deed under the Trust Deed; The Amending Deeds are within the amendment powers of the Trust Deed and do not enliven any restrictions or limitations on the power of amendment under the Trust Deed.

The Court will to the extent it considers necessary approve each of the variations made in the Deed of Amendment in accordance with relevant section.

Following the proposed changes in the Deed made by Deed of Amendment, it is assumed that throughout the Ruling Period:

•                     no new Trustee will be appointed

•                     any of the current Trustees will not be removed

•                     the entities controlling the Trust and benefiting from the Trust will remain the same

•                     obligations of the current Trustees will remain the same

•                     rights of the beneficiaries will not change.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

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)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'

Reasons for decision

A trust resettlement will occur for income tax purposes where one trust estate has ended, and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue as a result of CGT event including E1.

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.

In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark), it was established that a trust will not be terminated provided that any amendment to the trust is made in accordance with a power conferred by the Deed and there is some continuity of property and membership of the trust.

Following Clark, the Commissioner issued 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 documents, or varied with the approval of a relevant court?.

In TD 2012/21 the Commissioner expresses the view that in the circumstances where 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, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 happens 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 asset has been settled on terms of a different trust.

For CGT event E1 to occur, it is required that there be both the creation of a trust and that this be done by way of declaration or settlement.

The phrase 'you create a trust over a CGT asset' is to be understood by reference to the general law of trusts.

In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980], Hope JA analysed the 'very nature of a trust' in terms of a personal obligation of a trustee annexed to property to hold the property for the benefit of another.

In order to 'create' a trust, there must be a creation of both elements of a trust; that is, a creation of personal obligations and a creation of rights annexed to property.

Notwithstanding that an existing trust estate may not have come to an end and the entirety of the trust fund settled on terms of a new trust, it is possible for assets to be settled on a new trust estate that has been separated from (or carved out of) the original trust fund. This may occur notwithstanding that the transactional documents executed to affect such a separation do not expressly speak of the asset having been settled on a new trust.

The decision of the Supreme Court of South Australia in Dyda P/L & Anor v Commissioner of State Taxation [2013] SASC 156 (Dyda), albeit concerned with a different legislative regime, is instructive in this context.

In Dyda the Supreme Court of South Australia considered whether a series of steps to transfer control of a real property to the Dyda group gave rise to a stamp duty liability. The land in question was held in a unit trust, the Woodville Property Trust. Units in this trust were held by two family trusts, the Meeuwissen Family Trust and the Young Family Trust.

The transfer of the control of the real property was affected through a series of steps. First Dyda Pty Ltd was appointed as trustee of the part of the trust assets of the Woodville Property Trust which comprised the real property. This part of the trust was to be known as the Burleigh Avenue Trust. The trust deed was amended to allow for a new type of units, funding units, which could receive income in priority to all existing units. Dyda Nominees was appointed as trustee to part of the Meeuwissen Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 2. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 2. Similarly, Dyda Nominees was appointed as trustee to part of the Young Family Trust comprising 1 ordinary unit in the Burleigh Avenue Trust. This was henceforth known as the Burleigh Avenue Trust No. 3. John Dyda was also made guardian and appointor of the Burleigh Avenue Trust No. 3.

The appellants argued that upon appointment of the new trustee, no rights were conferred in relation to the trust property. The rights remained as they were because the same persons remained objects and beneficiaries of the discretionary trusts.

Stanley J rejected the arguments of the appellants. At paragraphs [143] - [144] he concluded as follows:

143. The appointment of Dyda Nominees as trustee of the Burleigh Avenue Trust No. 2 and No. 3, was in each case, effectively the resettlement of the units under a new trust rather than the appointment of a new trustee to existing trusts. The requisite continuity of the trust did not exist.

144 The continuity of trusts was broken because of the transfer of control of these two discretionary trusts to the Dyda group, which occurred on 8 March 2007. This was achieved by the appointment of Dyda Nominees as the trustee, and by the appointment of John Dyda as the appointor and guardian under the trusts. In his capacity as guardian, John Dyda could control the distributions of some income and of all of the capital of the trusts. A member of the class of potential beneficiaries of the trusts who was not a member of the Dyda group could not realistically expect ever again to receive any distributions under the trusts. This conclusion is reinforced by the granting of the indemnities. Accordingly, Dyda Nominees acquired an absolute interest in the ordinary units.

Dyda demonstrates that in particular circumstances the appointment of different trustees and appointors over specific trust assets can cause those assets to be settled on terms of a new trust.

The Commissioner's view on the potential capital gains tax implications of a 'trust split' is contained in Taxation Determination TD 2019/14 Income Tax: Will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens?. For this determination, a trust split is defined as an arrangement which generally involves the transfer of some of the assets of the original trust to a new trust fund that has been separated, or carved out of, the original trust fund. TD 2019/14 at paragraph 47 sets out that the purpose of such arrangements is directed to separating the functional operation of the trust. It is put into place with the intention of:

(a)          separating those who control and can benefit from part of the trust corpus transferred to the new trustee from those who control and benefit from the remaining assets held by the original trustee

(b)          removing the fiduciary obligations of the original trustee in relation to the assets transferred to the new trustee

(c)           removing the entitlement of the original trustee to be indemnified out of the transferred assets for expenses incurred after the introduction of the new trustee, and

(d)          ensuring that the new trustee will have no fiduciary obligations in respect of the assets retained by the original trustee and will have no right to be indemnified from those assets.

By declaration or settlement

The second element necessary for CGT event E1 to happen is that the creation of the trust is by declaration or settlement.

A trust is created by declaration within the meaning of subsection 104-55(1) when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property (Kafataris v. DC of T (2015) 243 FCR 291 at [26] (Kafataris)). Transactional documentation that evidences an express intention to hold the transferred assets subject to the terms of the trust deed, may suffice to create a trust over those assets by declaration.

A trust is created by settlement when property is vested in a trustee for the benefit of others (Taras Nominees Pty Ltd v. FC of T (2015) 228 FCR 418 at [5]; Kalantaris at [31]). A transfer of existing trust property to, and the vesting of this property in, a new trustee for the benefit of others can satisfy the description of the creation of a trust by settlement.

In TD 2012/21, the Commissioner accepts that 'continuity of a trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated'. The determination states that CGT event E1 and CGT event E2 will not generally happen if the terms of a trust are changed pursuant to a valid exercise of a power contained in the trust's constituent document or are varied with a court's approval. However, a CGT event will occur if the change:

•                     causes the existing trust to terminate and a new trust to arise for trust law purposes; or

•                     results in a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that asset has been settled on terms of a different trust.

Application to your circumstances

This ruling is based on the assumption that the Trustee has the power to amend the Deed in accordance with the proposed amendments, and relevant court approval will be obtained.

The current Deed provides the Trustee with broad powers to revoke, alter to or vary all of any of the provisions of the Trust Deed at any time.

The proposed key amendments are considered comparable to some extent to the situation described in Example 3 of TD 2012/21, where the making of similar resolutions was deemed a valid exercise of a power of amendment contained within the applicable trust deed.

The proposed changes to the Deed are also considered to fall within the scope of the Trustee's power of amendment provided for in the Deed. In this regard, it is noted that the proposed amendments are not considered to fall within the specific restrictions, namely they are in favour of the employees or former employees of the Company or other beneficiaries of the Trust set out in the current Deed.

The Commissioner is satisfied that the factors regarding possible trust splitting will not occur in your case. Therefore, the proposed amendments to the Deed will not result in the creation of a new trust by declaration or settlement as the Trustees do not have new personal obligations and new rights have not been annexed to the assets held by the Trust. Therefore, CGT Events E1 and E2 will not happen.

Conclusion

As the proposed amendments are within the Trustee's powers contained in the Deed and once approved by the Court, the Commissioner considers that, following the execution of the Proposed Deed of Amendment to amend the terms of the 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.

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.

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 Deed pursuant to a valid exercise of the amendment power in the 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.

Having regard to paragraph 27 of TD 2012/21, the Commissioner is 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.

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