Private ruling: Capital gains tax: variation of will
Published: November 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will CGT event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of the proposed variations to the will? | A1: No. | Q2: Will the proposed variations to the will result in a capital gain under CGT event E1 in relation to all of the capital gains tax (CGT) assets of the estate if the market value of the assets at the time that the deed is entered into exceeds the cost base of those assets. Answer No.

Relevant facts and circumstances: The deceased died recently leaving no surviving spouse or children. The deceased left her estate to a number of named beneficiaries. All of the CGT assets in the estate were acquired by the deceased after 20 September 1985. The cost base of most of the CGT assets is less than their current market value. The will contains a bequest for the benefit of one particular individual that provides that part of the residue of the estate is to be held on trust for this individual during the individual's life by a trustee. On this individual's death, the balance of this trust would pass to the child of the individual. The individual has capacity, which has been certified by a general practitioner, but there was concern that this individual might spend their inheritance unwisely. The individual has asked the executors to pay the entitlement to the individual rather than to the trustee. The proposed transactions are: The executors and all beneficiaries are prepared to agree to the individual's request to pay the entitlement directly to the individual rather than to the trustee subject to all parties signing a deed under which the parties will agree that: · the assets representing the assets that were to be held by the trustee will be paid to her directly from the estate and · the individual's child's interest in the residue of the individual's entitlement will be extinguished. The remaining bequests will be paid in accordance with the terms of the will.

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

Reasons for decision: Summary: CGT event E1 under section 104-55 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement. The time of the event occurs when the trust over the asset is created. The Commissioner of Taxation has published Creation of a new trust - Statement of Principles (Statement of Principles) to provide guidance on when the Commissioner will treat changes made to a trust deed as giving rise to a new trust estate/s. The Statement of Principles was released on 9 June 1999 and updated on 29 August 2001. The Statement of Principles uses the term resettlement to describe when changes to a trust deed are such that, for income tax purposes, one trust estate comes to an end and is replaced by another trust. For convenience, these situations are sometimes referred to as resettlements, although resettlements in the technical sense may be only one way in which such terminations occur. The consequences of terminating the trust can include: · realisation at trustee level of the trust property, and the loss of carried forward tax benefits, and · disposal by beneficiaries of their interests in the terminating trust and acquisition of interests in the new trust. In other situations, although the original trust estate may continue, changes may lead to the creation of one or more new and separate trust estates for tax purposes. The Statement of Principles advises that it is a change in the essential nature and character of the original trust relationship which creates a new trust. The Statement of Principles outlines some changes which may result in the creation of a new trust, being: · any change in beneficial interests in trust property. · a new class of beneficial interest (whether introduced or altered). · a possible redefinition of the beneficiary class. · changes in the terms of the trust or the rights or obligations of the trustee. · changes in the nature of features of trust property. · additions of property which could amount to a new and separate settlement. · depletion of the trust property. · a change in termination date of the trust. · a change in the trust that is not contemplated by the terms in the original trust. · a change in the essential nature and purpose of the trust. · a merger of two or more trusts or a splitting of a trust into two or more trusts. Depending on their nature and extent, and their combination with other factors, these may amount to a mere variation of a continuing trust, or alternatively to a fundamental change in the essential nature and character of the trust relationship. A fundamental change in the essential nature and character of the trust relationship means that the original trust is brought to an end and/or a new trust is created. The Statement of Principles provides: Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the power of the trustee. The original intention of the settlor must be considered in determining a new trust has been created. In your case, the trust was established by the will of the deceased. The will expressly contained a bequest for the benefit of an individual, where part of the residue of the estate is to be held on trust for the individual during their life by a trustee, and on the individual's death, the balance in this trust would pass to the child of the individual. The deed between the executors, the child of the individual and all of the other beneficiaries will make changes to the original trust. As a result of this deed, the assets which were to be held on trust for the individual will be paid to the individual directly from the estate, and the individual's child's interest in the residue of the individual's entitlement will be extinguished. The remaining bequests will be paid in accordance with the terms of the will. Taking into account the nature and extent of the changes in this case, we would consider the changes as amounting to a mere variation of a continuing trust rather than a fundamental change to the essential nature and character of the trust relationship. Accordingly, CGT event E1 under section 104-55 of the ITAA 1997 will not happen when the deed is entered into. We have determined above that CGT event E1 will not apply and there will therefore be no capital gain resulting from this event in relation to the CGT assets of the estate as a result of entering into the deed.

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