Edited version of private advice

Authorisation Number: 1052284653145

Date of advice: 1 August 2024

Ruling

Subject: CGT - trusts

Question

Will the proposed variations to the Trust Deed of the Trust cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) or CGT event E2 in section 104-60 of the ITAA 1997 to happen?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 2025

Relevant facts and circumstances

1.    The Trust is a discretionary trust established by the Trust Deed.

2.    The directors and shareholders of the Trustee are Mr A and Mrs A.

3.    The beneficiaries of the Trust include:

•         Mr A and Mrs A as primary beneficiaries;

•         Mr A and Mrs A's siblings, children (B, C, D, E and F) and other issue of the primary beneficiaries; and

•         any related or commonly controlled trusts and companies.

4.    The Trust assets primarily comprise real properties and investment shares.

5.    The income of the Trust has always been distributed to the beneficiaries.

6.    The Trust Deed confers on the Trustee wide and unfettered powers to vary the terms of the Trust pursuant to Clause X of the Trust Deed.

7.    The proposed variations to the Trust Deed (to be executed under a Deed of Variation) contemplate Mr A and Mrs A's wishes to ensure that the Trust would be administered fairly and for the benefit of B, C, D, E and F equally after the last of their deaths and to mitigate the risk of future disputes.

8.    The Deed of Variation, among other things, has been drafted to operate as a class discretionary trust after the deaths of Mr A and Mrs A with income and capital of the trust to be distributed to (or otherwise held for the benefit of) classes of beneficiaries associated with B, C, D, E and F in equal proportions, and then to members of each such class in the absolute discretion of the Trustee.

9.    In that regard, the Deed of Variation will create 5 classes of beneficiaries, namely:

a.    B Class Beneficiaries of which the Representative Beneficiary is B;

b.    C Class Beneficiaries of which the Representative Beneficiary is C;

c.     D Class Beneficiaries of which the Representative Beneficiary is D;

d.    E Class Beneficiaries of which the Representative Beneficiary is E; and

e.    F Class Beneficiaries of which the Representative Beneficiary is F.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

The proposed variations to the Trust Deed will not cause CGT event E1 or CGT event E2 to happen.

Detailed reasoning

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1)).

CGT event E2 happens if a CGT asset is transferred to an existing trust (subsection 104-60(1)).

In Commissioner of Taxation v Commercial Nominees[1](Commercial Nominees), the High Court, consistent with the decision of the Full Federal Court[2], held that resettlement analysis requires a canvass on whether there is continuity of the trust estate. In this context, consideration of 3 main indicia is relevant:

•         the constitution of the trusts under which the fund operated;

•         the trust property; and

•         membership.

In Commissioner of Taxation v David Clark and Commissioner of Taxation v Helen Clark[3], the Court endorsed the approach adopted in Commercial Nominees as authority for the proposition that, where changes to the trust are made by a valid exercise of power and provided that there is continuity of trust property and membership, the amendments to the trust will not cause it to terminate for trust law purposes.

Taxation Determination 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) expresses the view that neither CGT event E1 nor E2 happens 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, 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.

Relevantly, paragraphs 24 and 27 of TD 2012/21 explain that:

24. ... the ATO accepts 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 and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 happening.

...

27. Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

TD 2012/21 provides a number of examples. Of relevance to the current circumstances is Example 4 which is reproduced below:

Example 4: settling of trust asset on new trust

11. The Hedgerow Trust is a discretionary trust the class of objects of which consists of a large number of entities associated with the Buttercup family. Under its terms, the trustee has a wide range of powers including the power to declare that particular assets of the trust are to be held exclusively for one or more of the trust objects to the exclusion of the other objects of the trust. In exercise of this power, the trustee declares that one of several assets forming part of the corpus of the trust - asset 1 - was henceforth held exclusively in trust for one of the objects, Mr Badger (subject to the trustee's other powers, such as its power of sale). One month later the trustee makes a second declaration to similar effect in favour of Mr Badger in respect of one of the remaining assets of the Hedgerow Trust (asset 2). While the respective declarations do not terminate the Hedgerow Trust, the effect of the declarations is that assets 1 and 2 are no longer held on that trust. Rather, the trust obligations attaching to those assets have changed in a manner consistent with a conclusion that the assets have commenced to be held on the terms of a separate trust for the benefit of Mr Badger as sole beneficiary. As a result, CGT event E1 happens when the separate trust for the benefit of Mr Badger is created over asset 1. CGT Event E2 happens when asset 2 is also transferred to that separate trust.

Application to the Trust

A set of amendments as contemplated under the Deed of Variation will give rise to the establishment of 5 new classes of beneficiaries in respect of which the income and capital of the Trust may, after the deaths of Mr A and Mrs A, be applied by the Trustee in equal proportions. The proposed members of each respective class of beneficiaries are limited to the family group.

Clause X of the Trust Deed empowers the Trustee to alter or vary the terms of the Trust and to appoint the Trust Fund in such manner and proportions, including altering the beneficial interests of the beneficiaries, as the Trustee from time to time thinks fit. There are no other conditions imposed on the Trustee that need to be satisfied for the effective exercise of that power.

The Deed of Variation will be executed by a valid exercise of the power in Clause X of the Trust Deed.

The Deed of Variation will not alter the property of the Trust and the membership of the Trust will have sufficient continuity. That is, no new beneficiaries will be introduced and the Trust will continue to be administered for the exclusive benefit of the family group. As such, the Trust will not be terminated for trust law purposes.

Unlike Example 4 in TD 2012/21, the Deed of Variation does not purport to make an item of trust property commence being held for any beneficiary to the exclusion of others. It is therefore also concluded that the Deed of Variation will not result in a particular asset being subject to a separate charter of rights and obligations.

Therefore, neither CGT event E1 in section 104-55 nor CGT event E2 in section 104-60 will happen.

[1] [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220.

[2] Commissioner of Taxation v Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42.

[3] [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550.