Edited version of private advice

Authorisation Number: 1052343206797

Date of advice: 16 December 2024

Ruling

Subject: Trust resettlement

Question

If the Trustee executes the First and Second Deed Poll of Variation, will that cause either CGT event A1, CGT event E1 or CGT event E2 in sections 104-10, 104-55 and 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 December 20YY

Relevant facts and circumstances

1.            The Taxpayer commenced a business and grew it into a significant and highly successful one.

2.            The Taxpayer established a discretionary trust to hold the assets of the business and various other investments.

3.            The Taxpayer passed away on XX/XX/XXXX and until their passing, the business was family-run that included the Taxpayer and other family members.

4.            In early XXXX, the Taxpayer commenced formally communicating with family members regarding their wishes with respect to the Trust. In particular, the Taxpayer reiterated that it was their wish and intention that the Trust to continue for as long as possible such that the business continues to be run by and provide relevant benefits to the family and members of future generations.

The Trust

5.            The Trust was established by deed of settlement on XX/XX/XXXX and has been varied from time to time since that date (Trust Deed).

6.            The Trustee was appointed as trustee of the Trust on XX/XX/XXXX.

7.            The beneficiaries of the Trust include The Taxpayer, their children and their children's children.

8.            Clause 16 of the Trust Deed provides:

This Deed shall be construed and take effect in accordance with the law of the State of State A which is hereby declared to be the proper law hereof.

9.            The Vesting Date of the Trust is defined in the Trust Deed as follows:

The "Vesting Date" means the date on which shall expire the period of eighty years after the execution of the Deed of the date being twenty-one years from the death of the last survivor of the descendants now living of his late Majesty King George the VI or such date as may be fixed by the Trustee as the vesting day by deed in writing pr by oral declaration whichever shall be the earlier.

Proposed variations to the Trust

10.            The Trustee has broad powers to vary, revoke, and amend the provisions of the Trust. The Trustee's power of variation is set out in the Trust Deed, which provides:

At any time prior to the vesting date the Trustee may subject as hereinafter provided in his absolute and unfettered discretion by deed in writing or by oral declaration add to vary revoke or amend any provisions hereof in any manner whatsoever provided that no powers shall be exercised so as to confer any benefit on the Settlor or the Trustee provided further that no such power shall be exercised in relation to the income of the Trust Fund derived prior to the date of exercise of such power.

11.            In pursuance of the Taxpayer's wishes and intentions identified at paragraph 5 above, the Trustee anticipates exercising its broad powers and express power of variation under the Trust Deed to vary the proper law of the Trust from the law of State A to the law of State B, and to subsequently vary the definition of the 'Vesting Date' of the Trust. The Trustee also anticipates exercising its power of variation to vary the definition of 'The beneficiaries' to include further lineal descendants of their children.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-10(2)

Income Tax Assessment Act 1997 Section 104-55

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

Income Tax Assessment Act 1997 Section 104-60

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

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) 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.

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:

(a)           the change causes the exiting trust to terminate and a new trust to arise for trust law purposes, or

(b)           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.            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.

8.            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 CGT event 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 Deed 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.

9.            Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can also be found in the examples contained in TD 2012/21. Of relevance to your circumstances are Examples 1, 3 and 3A. These examples deal with additions of entities to the class of eligible beneficiaries and extensions to the vesting date of the Trust give rise to a CGT event happening.

10.            Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting (TR 2018/6), sets out the Commissioner's view about the immediate income tax consequences of a trust vesting and discusses certain issues that can arise when a vesting date of a trust is mistaken thought to have been extended.

11.            Paragraph 6 of TR 2018/6 states:

Prior to a trust's vesting, it may be possible for the trustee pursuant to a proper exercise of a valid power under the deed, or a court, to postpone the vesting of the trust by nominating a later date as the new vesting date. A proposed alteration by a trustee without intervention of the court will be subject to any specific requirements in the trust deed about how and when any alteration to the vesting date can occur.

12.            Paragraph 7 of TR 2018/6 states:

Determining whether the trustee has the power to amend the deed to change the vesting date requires a careful consideration of the terms of the trust deed. For example, although a trustee may have a general power to amend the deed, there may also be specific exclusions from the scope of that power. The power might also be limited to permitting the trustee to bring forward the date on which the trust vests and not permit extending that date.

13.            Paragraph 10 of TR 2018/6 provides that CGT event E1 does not happen where the vesting date of the Trust is amended through the valid exercise of a power in a trust deed or an approval of a relevant court and refers by footnote to TD 2012/21.

14.            You are proposing to make a number of amendments to the Trust Deed, including:

(a)            changing proper law of the Trust to the law of State B, the First Deed Poll of Variation, and

(b)            changing the vesting date and beneficiaries of the Trust, the Second Deed Poll of Variation.

First Deed Poll of Variation

15.            The First Deed Poll of Variation is about varying the governing law of the Trust to State B

16.            The Trust Deed contains a clause that includes a broad power of variation on the Trustee, to vary, revoke and or amend any provisions of the Trust Deed.

17.            There are no express limitations on the use of the Variation power by the Trustee or any other clauses in the Trust Deed that prohibits the Trustee varying the governing law of the Trust.

18.            Therefore, the change in governing law of the Trust, being made pursuant to a valid exercise of the variation power of the Trustee in the Trust Deed, will not terminate the Trust.

19.            If the amendment to the Trust Deed to change in the governing law of Trust, is taken to be beyond the power conferred on the Trustee by the terms of the Trust Deed, and not otherwise authorised by a court under relevant trust legislation, then it will have no effect, and would not result in either CGT event E1 or CGT event E2 happening.

20.            Accordingly, the proposed variation contemplated under the First Deed Poll of Variation, will not result in a resettlement of the Trust and neither CGT event E1 nor CGT event E2 will happen to the Trust.

Second deed poll of variation

21.            The Second Deed Poll of Variation is about varying the definitions of the 'Vesting Date' and the definition of 'Beneficiaries' in the Trust Deed and the addition of lineal descendants as eligible beneficiaries under the Trust.

22.            There are no express limitations on the use of the Variation power by the Trustee or any other clauses in the Trust Deed that prohibits the Trustee varying of definition of 'Beneficiaries', 'The Vesting Date'. Furthermore, the variation to the definition of the' Vesting Date' will be made before the Trust has vested.

23.            The common law rule against perpetuities prescribes a maximum period which the interest of a beneficiary in trust property is required to vest, the common law rule against perpetuities has been modified by the Perpetuities Act 1984 (NSW) which prescribes a maximum perpetuity period in State A for the purposes of the rule against perpetuities of 80 years.[1]

24.            Section 61 of the Law of Property Act 1936 (SA)effectively abolishes the rule against perpetuities and provides:

61-Abolition of rules against perpetuities and excessive accumulations

(1)      A disposition of property is not invalid-

(a)     because of the remoteness from the date of the disposition of the time an interest will, or may, vest in pursuance of the disposition; or

(b)     because, under the terms of the disposition, an interest is limited, for life, to a person who was unborn at the date of the disposition, with a remainder over to a child or other issue of that person; or

(c)     because it provides for or permits the accumulation of income.

(2)      A right or power in respect of property is not invalid because of the remoteness of the time it is to be, or may be, exercised.

(3)      A purported exercise of a right or power in respect of property is not invalid because of its remoteness from the time the right or power was created.

25.            Pursuant to the above, trusts governed by the law of State B have the potential to operate indefinitely and do not require a vesting date.

26.            However, it is important to note that section 62 of the Law of Property Act 1936 (SA) provides, in effect, that if 80 years or more have elapsed since the trust was first settled, the Court may, on application of a beneficiary, vary the terms of the trust so the interests vest immediately.

27.            If such an application were made, the Court would take into account all of the surrounding circumstances, including the selection of State B law as the governing law of the trust and could make an order to vest the trust.

28.            Therefore, whilst the choice of State B law provides flexibility, the legislation provides beneficiaries with the ability to make an application to the Court to vest a trust pursuant to a statutory power.

29.            Therefore, the change to the definitions 'Vesting Date' and the 'Beneficiaries' is made pursuant to a valid exercise of an existing power contained within the Trust Deed will not terminate the Trust.

30.            If the amendment to the Trust Deed to alter the Vesting Date and beneficiaries of the Trust, is taken to be beyond the power of the Trustee conferred by the terms of the Trust Deed, and not otherwise authorised by a court under relevant trust legislation, then it will have no effect, and would not result in either CGT event E1 or CGT event E2 happening.

31.            Accordingly, the proposed variations to the Trust Deed made under the Second Deed Poll of Variation, 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

32.            Section 104-10 provides 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.

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

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

(a)           there is no change in the ownership of the CGT assets that make up the Trust Fund, and

(b)           the proposed amendments to the Trust Deed do not cause a change in the trust relationship such that the existing Trust ceases, and a new Trust is created.

[1] Perpetuities Act 1984 (NSW) section 7.