Edited version of your written advice

Authorisation Number: 5010048108641

Date of advice: 25 January 2018

Ruling

Subject: Excluded beneficiaries and trust resettlement

The exclusion of all foreign resident beneficiaries from the X Family Trust, pursuant to the valid exercise of an amendment power in clause zz of the trust deed, will not result in CGT event E1 or E2 occurring.

Question

Will the proposed variation to the trust deed to exclude certain beneficiaries trigger a resettlement of the X Family Trust?

Answer

No

This ruling applies for the following period:

2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The X Trust is a discretionary trust, established in 200A.

The trustee, settlors and specified beneficiaries are listed. The specified beneficiaries are X and Y and their Z children, X’s parent- who resides overseas, another individual beneficiary (now deceased) and Pty Ltd which is now deregistered.

The Trustee holds various residential and commercial properties which are leased to earn rental income.

The Trustee wishes to vary the deed to exclude foreign resident beneficiaries to avoid being subjected to the absentee owner land tax surcharge by the Relevant State Revenue authorities.

Additionally the trustee also seeks to exclude the deceased individual and the deregistered company from the list of ‘Specified Beneficiaries’.

To date the foreign beneficiary has never received any distributions from the X Trust.

Proposed amendments to the trust deed

The proposed amendments contained in the deed of variation will update the terms of the Trust Deed to define “Excluded Foreign Person” and exclude them from any benefits received under the trust. The trustee is also seeking to amend the list of “Specified Beneficiaries’ to exclude the deceased individual and the deregistered company.

The amendment will not result in any changes to trust property or any particular assets being subject to separate rights or obligations. There will be no loss of continuity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Section 104-60

Reasons for decision

There may be situations where changes to a trust result in the creation of a new trust (a resettlement). Where a resettlement arises, the new trust may exist independently of the original trust or, alternatively, the original trust may cease to exist.

What constitutes a resettlement is a very important issue, for in circumstances where there is a resettlement, the tax consequences for the trust (and therefore the beneficiaries of the trust to whom any tax liability may be assessed) can be potentially serious.

In the present case, the issue at hand is whether or not a change to the terms of the Trust, pursuant to a valid exercise of a power contained in the trust deed, will result in CGT event E1 or E2 in sections 104-55 and 104-60 respectively, of the Income Tax Assessment Act 1997 (ITAA 1997) occurring.

Trust resettlement - CGT event E1 or E2

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1) of the ITAA 1997).

CGT event E2 happens if a taxpayer transfers a CGT asset to an existing trust (subsection 104-60(1) of the ITAA 1997).

Taxation Determination TD 2012/21 which discusses CGT events E1 and E2, sets out the Commissioner’s view in respect to trust resettlements and whether or not a resettlement has occurred. TD 2012/21 asserts that an amendment to the terms of a trust will not result in the termination of a trust as long as:

● the amendment is made pursuant to a valid exercise of power contained within the trust’s constituent document;

● the amendment does not cause the existing trust to terminate and a new trust to arise for trust law purposes; and

● the effect of the amendment does not 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.

Case law

In a test case on resettlements for income tax purposes, the High Court in FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 (Commercial Nominees) considered whether a superannuation fund was entitled to utilise prior year losses, following amendments to its trust deed (including the appointment of a new trustee, a new set of rules, and a change in the nature of benefits from defined to accumulation). The High Court held that a resettlement did not arise because:

● the amendments were authorised by the trust deed (which contained wide powers of amendment);

● the trusts under which the superannuation fund operated were still constituted by the original trust deed (as varied);

● the trust property and the fund members did not change; and

● the superannuation industry regulatory authority treated the fund as a continuing fund, both before and after the amendments.

Paragraph 21 of TD 2012/21 explains that, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark, is 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 ‘a proper exercise of a power of amendment contained under the deed’ will not result in a termination of the trust, despite the extent of the amendments that are made to the trust, so long as the amendments are properly supported by the power.

Relevantly the Full Federal Court in F.C. of T v Commercial Nominees of Australia (1999) 167 ALR 147 stated:

55…in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property of corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust [emphasis added].

56…so long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligations is established…

[emphasis added]

The decisions of the High Court and the Full Federal Court in Commercial Nominees were followed in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark). In that case, the Full Federal Court had to determine whether changes to property, membership, and operation of the trust had caused termination of the trust for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Additionally, paragraphs 2 to 5 of TD 2012/21 provide the following example:

Example 1: addition of new entities to, and exclusion of existing entities from, class of objects

2. The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists.

3. Having decided to get out of the flower industry, the Squirrel Family disposes of their interest in Oak Pty Ltd to an unrelated third party.

4. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:

● the respective spouses of the children;

● trusts and companies in which the family has a majority controlling interest; and

● a philanthropic charity unrelated to the Squirrel Family.

5. 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 to your circumstances

In the present case, the Trustee is proposing to exercise the amendment power in clause zz of the trust deed, in order to include additional defined terms of ‘Excluded Foreign Persons’ and excluding those persons from any entitlements or benefits under the trust. Additionally the trustee has sought to amend the list of ‘Specified Beneficiaries’ in the schedule to exclude the deceased individual and the deregistered company. However, by doing so, it will not result in the resettlement of the trust, nor the occurrence of CGT events E1 or E2. There is continuity of property and membership of the trust, and the proposed amendment will be a proper exercise of an amendment power contained in the deed.

Based on the information provided;

● Clause zz gives the trustee the power to vary all or any of the trusts provisions terms and conditions contained in the deed by consulting the wishes of the Guardian.

● Clause kk provides that the Trustee may, at any time or times declare any individual or entity to be removed as beneficiary.

● The current beneficiaries, apart from the proposed excluded beneficiaries, will continue to be beneficiaries after the proposed Deed of Amendment is executed.

● Therefore, as the proposed Deed of Amendment will;

● be made pursuant to a valid exercise of power contained within the trust’s constituent document

● not cause the existing trust to terminate, and

● not lead to a particular asset being settled on terms of a different trust

it will not constitute a termination of the Trust or creation of a new trust pursuant to CGT events E1 or E2 of the Income Tax Assessment Act 1997 (ITAA 1997).