Edited version of private advice

Authorisation Number: 1052260023941

Date of advice: 12 June 2024

Ruling

Subject: CGT - trust resettlement

Question

Will CGT event A1, CGT event E1 or CGT event E2 in sections 104-10, 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on entering into any of the following Deeds:

(a)          Deed of Amendment

(b)          Deed Excluding Beneficiaries, and

(c)          Deed Changing the Trustee.

Answer

(a)          No

(b)          No.

(c)          No.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commenced on:

XX/XX/XXXX

Relevant facts and circumstances

1.            The Taxpayer and his Former Spouse have children who are Primary Beneficiaries of the Trust.

2.            As a result of the breakdown of the Taxpayer's and his Former Spouse marriage, a review of the terms of The Trust was conducted.

3.            The Taxpayer has commenced a relationship with a New Spouse.

History of changes to the Trust

4.            The Trust was established by Deed dated XX/XX/XXXX (Trust Deed).

5.            On XX/XX/XXXX, a Deed of Retirement and Appointment for the Trust was executed which saw the change in trustee of the Trust.

6.            There were a number of additions and exclusion from the class of general beneficiaries of the Trust. Namely, the former spouse, their children and any new children of the former spouse were excluded from the class of General beneficiaries. Corporation that has a director who is a beneficiary of the Trust is added to the class of General Beneficiaries.

7.            The Taxpayer appointed a company which he was the sole director and shareholder as the Appointor and Guardian of the Trust

Proposed changes to the Trust Deed and powers of the trustee

8.            The trustee of the Trust, with the consent of the Guardian, proposes to make changes listed below to the Trust by executing the following Deeds:

a)            Deed of Amendment

b)            Deed Excluding Beneficiaries, and

c)            Deed Changing the Trustee.

9.            The trustee of the trust, with the consent of the Guardian, wishes to take the following actions:

a)    remove the Children from his marriage to his Former Spouse as Primary Beneficiaries of the Trust

b)    remove the Former Spouse as an Additional member of the class of General Beneficiaries of the Trust

c)    insert the Taxpayer, New Spouse, and the children of the relationship as primary Beneficiaries of the Trust, and

d)    declare that the spouses, widows, and children of each of his children from the relationship with his Former Spouse to be excluded from the class of General beneficiaries of the Trust going forward.

e)    The Appointment of a new trustee and the retirement of the existing trustee.

10.            The amendments and proposed amendments to the Trust and the Trust Deed result from a valid exercise of the powers under the Trust Deed (including where necessary the amendment power contained within the Trust Deed).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Question

Will CGT event A1, CGT event E1 or CGT event E2 in sections 104-10, 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on entering into any of the following Deeds:

(a)          Deed of Amendment

(b)          Deed Excluding Beneficiaries, and

(c)          Deed Changing the Trustee.

Summary

Neither CGT event A1, CGT event E1 or CGT event E2 will happen when any of the proposed amendments to the terms of the Trust is implemented either separately or together as they all result from valid exercises of powers under the Trust Deed.

Detailed reasoning

Trust resettlement

1.            A trust resettlement will occur for income tax purposes where a trust has ended, and another trust has replaced it. The effect of a trust resettlement is that a deemed disposal of the trust assets is deemed to occur that could result in a CGT event occurring, such as CGT event E1 or CGT event E2.

2.            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.

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

4.            The Commissioner's view on whether CGT event E1 or CGT event E2 happens when the terms of a trust are changed 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 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? (TD 2012/21)

5.            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 power contained within the trust constituent document, or varied with the approval of a relevant court, unless:

•                     the change causes the exiting 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.

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

7.            Example 1 in TD 2012/21 sets out what happens when there is an addition of new entities and the exclusion of existing entities from a class of beneficiaries. The example concludes that the making of resolutions, being a valid exercise of power of amendment in contained within the deed, does not give rise to the happening of a CGT event.

8.            Paragraph 21 of TD 2012/21 provides that the Full Federal Court decisions in FCT v of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42 (Commercial Nominees)and FCT v David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark) are 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.

9.            Paragraph 24 of TD 2012/21 affirms that the principles established by both Commercial Nominees and Clark are also relevant to 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, it is accepted 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, will not result in a termination of the trust.

10.          In this case, there are a number of amendments being proposed to the Trust Deed. These include changing the Trustee and adding and excluding Primary and General Beneficiaries to the Trust.

11.          All of the proposed changes to the Trust will occur pursuant to a valid exercise of powers under the Trust Deed (including the amendment power in the Trust Deed where required). The amendments to the Trust will not cause the termination of the Trust nor do they result in any change in terms of the Trust whereby some or all of the trust property is held by a new or existing trust.

12.          Consequently, the proposed amendments to the Trust will not result in a resettlement of the trust and neither CGT event E1 nor CGT event E2 will happen to the trust.

Change in ownership of the Trust's Assets

1.            Section 104-10 provides that CGT event A1 happens where an entity disposes of a CGT asset. The entity disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if the entity stops being the legal owner by continues to be its beneficial owner.

2.            The note to subsection 104-10(2) provides that a CGT event A1 will not merely happen because of a change in the Trustee.

3.            CGT event A1 will not happen because there is no change in the beneficial ownership and no disposal under subsection 104-10(2) because:

•                     the proposed amendments do not cause a change in the trust relationship such that existing trust ceases, and a new trust is created (as discussed in paragraphs 18 to 29), and

•                     the change in the Trustee of the Trust results in a change in legal ownership of the Trust's assets but not in a change in the beneficial ownership of the Trust's assets.