Private ruling: Capital gains tax - trust - resettlement
Date of advice: 14 August 2017
Published: January 2018
Ruling period: Income year ending 30 June 2018
Date scheme commenced: 1 July 2017.

Ruling: Q1: Will the Trust terminate on the proposed implementation of the Deed of Amendment? | A1: No. | Q2: Will any capital gains tax event happen when the Deed of Amendment is implemented? | A2: No.

Relevant facts and circumstances: The Trust was established by Deed after 20 September 1985 between Company A (the Trustee) and Company B as the Trustee for Trust Y (the Corporate Unit Holder). The Deed includes a clause which provides the Trustee with the power to amend or add to the Deed if the following occurs: ● a specified percentage of the registered units holders vote in favour of the changes; ● the changes will not prejudice the interests of the registered unit holders; and ● that following the execution of the changes the Deed will take effect in accordance with the changes. The current Trustee and the current unit holders now wish to amend the Deed and a Draft Deed of Amendment has been prepared for the purpose of amending the Deed to satisfy the criteria of a “fixed trust” under section 3A(3B) of the Land Tax Management Act NSW 1956 (the Land Act). The following information has been sourced from the Draft Deed of Amendment: ● The parties are: ○ The Trustee; and ○ Company Z and Person A (the unit holders of the Trust); ● Under the clause of the Deed referred to above, the Trustee may make changes to the Deed with the consent of a resolution of a specified number of the registered unit holders if those changes do not prejudice the registered holders after the execution of the supplement deed; ● The Trustee has determined that the terms of the Deed should be varied in accordance with the Draft Deed of Amendment and proposes to vary the Deed accordingly; ● The Trustee has determined that the proposed changes to the Deed in accordance with the Draft Deed of Amendment will not prejudicially affect the rights of any unit holders in the Trust, or any income previously set aside for them, or held for their benefit; and ● The unit holders have consented to the changes to the Deed and have agreed to join the Draft Deed of Amendment to confirm their consent. The Trustee wants to amend the Deed and has determined that the proposed changes to the Deed in accordance with the Draft Deed of Amendment will not prejudice the interests of the unit holders. The unit holders, being the registered holders of all issued units, will consent to the changes to the Deed in accordance with the Draft Deed of Amendment and will join in the Deed of Amendment to confirm their consent. No asset/s will be transferred as a result of the changes under the Deed of Amendment. Relevant legislative provisions Income Tax Assessment Act 1997 Part 3-1 Income Tax Assessment Act 1997 Part 3-3 Reasons for decision A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various capital gains tax (CGT) events. The Commissioner has released Taxation Determination TD 2012/21 (TD 2012/21)which was published as a result of the court case CoT v. Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark’s case). Whilst Clark’s case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark’s case have broader application. TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or CGT event E2 happening unless: ● the change causes the existing 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 that asset has been settled on terms of a different trust. In this situation the Deed allows for the Trustee to make changes to the Deed with the consent of a resolution of a specified percentage of the unit holders voting in favour of the change/s. After reviewing the changes to the Deed contained in the Draft Deed of Amendment, it is considered that the changes to the Deed are within the powers of the Trustee in accordance with the Deed. Therefore, the continuity of the Trust will be maintained for trust law purposes because the proposed changes are within the Trustee’s powers contained in the Deed. In this case it is accepted that neither of the two exclusions mentioned above will apply as a result of the Deed of Amendment being implemented. Therefore, neither CGT event E1 nor CGT event E2 will occur as a result of the implementation of the Deed of Amendment. It is also considered that no other CGT event will occur as a result of the implementation of the Deed of Amendment.