Edited version of private advice

Authorisation Number: 1052277128515

Date of advice: 17 July 2024

Ruling

Subject: Trust deed of variation

Question

Will subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) be triggered on entering into the Deed of Variation?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Family Trust (the Trust) is a discretionary trust which was constituted by a trust deed with a commencement date of XX XX XXXX.

The Trust Deed was varied by Deed of Variation (First Variation Deed) and a later Deed of Variation (Second Variation Deed).

Under the trust deed, the beneficiaries are defined as:

Beneficiaries - means the persons referred to in the Schedule to This Deed and any other persons appointed as Beneficiaries pursuant to Clause 6

Under the Trust Deed and First Variation Deed, there are named beneficiaries of the Trust.

The Trustee has the power to add additional beneficiaries, under clause 6(1)(a) of the Trust Deed, which states as follows:

Subject to sub-clause (2) the Trustee may at any time and from time to time with the consent in writing of the Appointor, by an instrument in writing -

(a)           Appoint any person to be Beneficiaries in addition to those referred to or described in Part 1 of the Schedule to this Deed.

The First Variation Deed broadened the definition of beneficiaries to include corporations, with strict limitations. Clause 1 of the First Variation Deed itself reads as follows:

By permitting a corporation to be a beneficiary of income only (but not at any stage a beneficiary of corpus or capital).

Clause 6(1)(b) of the Trust Deed enables the Trustee, with consent in writing of the Appointor, to amend, revoke or add to any of the provisions of the Trust Deed, subject to the terms and conditions of clause 6.

The Trustee wishes to exercise its powers under clause 6(1)(b) of the Trust Deed to vary the Trust Deed in the manner set out in the Draft Deed of Variation, and specifically by amending clause 6(1)(a) of the Trust Deed as follows:

... appoint any person or Trust, established at any time in any country in which any Beneficiary referred to in Part 1 of the Schedule is a beneficiary and the inclusion of which does not infringe the rule against perpetuities, to be Beneficiaries in addition to those referred to or described in Part 1 of the Schedule of this Deed.

The Draft Deed of Variation does not seek to vary the rights, obligations or limitations of corporations as beneficiaries of the Trust.

Corporations will continue to have the same rights, obligations and limitations as specified in the First Variation Deed when they are beneficially entitled to income in their own capacity and not as trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-55(1)

Reasons for decision

Subsection 104-55(1) of the ITAA 1997 states that 'CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.'

For a CGT event E1 to be triggered as per section 104-55(1) of the ITAA 1997 in relation to an existing trust, there needs to be an event which causes assets of the trust to be resettled, effectively creating a new trust.

The Commissioner's position is outlined 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 states that CGT event E1 does not happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within a trust's constituent document or are varied with court approval.

Example 1 of TD 2012/21 at paragraphs 2-5 outlines an example of a family discretionary trust amending the trust deed by a valid exercise of a power of amendment contained within the deed to alter the class of beneficiaries. In the example a company was removed from the General Beneficiaries, and spouses, trusts and companies in which the family has a majority controlling interest, and a philanthropic charity were added to the class of General Beneficiaries. CGT event E1 would not be triggered in this example.

Paragraph 5 of TD 2012/21 states that 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.

Application

In these circumstances, the trustee is proposing to execute a deed of variation under Clause 6(1)(b) of the trust deed. This clause allows the trustee to 'revoke, amend or add to the provisions of this deed'. The proposed variation is to ensure that a trust can be a beneficiary of the Trust.

The proposed amendment aligns with Example 1 in TD 2012/21 as an addition of new entities to a class of objects. This is a valid exercise of a power of amendment contained within the deed and therefore does not give rise to the happening of a CGT event.