Private ruling: Income Tax: Capital Gains Tax: CGT events: CGT events E1 to E9 – trusts
Date of advice: 13 April 2018
Published: July 2018
Ruling period: Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will CGT event E1 or CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen as a result of making the Proposed Variation to the Trust Deed for the Trust to remove Individual B as a member of the Appointed Class of beneficiaries? | A1: No.

Relevant facts and circumstances: 1. The Trust was established by a deed of settlement (’the Trust Deed’) between the Trustee and the settlor. 2. The schedule to and forming part of the Trust Deed (‘the Schedule’) contains details of the key terms of the Trust. 3. Item (5) of the Schedule specifies the ‘Members of the Appointed Class’ of beneficiaries of the Trust. 4. The members of the Appointed Class of the Trust are as follows: a) Individual A b) Individual B c) the children of Individual B. 5. The Trustee proposes to vary the Trust Deed by a deed of variation to remove Individual B from the Appointed Class of beneficiaries (’the Proposed Variation’). 6. Clause 33 of the Trust Deed contains the Trustee’s powers to vary the Trust and the Trust Deed. 7. Clause 33 of the Trust Deed provides as follows: VARIATION OF TRUSTS 33. (1) Subject to clause 37 hereof the Trustees for the time being may at any time and from time to time prior to the Vesting Day by oral declaration, or by resolution, or by deeds, revocable (at any time up to but not including the Vesting Day) or irrevocable, revoke add to or vary all of the Trusts terms and conditions herein contained or the trusts terms and conditions contained in any variation or alteration or addition made thereto from time to time and may in like manner declare any new or other trusts terms and conditions concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied provided that a Perpetuity is not thereby created and subject to the later provisions of this clause. (2) In so far as the beneficial interests created by this deed are revoked added to or varied such revocation addition or variation must in the opinion of the Trustees be for the benefit of all or any one or more of the General Beneficiaries or the persons who would be the Next of Kin of any of the General Beneficiaries had that General Beneficiary died on the date of such deed. (3) Such revocation addition or variation shall not be in favour of or result in any benefit to any member of the Excluded Class. (4) Such revocation addition or variation shall not affect the beneficial entitlement to any amount set aside for any Beneficiary prior to the date of the variation alteration or addition. (5) Such revocation addition or variation shall not enlarge the class of persons capable of falling within the description Beneficiary hereinbefore contained. (6) Such oral declaration or resolution or deed shall provide that the provisions of this clause or provisions to the like effect will apply to the trusts terms and conditions upon which the Trust Fund or the part or parts the subject of such oral declaration or resolution or deed are thenceforth held. (7) The powers granted by this clause are in addition to and not in derogation from any applicable statutory power whereby the trusts of this settlement or the trusts upon which the Trust Fund or any part thereof are from time to time held may be varied. 8. Clause 37 of the Trust Deed relevantly provides as follows: VARIATION OF TRUSTS 37. Subject always to any express provision to the contrary herein contained every discretion vested in the Trustees shall be absolute and uncontrolled and every power vested in them shall be absolute and uncontrolled and every power vested in them shall be exercisable at their absolute and uncontrolled discretion PROVIDED that notwithstanding anything contained in this deed: (1)… (2)… (3)… (4) where no Guardian is named in the schedule the Trustees may unless otherwise expressly provided in the schedule exercise all the reserved powers and the restricted powers in their absolute and uncontrolled discretion and without notice to any other person; (5)… 9. There has been no Guardian appointed for the Trust and, accordingly, there is no restriction on the Trustee’s powers under the Trust Deed under clause 37 pursuant to clause 37(4) of the Trust Deed. 10. The Trust Fund includes ‘CGT assets’, as that term is defined in section 108-5 of the ITAA 1997.

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 108-5

Reasons for decision: Summary: Pursuant to TR 2012/21, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) will happen as a result of making the Proposed Variation to the Trust Deed for the Trust to remove Individual B as a member of the Appointed Class of beneficiaries, as: ● under the Proposed Variation the terms of the Trust will be changed pursuant to a ‘valid exercise of a power’ contained within the Trust’s constituent document (the Trust Deed), and ● the Proposed Variation will not cause the Trust to terminate and a new trust to arise for trust law purposes, and ● the Proposed Variation will not lead to any asset of the Trust 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. | Detailed Reasoning - Detailed reasoning: 1. Subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. 2. Subsection 104-60(2) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust. 3. In the Full Federal Court case of Commissioner of Taxation v Clark [2011] FCAFC 5 (‘Clark’s case’), it was established that a trust will not be terminated provided that any amendment to the trust is made in accordance with a power conferred by the trust instrument and there is some continuity of property and membership of the trust. 4. Following Clark’s case, the Commissioner issued 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 the trust are changed pursuant to a valid exercise of a power contained within the trust’s constituent documents, or varied with the approval of a relevant court? (TD 2012/21). 5. In TD 2012/21 the Commissioner expresses the view that in the circumstances where 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, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the ITAA 1997 happens 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. | Detailed Reasoning - Application to your circumstances: Under the proposed amendment, will the terms of the Trust be changed pursuant to a valid exercise of a power contained within the Trust’s constituent document? 6. Paragraph 24 of TD 2012/21 explains that the ATO accepts that a change in the terms of a trust pursuant to an existing power (including an amendment to the deed of a trust) will not result in the termination of the trust. 7. In your case, the Trust was established by a deed of settlement (’the Trust Deed’) which constitutes the Trust’s constituent document. 8. The Trustee proposes to vary the Trust Deed by a deed of variation to remove Individual B from the Appointed Class of beneficiaries (’the Proposed Variation’). 9. Clause 33 of the Trust Deed contains the Trustee’s powers to vary the Trust and the Trust Deed. 10. Clause 33 of the Trust Deed provides as follows: | Detailed Reasoning - VARIATION OF TRUSTS: 33. (1) Subject to clause 37 hereof the Trustees for the time being may at any time and from time to time prior to the Vesting Day by oral declaration, or by resolution, or by deeds, revocable (at any time up to but not including the Vesting Day) or irrevocable, revoke add to or vary all of the Trusts terms and conditions herein contained or the trusts terms and conditions contained in any variation or alteration or addition made thereto from time to time and may in like manner declare any new or other trusts terms and conditions concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied provided that a Perpetuity is not thereby created and subject to the later provisions of this clause. (2) In so far as the beneficial interests created by this deed are revoked added to or varied such revocation addition or variation must in the opinion of the Trustees be for the benefit of all or any one or more of the General Beneficiaries or the persons who would be the Next of Kin of any of the General Beneficiaries had that General Beneficiary died on the date of such deed. (3) Such revocation addition or variation shall not be in favour of or result in any benefit to any member of the Excluded Class. (4) Such revocation addition or variation shall not affect the beneficial entitlement to any amount set aside for any Beneficiary prior to the date of the variation alteration or addition. (5) Such revocation addition or variation shall not enlarge the class of persons capable of falling within the description Beneficiary hereinbefore contained. (6) Such oral declaration or resolution or deed shall provide that the provisions of this clause or provisions to the like effect will apply to the trusts terms and conditions upon which the Trust Fund or the part or parts the subject of such oral declaration or resolution or deed are thenceforth held. (7) The powers granted by this clause are in addition to and not in derogation from any applicable statutory power whereby the trusts of this settlement or the trusts upon which the Trust Fund or any part thereof are from time to time held may be varied. 11. Clause 37 of the Trust Deed relevantly provides as follows: | Detailed Reasoning - VARIATION OF TRUSTS: 37. Subject always to any express provision to the contrary herein contained every discretion vested in the Trustees shall be absolute and uncontrolled and every power vested in them shall be absolute and uncontrolled and every power vested in them shall be exercisable at their absolute and uncontrolled discretion PROVIDED that notwithstanding anything contained in this deed: (1)… (2)… (3)… (4) where no Guardian is named in the schedule the Trustees may unless otherwise expressly provided in the schedule exercise all the reserved powers and the restricted powers in their absolute and uncontrolled discretion and without notice to any other person; (5)… 12. There has been no Guardian appointed for the Trust and, accordingly, there is no restriction on the Trustee’s powers under the Trust Deed under clause 37 pursuant to clause 37(4) of the Trust Deed. Conclusion 13. Based on the information provided, the Commissioner accepts that if the Proposed Variation is made to the Trust Deed, the terms of the Trust will be changed pursuant to a ‘valid exercise of a power’ contained within the Trust’s constituent document (the Trust Deed). 14. It should be noted that where a proposed change is beyond the power conferred by the terms of a trust, it will be of no effect. Therefore, it cannot give rise to a resettlement of the trust, and would not result in CGT event E1 or E2 happening. Will the proposed amendment cause the Trust to terminate and a new trust to arise for trust law purposes? 15. Paragraph 24 of TD 2012/21 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) will not result in a termination of the trust. 16. As stated above (at paragraph 13), the Commissioner accepts that if the Proposed Variation is made to the Trust Deed, the terms of the Trust will be changed pursuant to a ‘valid exercise of a power’ contained within the Trust’s constituent document (the Trust Deed). Conclusion 17. Accordingly, the Commissioner accepts that if the Proposed Variation is made to the Trust Deed, it will not cause the Trust to terminate and a new trust to arise for trust law purposes. Will the effect of the proposed amendment lead to a particular asset of the Trust 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? 18. Paragraph 27 of TD 2012/21 states that even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust – whether by exercise of a power under the deed (including a power to amend) or court approved variation – such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust. 19. In your case, the Proposed Amendment does not affect the composition of the trust property, or the obligations under which the assets comprising the trust property are held. Conclusion 20. Accordingly, the Commissioner accepts that if the Proposed Variation is made to the Trust Deed, it will not lead to any asset of the Trust 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. Conclusion 21. Accordingly, neither CGT event E1 nor CGT event E2 will happen as a result of making the Proposed Variation to the Trust Deed for the Trust to remove Individual B as a member of the Appointed Class of beneficiaries. 22. We consider that the Proposed Amendment is similar to those contained in example 1 of TD 2012/21, and therefore that the proposed amendment will not cause either CGT event E1 or E2 to occur.