Private ruling: Is the trust resettled and is the deed of exclusion and variation considered an irrevocable trust
Date of advice: 24 June 2016
Published: August 2016
Ruling period: Year ended 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the exclusion of the Settlor (and any children of the settlor until they reach 18 years of age) of the Trust as a beneficiary of the trust cause CGT event E1, E2 or any other CGT event to happen? | A1: No | Q2: Subject to the express exclusion of the Settlor (and any children of the settlor until they reach 18 years of age) of the Trust, will the Trust be deemed to be an irrevocable trust with effect from the date of the variation under section 102 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes

Relevant facts and circumstances: A company was appointed as trustee (trustee). The trust was established. The settlor paid the settlement sum. Assets were held by the trustee. The schedule to the trust deed named specified beneficiaries. The settlor was erroneously included in the list of specified beneficiaries of the trust. Trustee power to remove a beneficiary The trust deed at clause 3(3) states: (a) A beneficiary, other than a default beneficiary, shall cease to be a beneficiary: (i) If by deed expressed to be irrevocable the beneficiary not being a minor unconditionally declares a determination to no longer be included as a beneficiary of the trust and serves a properly executed copy of such deed on the trustee; or (ii) Where the trustee with the consent of the Appointor by resolution or deed declares that a person or a class of persons is no longer to be included as a beneficiary and the deed of resolution is expressed to be irrevocable. Trustee's power to vary the Trust Deed The trust deed at clause 10 provides: (a) Subject to the provisions of sub-cl 2 and 3 of this clause, at any time and from time to time prior to the termination date, the trustee with the written consent of the Appointor for the time being may by deed alter, vary or revoke any trust or provision hereunder other than this clause and cl 7 and 8(1). (b) No alteration, variation or revocation shall have the effect of diverting or modifying a vested interest of a beneficiary in the income or capital of the trust of the investments representing the same or income derived from any such investment to which such beneficiary has become absolutely entitled pursuant to this deed. (c) No alteration, variation or revocation shall infringe any applicable law or rule against perpetuities or remoteness of vesting of the period during which income may be accumulated or otherwise extend the termination date or result in any provision of the Trust becoming void. Beneficiaries Clause 3(2)(a) provides that a natural person who is not a beneficiary under cl 3(1) may become a beneficiary, other than a default beneficiary, where the trustee with the consent of the Appointor in writing so determines and appoints, provided that any such appointment shall not be contrary to any express provision of this deed and neither the Settlor, the trustee for the time being, a former trustee or any person whose appointment would result in infringement of any rule or law against perpetuities or vesting which may apply to the Trust shall be appointed as a beneficiary. The Appointer has given consent for the Trustee to vary the trust deed. The specified beneficiary and settlor does not have a vested interest nor are they absolutely entitled to either the income or capital of the trust. The settlor has never received a distribution from the trust. A Deed of exclusion and variation has been drafted and states the trustee declares that the excluded beneficiary is permanently and irrevocably excluded as a beneficiary of the trust with effect from the date of this deed pursuant to clause 3(a)(ii) of the Trust deed. Provisions relating the trustee Clause 8(1)(a) states notwithstanding anything to the contrary contained in this deed (but subject to sub-cl.(b)), income or capital of the Trust, other than remuneration permitted under cl 8(2), shall not, in any circumstances, be paid, lent or transferred beneficially to, or applied for the benefit of the trustee, the Settlor or any claiming under or in right of the Settlor. Subject to sub-cl (b), discretion or power hereby conferred shall be exercised, or be capable of being exercised, and no provision of this deed operate so as to confer, or be capable of conferring, any direct or indirect benefit in or out of the Trust to any such person. Clause 8(1)(b) states where a trustee, other than a corporate body in which the Settlor may hold an interest, is named or described in the Schedule as a General Beneficiary or a Specified Beneficiary, the trustee may exercise any of its powers or discretions under this deed in favour of such beneficiary and sub-cl(a) shall not apply to such beneficiary. Clause (2)(a) states the trustee, other than a corporate body in which the Settlor may hold an interest, shall if the trustee so requires be entitled by way of remuneration of the trustee's services to such sum out of the income or capital of the trust fund, where by way of periodical fee, salary, commission or otherwise, as shall not exceed fees charged by the Public Trustee of the state or territory stipulated in the Schedule (or any person succeeding to or substantially taking over the functions of the same), in acting as trustee of an inter vivos trust if it were to carry out or perform duties similar to those performed by the trustee.

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: Summary: 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 CGT events. The Commissioner has released Taxation Determination 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. The Trust Deed in question allows for the Trustee to amend the deed and in this case it is accepted that neither of the two exclusions mentioned above apply. Consequently, neither CGT event E1 nor CGT event E2 arises in relation to the change proposed. No other CGT events are considered to arise. Subsection 102(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states where a person has created a trust in respect of any income or property (including money) and: (a) the person has power, whenever exercisable, to revoke or alter the trusts so as to acquire a beneficial interest in the income derived by the trustee during the year of income, or the property producing that income, or any part of that income or property; or (b) Income is, under that trust, in the year of income, payable to or accumulated for, or applicable for the benefit of a child or children of that person who is or are under the age of 18 years; the Commissioner may assess the trustee to pay income tax, under this section, and the trustee shall be liable to pay the tax so assessed. In this case a person created the trust as settlor. After the Deed of exclusion and variation comes into effect the settlor will no longer be a beneficiary of the trust. After the Deed of exclusion and variation comes into effect the settlor will not have any power to revoke or alter the trust so as to acquire a beneficial interest in the income derived by the trustee or the property producing that income or any part of that income or property nor will income under the trust be payable to or accumulated for, or applicable for the benefit of a child or children of that person who is or are under the age of 18 years. It is considered that from the date of the execution of the Deed of exclusion and variation the trust will not be a revocable trust under section 102 of the ITAA 1936.