Edited version of private advice

Authorisation Number: 1052318425480

Date of advice: 12 November 2024

Ruling

Subject: CGT - trust deed amendment

Question

Will the proposed amendments to the trust deeds of the XXX Group Trusts cause any of CGT events E1, E2 or E8, to happen?

Answer

No.

The proposed variation through the removal of the beneficiaries is a valid exercise of the power of amendment contained within the original deeds. CGT event E1 or E2 will not apply. In this case, the proposed amendments to each of the trust deeds will update the terms of the trust deeds to formally and expressly exclude any spouses of the Specified Beneficiaries, the lineal descendants of those excluded spouses and the spouses of any other relatives of the Specified Beneficiaries who might otherwise be included in the class of General Beneficiaries from any entitlement to the income or capital.

As the relevant beneficiary's interest in the trust did not constitute a vested and indefeasible interest in the trust capital, CGT event E8 does not apply to their removal as a beneficiary.

This ruling applies for the following periods:

year ending 30 June 20xx

year ending 30 June 20xx

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.   The trusts listed in the table below are family trusts associated with and controlled by Individual A and their family (collectively, the XXX Group Trusts). Each of these trusts is a discretionary trust established via a deed of settlement between the relevant settlor and the original trustee. Details relating to each trust:

Table 1: The trusts listed in this table are family trusts associated with and controlled by Individual A and their family (collectively, the XXX Group Trusts).

2.   The Specified Beneficiaries in each of the Group Trusts

Table 2: The Specified Beneficiaries in each of the Group Trusts.

3.   The Specified Beneficiaries are each Australian residents for income tax purposes.

4.   The following paragraphs relate to the Group Trust deed provisions which have been provided.

5.   XX

6.   XX

7.   The amendment powers in the various trust deeds:

XX

8.   The proposed amendments to each of the trust deeds will formally and expressly exclude any spouses of the Specified Beneficiaries, the lineal descendants of those excluded spouses and the spouses of any other relatives of the Specified Beneficiaries who might otherwise be included in the class of General Beneficiaries from any entitlement to the income or capital. The proposed amendments will be executed via yet to be prepared deeds of variations modifying the following clauses:

‒      XX

‒      XX

9.   The variation/amendment power afforded to the trustee under the relevant trust deed, as set out above, permit the exclusionary variations proposed to be exercised. These exclusionary variations will be made pursuant to the valid exercise of a power contained in the relevant trust instrument. In the case of Group Trusts, where processes involving the Guardian of each trust are involved, the relevant procedures will be complied with and Guardian consent provided in each case.

10.The amendments proposed will not result in any changes to the property or assets held under the relevant trust or result in any particular assets being subject to separate rights or obligations. There will be no loss of continuity for the Group Trusts.

11.The proposed amendments to each of the trust deeds constitute a valid exercise of the trustee's amendment power contained in each of the of trust deeds: Group Trust deeds.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-55

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 104-90

Reasons for decision

Summary

The proposed variation through the removal of the beneficiaries is a valid exercise of the power of amendment contained within the original deeds. CGT event E1 or E2 will not apply. In this case, the proposed amendments to each of the trust deeds will update the terms of the trust deeds to formally and expressly exclude any spouses of the Specified Beneficiaries, the lineal descendants of those excluded spouses and the spouses of any other relatives of the Specified Beneficiaries who might otherwise be included in the class of General Beneficiaries from any entitlement to the income or capital.

As the relevant beneficiary's interest in the trust did not constitute a vested and indefeasible interest in the trust capital, CGT event E8 does not apply to their removal as a beneficiary.

Detailed reasoning

The application of CGT event E1 or E2 to the amendment of a trust deed will generally turn on questions of trust law, concerning the scope of the variation power in the trust instrument.

In TD 2012/21 the Commissioner states that CGT events E1 or E2 will not 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 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.

The Commissioner accepts the general proposition that where there is some continuity of property and membership of the trust, changes to the terms of a trust that are made in proper exercise of a power of amendment will not terminate the trust where they are properly supported by that power. Accordingly, the scope of the amendment power and the validity of its exercise in a particular case will be critical.

The facts of this ruling contain an assumption that the trustees have the power to amend the trust deeds in accordance with the amendments.

As the proposed amendments to each of the trust deeds will:

•         be made pursuant to a valid exercise of power contained within the constituent document (trust deed) of each trust,

•         not result in any of the Group Trusts terminating, and

•         will not lead to a particular asset being settled on terms of a different trust,

the proposed amendments will not constitute any termination of any of the trusts or creation of a new trust pursuant to CGT events E1 or E2.

There is continuity of property and membership of the trusts - the assets of the trusts will continue to be held for the benefit of the Specified Beneficiaries.

On the basis of the assumption that the amendments are valid, and in accordance with the views expressed in TD 2012/21, neither CGT events E1 or E2 will happen by reason of the variation of the trust instrument.

It should be noted that where a change is beyond the power conferred by the terms of a trust, it will be of no effect. Therefore, it cannot give rise to a resettlement of the trust, and would not result in CGT events E1 or E2 happening.

Section 104-90 of the ITAA 1997 provides that CGT event E8 happens when 3 conditions are met:

1)    you are the beneficiary under a trust (except a unit trust or a trust to which Division 128 applies)

2)    you didn't give money or property to acquire (the CGT asset that's) your interest in the trust capital (and you didn't acquire it by assignment)

3)    you dispose of the interest or part of it (but not to the trustee).

The Commissioner has provided guidance on the application of CGT event E8 in Taxation Determination TD 2009/19 Income tax: does a taker in default of trust capital have an 'interest in the trust capital' for the purposes of CGT event E8 in section 104-90 of the Income Tax Assessment Act 1997? which states that 'only those interests which constitute a vested and indefeasible interest in a share of the trust capital fall within the scope of CGT event E8' (paragraph 2 of TD 2009/19).

Two other provisions are relevant to the application of CGT event E8. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset when a change of ownership occurs from you to another entity. Section 108-5 of the ITAA 1997 provides that CGT assets are property, and legal or equitable rights which aren't property. The terms 'disposal' and 'CGT asset' would have the same meaning in the context of CGT event E8. The Commissioner's view as set out in Taxation Determination TD 2001/26 Income tax: capital gains: what are the capital gains tax consequences for a beneficiary of a discretionary trust who renounces their interest in the trust? posits that an interest in a discretionary trust is a CGT asset.

The first two conditions in section 104-90 of the ITAA 1997 would be met. For the first condition, the trust has beneficiaries and the trust is not a unit trust. The trustee has a discretion to allocate income or capital to any beneficiaries in any amounts at their discretion. Beneficiary interests aren't described in terms of units. Further, the trust interests could not be fairly described as units because no beneficiary has a percentage interest in income or capital. For the second condition, the beneficiaries have not given money or property for their interest in the trust or acquired their interest through an assignment. Rather, the trust deed creates classes of beneficiaries within a family group.

However, CGT event E8 won't happen when the trust deeds are amended because the third condition will not be met. Disposal requires a change of ownership in a CGT asset. Before the amendment, beneficiaries enjoy discretionary rights to income or capital. The beneficiary's rights are CGT assets because they're equitable rights, and that's consistent with TD 2001/26. But those beneficial interests won't change ownership; they'll end when the trust deed is amended, and no beneficiary will enjoy similar rights afterwards. It follows that no beneficiary will dispose of their interest in the trust.