Private ruling: CGT consequences of variation to a trust deed
Date of advice: 20 March 2018
Published: June 2018
Ruling period: The year ending 30 June 2018 | The year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the proposed variation to add corporate and trust beneficiaries cause CGT event E1 or E2 to occur in relation to the Trust? | A1: No.

Relevant facts and circumstances: The Trust is a discretionary trust which was established in the 1980s. The Trust was established for the benefit of a family group. The beneficiaries of the Trust are defined in a clause of the trust’s deed to include the persons listed in the fourth part of the Schedule to the trust deed. That list includes specified individuals and their children and grandchildren and future children and grandchildren and future spouses. The Trustee wishes to vary the Trust to include companies and trusts which are part of the family group as beneficiaries of the Trust. Clause 21 of the trust deed states: The Trustee for the time being may at any time and from time to time by deed of appointment or other deed revoke add to or vary all or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made thereto from time to time and may by the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied but so that the law against perpetuities is not thereby infringed and so that such new or other trusts powers discretions alterations or variations – (i) may relate to the management or control of the Trust Fund or the application or investment therefore or to the Trustee’s powers or discretions in these presents contained; (ii) shall not be in favour of or for the benefit of the Settlor or result in any benefit to the Settler but shall otherwise be for the benefit of all or any one or more of the statutory next of kin of the last surviving Beneficiary; (iii) shall not affect the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation alteration or addition. A draft Deed of Variation has been prepared (Proposed Variation), which proposes to add the following beneficiaries to the list of beneficiaries in the fourth part of the Schedule: ● any corporation that any beneficiary named, described or defined in the list: ● owns or holds at least one share in (whether legally or beneficially, including the trustee of any trust referred to in the list); ● is a director or officeholder of; ● any trust, settlement, foundation, or other juristic entity that any beneficiary named, described or defined in the list has any interest (whether vested or contingent).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-55 | Income Tax Assessment Act 1997 Section 104-60

Reasons for decision: Summary: Paragraph 1 of 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 power contained within the trust’s constituent document, or varied with the approval of a relevant court? asserts that a valid amendment to a trust made pursuant to a power contained in the trust deed will not result in CGT events E1 or E2 happening in relation to a trust as long as: ● the amendment does not cause the trust to terminate 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 ter ms of a different trust. Paragraph 24 of TD 2012/21 explains that a change in the terms of a trust that is made pursuant to the exercise of an existing power (including an amendment to the deed of a trust) will not terminate the trust. Paragraph 27 explains that even where a trust does not terminate, the assets may be held on terms of a distinct trust. Where neither the trust terminates, nor assets are held under a different charter of rights and obligations such as to give rise to a different trust, CGT events E1 or E2 will not be considered to have occurred. Where a proposed change is beyond the power conferred by the terms of the deed of a trust, it will be of no effect. Therefore it could not give rise to a resettlement of the trust and would not result in CGT event E1 or E2 happening. The Commissioner’s view in TD 2012/21 is based on the principles established by Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 550 ( Clark ). Application to your circumstances To the extent that the proposed changes to the Trust’s deed are within the power of amendment conferred by the deed, they will not terminate the existing trust or lead to a particular asset or assets being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset or assets have been settled on a different trust. We consider that the proposed amendments are similar to those contained in example 1 of TD 2012/21 and therefore that the proposed amendments will not cause CGT event E1 or E2 to occur.