Edited version of private advice

Authorisation Number: 1052329593839

Date of advice: 18 December 2024

Ruling

Subject: Capital gains tax - trust deed amendment

Question 1

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 the amendments to the Trust Deed for the Trust?

Answer 1

No

This ruling applies for the following period:

Year ended XX June 20XX

The scheme commenced on:

XX July 20XX

Relevant facts and circumstances

1.            On xx xx xxxx, AA (the Trustee) and BB (the Settlor) executed a deed (the Trust Deed) establishing the CC Trust (Trust). Units were allotted to DD, EE and FF on establishment.

2.            The Trust Deed was previously amended on xx xx xxxx.

3.            Pursuant to clause x of the Trust Deed the Unit Holders have a beneficial interest in the Trust Fund.

4.            The Trustee proposes to amend the terms of the Trust Deed in accordance with Clause xx of the Trust Deed.

5.            Clause xx of the Trust Deed relevantly provides that:

[Trustee amendment powers]

6.            The unitholders as set out in the First Schedule to the Trust Deed are DD X Ordinary Class Units, EE X Ordinary Class Unit and FF X Ordinary Class Unit (collectively described as the Unit Holders).

7.            All entities (the Trustee, Unit Holders and their interest holders) are Australian residents for tax purposes.

8.            The amendments do not result in the transfer of any asset - including in satisfaction of any unpaid entitlement of a beneficiary of the Trust to income from a prior year.

9.            The amendments do not cause any beneficiary to become absolutely entitled to any particular asset of the Trust as against the Trustee.

10.         The amendments do not involve an agreement to create a trust over future property.

11.         The amendments do not involve any agreement between the Trustee and another entity under which the right to the use and enjoyment of a CGT asset passes to another entity, shares, options, prospecting entitlements, mining entitlements, conservations covenants over land, leases, deposits, emission units, debts, depreciating assets or foreign interests, collectables, carried interests, or the ending of Australian residency, a roll-over with respect to a CGT event, or becoming a member of or leaving a consolidated group.

12.         The amendments do not result in the loss or destruction of a CGT asset, the cancellation, surrender etc. of a CGT asset, in an adjustment being made to the cost base or reduced cost base of a CGT asset, a CGT asset passing to a tax advantaged entity, a CGT asset becoming trading stock.

13.         The proposed variations to the Trust Deed do not contemplate a transfer of any asset.

14.         There are no unpaid beneficiary entitlements of income of the trust to any beneficiary in respect of prior year income.

15.         Following the variation, no beneficiary becomes absolutely entitled to any particular asset of the Trust as against the trustee.

16.         The amendments do not involve an agreement to create a trust of future property.

17.         The Trust is not a Managed Investment Trust (MIT).

18.         The Vesting Date for the Trust has not occurred.

19.         The proposed Deed of Amendment - CC Trust provides:

XXX

20.         In all other respects, the terms of the Trust Deed remain unaltered.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-55

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

Income Tax Assessment Act 1997 section 104-60

Reasons for decision

Question

Summary

As the proposed amendments are within the Trustee's powers contained in the Trust Deed, there will be continuity of the Trust property, membership of the Trust and operation of the Trust. The proposed amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust. As such neither CGT event E1 or CGT event E2 of the ITAA 1997 will happen.

Detailed reasoning

Trust resettlement

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.

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.

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

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)

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.

Paragraph 21 of TD 2012/21 explains 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.

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.

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.

The proposed change to the Trust will occur pursuant to a valid exercise of powers under the Trust Deed. 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.

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.