Private ruling: CGT - E1 & E2 - Trust deed variation
Date of advice: 4 November 2016
Published: March 2017
Ruling period: 1 July 20YY to 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will the proposed changes to the terms of the Trust cause capital gains tax (CGT) event E1 to happen pursuant to section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will the proposed changes to the terms of the Trust cause CGT event E2 to happen pursuant to section 104-60 of the ITAA 1997? | A2: No

Relevant facts and circumstances: Background The Trust was settled in early 20XX. The Trust is a unit trust. The trustees of the Trust are all the unit holders. These unit holders hold 100% of the units. The beneficial interest in the trust fund is vested in the unit holders in the proportion to the number of units each holds. Each unit entitles a unitholder equally with all other unit holders to the beneficial interest in the trust fund as an entirety. Clause 15 of the trust deed provides the trustees a broad power to vary the terms of the trust deed, subject to the consent of the unit holders. Proposed Changes to the Trust Deed A Deed of Variation is proposed to be executed which will insert clauses 3.3 of the deed as follows: Notwithstanding any other provision of the deed, the Trustee hereby admits that the Registered Holders: (I) are presently entitled to a fixed proportion of any distribution of income or capital of the trust, made by the Trustee, based on the proportion of income or capital units which each person owned in the trust; and (II) are presently entitled to all the income and capital of the trust, subject to the payment of the expenses properly incurred by the Trustee in the authorised administration of the Trust; and (III) may require the Trustee to wind up the Trust and distribute either the fund or the net proceeds of the sale of the assets of the fund; and the Trustee shall not remove, restrict or otherwise affect by the exercise of any discretion, or by a failure to exercise any discretion , paragraphs (i), (ii) and (iii) of this sub-clause. The intended purpose of the proposed clause 3.3 is to attempt to establish that the trust is a fixed trust, rather than a non-fixed trust. The unit holders will unanimously consent to the resolution that the deed be amended to include the proposed clause 3.3

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

Reasons for decision: Detailed Reasoning - Creating a trust over a CGT asset: CGT event E1: Broadly, section 104-55 of the ITAA 1997 provides that CGT event E1 will occur if a trust is created over a CGT asset by declaration or settlement. Guidance on the Commissioner's view of the application of section 104-55 of the ITAA 1997 is provided in 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? (TD 2012/21). It states at paragraph 1 that in these circumstances neither CGT event E1 or E2 will happen unless: a. the change causes the existing trust to terminate and a new trust to arise for trust law purposes; or b. the change leads to an asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that the asset has been settled on terms of a different trust. Paragraphs 24 and 27 of TD 2012/21 state 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 and will not result in CGT event E1 happening unless assets originally held as part of the trust property commence to be held under a separate charter of rights and obligations as a result of changes to the terms of the trust such as to give rise to the conclusion that those assets are now held on the terms of a different trust. Guidance on whether certain amendments made to a trust deed will give rise to a CGT event can also be found in the examples contained in TD 2012/21. 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 ). | Detailed Reasoning - Application to your circumstances: The Trustee of the Trust proposes to resolve to amend, with the consent of the Unit Holders, the Trust Deed to insert clause 3.3. As explained in paragraphs 24 and 27 of TD 2012/21, 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 and will not result in CGT event E1 happening, unless assets originally held as part of the trust property commence to be held under a separate charter of rights and obligations as a result of changes to the terms of the trust such as to give rise to the conclusion that those assets are now held on the terms of a different trust. To the extent that the proposed changes to the Trust Deed are within the power of amendment conferred by the Trust 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 3 of TD 2012/21. The power to insert an additional clause to restrict how the trustee may pay income and capital is a valid exercise of an existing power and does not result in the assets being held under different conditions, and therefore the proposed amendments to the Deed will not cause CGT event E1 to occur . | Detailed Reasoning - Transferring a CGT asset to a trust: CGT event E2: Section 104-60 of the ITAA 1997 broadly provides that CGT event E2 will occur if a CGT asset is transferred to an existing trust. | Detailed Reasoning - Application to your circumstances: The changes to the Trust Deed proposed to be made by the Trustee do not involve the transfer of a CGT asset to an existing trust. Rather, as explained in the facts, the amendment proposes to fix unit holder's entitlement to the income and the capital of the Trust. Consistent with TD 2012/21, to the extent that the proposed changes to the Trust Deed are within the power of amendment conferred by the Trust Deed, they will not cause CGT Event E2 to occur.