Private ruling: Removal of a beneficiary from a trust, CGT events e1, e2 or e8
Date of advice: 26 February 2020
Published: April 2020
Ruling period: Financial year ended 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will Capital Gains Tax Event E1 apply to the removal of all beneficial entitlements held by B in the C Family Trust by the Trustee or Appointor of the Trust? | A1: No | Q2: Will Capital Gains Tax Event E2 apply to the removal of all beneficial entitlements held by B in the C Family Trust by the Trustee or Appointor of the Trust? | A2: No | Q3: Will Capital Gains Tax Event E8 apply to the removal of all beneficial entitlements held by B in the C Family Trust? | A3: No

Relevant facts and circumstances: The C Family Trust was constituted by a deed between D as settlor and E and B acting as the trustees. The terms of the Trust define the primary beneficiary as being yourself. You are related to the people who live in the property. There are no Primary or Secondary beneficiaries of the trust who are outside the family group, but Tertiary Beneficiaries potentially include charities, tax exempt entities and Deductible Gift Recipients. There were no default or excluded beneficiaries. The definition of secondary beneficiary includes 'any person (in that capacity only) who is or becomes the executor or trustee of the estate of any deceased beneficiary'. Under a clause of the Trust Deed, the Trustee may 'revoke, add to, release, delete, resettle or vary all or any of the trusts, Rights or Obligations, powers and provisions of the Trust or this Deed'. An example of an amendment which may the subject of an exercise of the Trustee's Rights in a clause is 'the appointment or removal of any Beneficiary (including a Default Beneficiary) or any class, description or category of Beneficiary' (clause x of the Trust Deed). A clause of the Deed allows the Trustee or the Principal at any time to appoint and remove any person as a beneficiary (including Default Beneficiaries) as long as an Excluded Person is not appointed as a beneficiary. The 'removal will operate for a limited period or otherwise as the Trustee or the Principal prescribes'. A deed of amendment, appointment and removal by E and B as trustees appointing F as a primary beneficiary and removing B as a primary beneficiary has been prepared. A deed of retirement and appointment of principal between B as retiring principal and F as new principal has been proposed. In this B would resign as principal of the Trust and F would be appointed as the new principal of the Trust in her place. There is also a draft deed of retirement and appointment of trustee which was drawn up between F (principal) and E and B (retiring trustees). It stated that F would be appointed as the new trustee and the retiring trustees would be removed. B is now contemplating no longer being a beneficiary of the trust. The Trustee or Principal will remove her as beneficiary of the trust. The main asset of the trust is a property. It is the house that has been occupied by F and G for over 20 years. It has not been used to produce any income. B has not benefited from the trust in anyway. No trustee resolutions have been made since July 2019.

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: Detailed Reasoning - Detailed reasoning: CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happens if you create a trust over a CGT asset by declaration or settlement. CGT event E2 in section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust. Paragraph 24 of 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 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? states that: .... 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. Paragraphs 26 and 27 of TD 2012/21 clarify that: the validity of purported changes to a trust 'is to be determined in accordance with principles of trust law', and 'in instances where a pre-existing trust does not terminate', the assets may 'commence to be held under a separate charter of obligations as a result' of the variation 'such as to lead to the conclusion that those assets are now held on terms of a' different trust. Example 1 in TD 2012/21 (paragraphs 2 to 5) demonstrates that a valid change to the objects of a discretionary trust, in accordance with the power of amendment contained within the deed, does not result in resettlement of The Trust. Similarly a valid alteration to the objects of a discretionary trust pursuant to the principles of trust law would not result in resettlement. | Detailed Reasoning - Changes to beneficiaries of The Trust: The original deed in clause 20 gives The Trustee power to 'revoke, add to, release, delete, resettle or vary all or any of the trusts, Rights or Obligations, powers and provisions of the Trust or this Deed'. Also clause 20.2(d) includes the appointment or removal of any Beneficiary in these rights. Clause 21.1 states that The Trustee or the Principal may remove a beneficiary and 'the removal will operate for a limited period or otherwise' as they prescribe. Considering this power, the removal of Liz as a beneficiary would be a valid exercise of the power of amendment contained within the original deed. As the proposed removal is within the power of the original deed there has not been a trust created over a CGT asset by settlement, nor has there been a transfer of a CGT asset to an existing trust. The proposal to remove Liz as a beneficiary does not give rise to a CGT event E1 or E2. | Summary: The proposed variation through the removal of the beneficiary is a valid exercise of the power of amendment contained within the original deed. CGT event E1 or E2 will not apply. | Detailed Reasoning - CGT event E8: CGT event E8 happens to a beneficiary of a trust who did not give any money or property to acquire the CGT asset that is the beneficiary's interest in the trust capital and the taxpayer did not acquire it by assignment and the beneficiary disposes 'of the interest, or part of it (but not to the trustee)' (section 104-90 of the ITAA 1997). Taxation Ruling TR 2006/14 gives the Commissioner's view on the CGT consequences of creating life and remainder interests in property. Paragraph 73 of TR 2006/14 says that: CGT event E8 in section 104-90 happens if a remainder disposes of a post-CGT acquired interest in the capital of a trust (except a unit trust or a trust to which Division 128 applies) provided they: - did not give any money or property to acquire their remainder interest; and - did not acquire it by assignment. Division 128 does not appear to apply to trusts (paragraph 78 of TR 2006/14). Taxation Determination TD 2009/19 examines whether a taker in default of trust capital has an 'interest in the trust capital' for the purposes of CGT event E8. It says 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). | Summary: In this case, you are seeking to be removed as a beneficiary of the trust. As your interest in the trust did not constitute a vested and indefeasible interest in the trust capital CGT event E8 does not apply to your removal as a beneficiary.