Private ruling: CGT - trust variation
Date of advice: 26 July 2023
Published: 18 September 2023
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Will the execution of the deed of variation of trust cause CGT event E1 or E2 to happen for the Trustee in respect of any CGT assets of the Trust? | A1: No.

Relevant facts and circumstances: 1. The Trust was established by a deed of settlement of discretionary trust (the Trust Deed). 2. The trustee of the Trust is XYZ Pty Ltd (the Trustee). 3. The Nominated Beneficiaries of the Trust are: • Beneficiary 1 • Beneficiary 2 • Beneficiary 3 • Beneficiary 4. 4. Clause 2.3 of the Trust Deed provides: The following may not be Beneficiaries; 2.3.1 the Settlor or any person claiming under or in right of the Settlor; 2.3.2 any beneficiary who is at any time excluded from being a Beneficiary by the Trustee as follows: 2.3.2.1 the Trustee at any time and from time to time may declare in writing (without giving any reason for the declaration) that any Beneficiary shall be excluded from the class of General Beneficiaries, notwithstanding that, but for such exclusion the Beneficiary would by reason of one or more of the matters or circumstances described in this Deed have been a General Beneficiary and the class of General Beneficiaries shall from the date the Trustee makes the declaration be modified and reduced accordingly; 2.3.2.2 the declaration may be absolute, or conditional, or for a determined period of time or for a period of time that will come to an end upon the happening of an event. Upon any condition or period of disqualification terminating or the happening of a pre-determined event occurring a disqualified Beneficiary shall cease to be subject to the disqualification and may again be a General Beneficiary. 2.3.3 any person named in the schedule as an excluded beneficiary. 5. Clause 19 of the Trust Deed provides: The Trustee may at any time and from time to time by Resolution, Deed or Deed Poll revoke, add to, vary or amend all or any of the provisions of this Deed or the Trust that has been created by this Deed or any variation or alteration or addition that has been made to this Deed before that dale and may declare new or other Trusts or Trust powers concerning the Trust or any part of the Trust but this power shall be subject to the following restrictions: 19. 1 No amendment may cause the Trust to offend against the rule concerning Perpetuities of the Place of Proper Law 19. 2 An amendment will be invalid if it will be in favour of or will be for the benefit of the Settlor or Trustee (but this disqualification shall not extent to the Directors of a Corporate Trustee) or any of them or any person claiming under or in right of any such person or a person or Corporation who has disposed of any property to the Trustee to be held on the Trusts of the Trust Fund, otherwise than for full consideration, or otherwise result in a benefit to the Settlor or Trustee or any of them. 19.3 An amendment will be invalid if it affects the beneficial entitlement to any amount set aside for any Beneficiary prior to the date of the variation alteration addition or revocation. 19.4 An amendment will be invalid to the extent that the variation alteration addition or revocation may create a re-settlement of this Settlement except in the case that the Nominated Beneficiaries (or the Legal Personal Representatives of the Nominated Beneficiaries) as the case may require, shall unanimously in writing approve the re-settlement. 6. The Trustee will execute a deed of variation of trust (Variation Deed). Clause 1 of the Variation Deed provides: In exercise of, and in accordance with its power under clauses 19 and 2.3 of the Trust Deed, and any other powers, the Trustee varies the terms of the Trust Deed by: (a) deleting the following words without replacement: ' Beneficiary 2 ' and ' Beneficiary 3 ' and ' Beneficiary 4 ' where they appear in the schedule of the Trust Deed under the heading "Nominated Beneficiaries:"; and (b) inserting the following words ' Beneficiary 2 ' in the schedule of the Trust Deed under the heading "Specific Exclusion of Beneficiaries: (if any)". Assumption The variations set out in the Variation Deed constitute a valid exercise of the Trustee's power contained in clauses 2.3 and 19 of the Trust Deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-55(1) | Income Tax Assessment Act 1997 Subsection 104-60(1)

Reasons for decision: Summary: 7. Subsection 104-55 of the Income Tax Assessment Act 1997 (ITAA 97) provides: CGT event E1 happens if you create a trust over a * CGT asset by declaration or settlement. 8. Subsection 104-60 of the ITAA 97 provides: CGT event E2 happens if you transfer a * CGT asset to an existing trust. 9. 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) provides at paragraph 1 that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen 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. 10. TD 2012/21 provides at paragraph 21: Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark,[3] is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power. 11. In accordance with the assumption made for this ruling, the execution of the Variation Deed will constitute a valid exercise of the trustee's powers under the Trust Deed. The Variation Deed will not result in the discontinuance of property or membership of the Trust. It is considered that the Trust will therefore not terminate on execution of the Variation Deed. 12. TD 2012/21 provides at paragraph 27: 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. 13. TD 2012/21 provides at paragraph 29: ...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust. 14. The execution of the Variation Deed would not, we think, cause any assets of the Trust to relevantly be held subject to a separate charter of rights or obligations. No assets of the Trust would, therefore, be settled on terms of a different trust by reason of the Variation Deed. | Detailed Reasoning - Conclusion: 15. Based on the assumption that the execution of the Variation Deed will be a valid exercise of the Trustee's amendment power, CGT events E1 and E2 will not happen on execution of the Variation Deed.