Edited version of private advice

Authorisation Number: 1052242301880

Date of advice: 4 June 2024

Ruling

Subject: Trust resettlement - amendment to the trust deed

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 Unit Trust?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

In 20XX, 6 individuals executed a trust deed establishing the Unit Trust.

Unit Trust Pty Ltd is the current trustee of the Unit Trust (the Trustee).

The Trustee wishes to amend the Trust Deed in order to satisfy the criteria of a fixed trust under subsection 3A(3B) of the Land Tax Management Act 1956 (NSW).

No assets are being transferred.

The Unit Trust deed provides power to amend the Trust Deed in clause XY including the requirement for a unanimous consent by the unit holders.

The proposed amendments to the Trust Deed will make various changes to meet the criteria of being a 'fixed trust' as required by the Land Tax Management Act 1956 (NSW).

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 to beneficiaries as a result of various capital gains tax (CGT) events.

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

In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark's case), 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 trust instrument and there is some continuity of property and membership of the trust.

Following Clark's case, 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?(TD 2012/21).

Whilst Clark's case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark's case have broader application.

TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or CGT event E2 happening 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.

In this situation, Clause XY of the Trust Deed allows for the Trustee to revoke, add to or vary all or any of the trusts, provisions, terms and conditions contained in the Trust Deed when the additional conditions encapsulated in subclauses XY(a), XY(b) and XY(c) of the Trust Deed have been satisfied.

After reviewing the changes to the Trust Deed included in the proposed Deed of Rectification and Amendment, it is considered that the changes to the Trust Deed are within the powers of the Trustee. Therefore, the continuity of the Unit Trust will be maintained for trust law purposes because the proposed changes are within the Trustee's powers contained in the Trust Deed.

In this case, it is accepted that neither of the two exclusions mentioned above will apply as a result of the Deed of Rectification and Amendment being implemented. Therefore, neither CGT event E1 nor CGT event E2 will occur as a result of the implementation of the provided Deed of Rectification and Amendment.