Private ruling: Whether exercising of trustee's powers results in specific CGT Events
Date of advice: 28 June 2017
Published: October 2017
Ruling period: 30 June 2017 to 31 July 2017
Date scheme commenced: 30 June 2017 or date of execution being no later than 31 July 2017

Ruling: Q1: 1. Will execution of an irrevocable deed by ABC in their capacity as Trustee and Guardian of the ABC Family Trust ( Trust ) that would: a) exclude certain General Beneficiaries of the Trust from being General Beneficiaries of the Trust; b) remove the power of the Trustee of the Trust to add a person as: i. a General Beneficiary of the Trust pursuant to the power contained in clause 1.1(9)(f)(v) of the Trust Deed; and ii. an Additional Income Beneficiary pursuant to the power contained in Item 7(d) of the Schedule to the Trust Deed; and c) remove certain interpretation provisions in the Trust Deed relevant to the identification of those persons who are considered a General Beneficiary of the Trust ( Proposed Amendments ) result in the happening of CGT event A1? | A1: No | Q2: 2. Will execution of an irrevocable deed by ABC in their capacity as Trustee and Guardian of the Trust to effect the Proposed Amendments result in the happening of CGT event E1 or CGT event E2? | A2: No

Relevant facts and circumstances: 3. This ruling is based on the facts stated in the description and the application submitted to the Commissioner on the specified date ( Application ). Trust background information 4. The Trust was settled on a date by Settlor ( Settlor ) and ABC through the execution of a deed of settlement ( Trust Deed ). 5. The Applicant is the trustee of the Trust. At the time of the Application, the Trustee is also the Appointor and Guardian of the Trust. 6. The Trust is a discretionary trust. 7. The Trust Deed, or relevant parts of the Trust Deed (including any defined terms), as they exist in the form as provided to the Commissioner of Taxation on the specified date, form part of, and are to be read with, the relevant facts and circumstances in this Ruling. Proposed Exercise of Powers 8. It is proposed that the Trustee will execute an irrevocable deed that will result in: a) exercising the powers contained in clauses 1.1(8)(b) and (c) of the Trust Deed to exclude the following persons from being General Beneficiaries of the Trust with effect from the date of execution of that Deed: i. any person who is or becomes a widow or widower of a person referred to in clause 1.1(9)(c) of the Trust Deed, whether or not that person otherwise was already or becomes a General Beneficiary of the Trust as a result of becoming a widow or widower; ii. any person who is no longer married to a Primary Beneficiary or to a child or remoter issue of a Primary Beneficiary and would otherwise remain a General Beneficiary because of the operation of clause 1.1(9)(d) of the Trust Deed; and iii. any person who is related by blood or marriage to ABC or to ABC’s spouse, other than: a. ABC's parent; b. ABC's siblings; c. the spouse of any of ABC’s siblings; d. any remote lineal descendant of ABC’s siblings; e. the spouse of any remote lineal descendant of ABC’s siblings; and f. with the exception of the persons referred to at sub-paragraphs (iii)(a), (b), (c) and (e) above, any persons who are already members of the class of General Beneficiaries as set out as clauses 1.1(9)(a), (b), (c), (d) or (e) of the Trust Deed and who are not otherwise members of the Excluded Class (including those included as a member of the Excluded Class because of the operation of paragraphs 5(a)(i), (ii) or (iii)); and b) exercising the power contained in clause 17 of the Trust Deed to vary the Trust Deed by: i. deleting clause 1.1(9)(f)(v) of the Trust Deed; ii. deleting clause 1.2(1) of the Trust Deed iii. deleting clause 1.2(4) of the Trust Deed and replacing it with a definition of “spouse” which includes a de facto partner of 10 years; and iv. deleting Item 7(4) of the Schedule to the Trust Deed. 9. The purpose of ABC intending to effect the proposed amendments is to ensure that the individual beneficiaries of the Trust are those family members that are related to their children and align the beneficiary class to those members of ABC’s family who have historically benefited from distributions under the Trust (being ABC, their children and their remoter issuer). Assumptions 10. This ruling is made on the basis of the following assumptions: ● The Trust is not a fixed trust or unit trust. ● The Trust made a family trust election on a specific date. It is assumed that this election has not been revoked or varied since that date. ● The trust holds all of its assets on capital account, and the assets are therefore subject to the Capital Gains Tax ( CGT ) rules. ● No beneficiary is absolutely entitled or specifically entitled to a trust asset at any time. ● There is no beneficial entitlement to any amount set aside for any beneficiary at time of exercising of the power’s relating to this Application.

Relevant legislative provisions: ● Section 104-10 Income Tax Assessment Act 1997 (ITAA 1997) ● Section 104-55 of the ITAA 1997 | ● Section 104-60 of the ITAA 1997

Reasons for decision: Detailed Reasoning - CGT Event A1: Disposal of a CGT Asset: 11. Section 104-10(1) of ITAA 1997 states that: CGT event A1 happens when you dispose of a CGT asset. 12. Section 104-10(2) states that: You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. 13. CGT Event A1 happens when you dispose of a CGT asset. The proposed amendments to the Trust Deed will not result in a change of ownership to occur from the Trustee to another entity. 14. The Proposed Amendments would not give rise to CGT event A1. | Detailed Reasoning - CGT Event E1: Creating a trust over a CGT Asset: 15. Section 104-55(1) states that: CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. 16. An exception is contained in section 104-55(5) which states: CGT event E1 does not happen if you are the sole beneficiary of the trust and; (a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and (b) the trust is not a unit trust. | Detailed Reasoning - CGT Event E2: Transferring a CGT asset to a trust: 17. Section 104-60(1) states that: CGT event E2 happens if you transfer a CGT asset into an existing trust. 18. An exception is contained in section 104-60(5) which states: CGT event E2 does not happen if you are the sole beneficiary of the trust and; (a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and (b) the trust is not a unit trust. | Detailed Reasoning - Trust Resettlement: 19. A question arises as to whether the proposed amendments to the Trust Deed would result in the creation of a new trust. The question is whether there has been a break in the continuity of the trust estate such that the trust was effectively deprived of all assets and then re-endowed. Where this occurs, it could give rise to the happening of CGT events E1 or E2. 20. As a general proposition, the approach adopted by the Full Federal Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Limited (1999) 167 ALR 147(at 157-158) ( Commercial Nominees ), 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. Relevantly, in Commercial Nominees the Full Federal Court had stated that: 55. … in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income . It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust. 56. So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established, there will be identity of the 'taxpayer’ for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself. 21. The Commissioner’s view is 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 and, therefore, will not result in CGT event E1 happening. This does not apply where the exercise of a power under the deed would lead to a conclusion that those assets are now held on terms of a distinct (that is, different) trust. 22. This is set out 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 ). TD 2012/21 is primarily based on the decisions in Commercial Nominees and FC of T v Clark & Anor [2011] FCAFC 5 ( Clark ). 23. Paragraph 1 of TD 2012/21 states that where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust’s constituent document, neither CGT event E1 nor CGT event E2 happens unless: a. The change causes the existing trust to terminate and a new trust to arise for trust law purposes, or b. 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. 24. Relevantly, example 1 of the TD 2012/12 provides some guidance where the trust deed is amended for the addition of new entities to, and exclusion of existing entities from, class of objects. The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee (a private company of which Mr and Mrs Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists. Having decided to get out of the flower industry, the Squirrel Family dispose of their interests in Oak Pty Ltd to an unrelated third party. The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trust further resolves to add to the class of General Beneficiaries: ● the respective spouses of the children; ● trusts and companies in which the family has a majority controlling interest; and ● a philanthropic charity unrelated to the Squirrel Family. The making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event. 25. Paragraph 26 of TD 2012/21 goes further to say: whether a purported change to a trust in exercise of a power under the deed is properly supported by the power is to be determined in accordance with principles of trust law having regard to the scope of the power properly construed. 26. As such, so long as any amendment to the trust obligations is made in accordance with a power conferred by the trust instrument creating the obligations, then there will be 'identity’ of taxpayer notwithstanding those changes. | Detailed Reasoning - Valid exercise of a power of amendment contained within the deed: 27. Clause 17 of the Trust Deed provides that: with the consent of the Guardian pursuant to Clause 16, the Trustee may at any time and from time to time by deed (revocable or irrevocable) revoke, add to or vary all or any of the trusts, powers, terms and conditions contained in this Deed (or the trusts, powers, terms and conditions contained in any variation or alteration or addition made to this Deed from time to time)... 28. The proposed exercise of powers contained in clauses 1.1(8)(b) and (c) by the Trustee to exclude certain Beneficiaries and exercise of power under Clause 17 to make variations to the Trust Deed would: a. Be made in conformity with the powers contained in the Trust Deed b. Not affect the continuity of the property that is the subject of the Trust; and c. Not result in the termination of the Trust and a new trust to arise for trust law purposes. 29. This would be consistent with Example 1 of TD 2012/21. 30. The purported exercise of the powers would not result in the property of the Trust commencing to be held under a separate charter of rights and obligations such as to give rise to the conclusion that the trust property has been settled on terms of a different trust. The purported changes would not result in any changes to the terms and conditions under which the Trustee would continue to administer the property of the Trust. 31. Based on the above discussion, neither CGT event E1 nor CGT event E2 would arise as a result of the Trust executing an irrevocable deed to make the proposed amendments.