Private ruling: Changing a Trust to insert a new clause and extend the vesting date of the Trust
Published: June 2012
Ruling period: Year Ending 30 June 2012 | Year Ending 30 June 2013 | Year Ending 30 June 2014 | Year Ending 30 June 2015
Date scheme commenced: 01 July 2011

Ruling: Q1: Will an amendment to the Deed of the X Trust to add an amendment clause to the trust trigger CGT event E1 in relation to the Trust's CGT assets? | A2: Yes

Relevant facts and circumstances: Person A was married to Person B. Their children are Person C and Person D. Person C has children and Person D has no children. None of Person C's children have children. Person B died on XX 19XX and Person A died on XX 20XX. The ABCDEF Trust ("Trust") Deed was created on X between Person F as settler and Person B, Person C and Person G as trustee's. Person A exercised their power of appointment in the deed dated Y. Person A revoked the deed of appointment in the deed dated Z. Trustees removed and appointed in deed dated ZZ. A second Deed of appointment was made by Person A appointing Person C as being entitled to the capital on the vesting date subject to certain conditions. Person A exercised their power of appointment in the deed dated Z. On YY XYZ replaced the surviving trustee's being Person H, Person I and Person C as trustee of the Trust. The trust beneficially owns all of the issued shares in ABCDEF. Nine of those shares are registered in the name of the Trustee, XYZ and the other share is registered in the name of Person C as nominee for the Trust. ABCDEF in turn owns all of the shares in ABCXYZ which owns part of the property known as ABC123 which is used in the family business. Question 1 - Addition of an amendment clause There is no clause in the Deed allowing the Deed to be amended. The current beneficiaries of the Trust as per clause 1(b) are Person C, Person D and the grandchildren of Person A being Person X, Person Y and Person Z. The proposed amendment clause to the Deed is as follows: "The Trustee may with the consent of the person or persons entitled to remove and appoint trustees in accordance with clause 13(b) of the Deed, by deed or orally vary this deed at any time and in any way." Question 2 - Extending the vesting date Clause 1(f) of the Deed states: "The vesting date" means the date upon which occurs the first of the following events- · the expiration of XX years from the execution of this Deed; · the death of the last survivor of all the lineal descendants, male or female, living at the date of this Deed; · the execution by the Trustee of a document declaring the date of the execution of the same to be the vesting date for the purposed of this Deed. The proposed amendment changes 1(f)(i) to read: · the expiration of 2XX years from the execution of this Deed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-55

Reasons for decision: Detailed Reasoning - The effects of Clark's case: The Full Federal Court handed down its judgement on the Clark case, Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ) and denied the Commissioner leave to appeal this decision to the high court in September 2011. Due to this, on 20 April 2012 the Commissioner withdrew the document 'Creation of a new trust - Statement of Principles August 2001'. Even though Clark and Commercial Nominees were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also relevant to the question of the circumstances in which CGT event E1 may happen as a result of changes being made to an existing trust. In light of those principles, the ATO accepts that a valid amendment to a trust pursuant to an existing power will not result in termination of the trust and, therefore, subject to the observation in paragraph 23 below, will not result in CGT event E1 happening. This reasoning therefore means that the principles behind the Statement of principles still relate this case as per the Commissioners Decision impact statement based on Clark's case: The Commissioner considers that the decision of the Full Federal Court in Clark does not change the basic proposition that, based on the authority in Commercial Nominees , the relevant focus is on whether continuity of the trust estate has been maintained. That this is so is confirmed by the High Court's language in disposing of the Commissioner's application for special leave where the High Court noted that the decision of the Full Federal Court involved 'characterisation and evaluation of the continuity of the trust estate ' Based on the Guidance offered by "the Statement of Principles" | Detailed Reasoning - CGT Event E1: CGT event E1 under section 104-55 of the ITAA 1997 happens if you create a trust over a CGT asset by declaration or settlement. This event will also happen if changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created. The Commissioner issued a paper titled Creation of a new trust Statement of Principles August 2001 (Statement of Principles) on 29 August 2001 which outlines when the Commissioner will treat changes to a trust deed as giving rise to a new trust. It lists the following changes that may result in the creation of a new trust: · any change in beneficial interests in trust property; · a new class of beneficial interest (whether introduced or altered); · a possible redefinition of the beneficiary class; · changes in the terms of the trust or the rights or obligations of the trustee; · changes in the nature or features of trust property; · additions of property which could amount to a new and separate settlement; · depletion of the trust property; · a change in the termination date of the trust; · a change to the trust that is not contemplated by the terms of the original trust; · a change in the essential nature and purpose of the trust; and/or · a merger of two or more trusts or a splitting of a trust into two or more trusts. Under the Statement of Principles the Commissioner considers it is a change in the essential nature and character of the original trust relationship which creates a new trust. Whether a new trust is created will depend, among other things, on the terms of the original trust, and on the powers of the trustee. The original intentions of the Settlor must be considered in determining whether a new trust has been created. In this case the Trustee proposes to amend the Trust Deed to both give the power to make discretionary changes to the Trust as well as extending the vesting date of the Trust. Under part 5.2 of the Statement of Principles, the Tax Office will accept that in most circumstances the mere extension of the term of a trust is consistent with a continuing trust estate when: 1. the trust deed confers an express power to alter the termination date; 2. the deed and the surrounding circumstances do not indicate that a particular trust period was a fundamental feature of the particular trust relationship; and 3. other accompanying circumstances do not indicate a fundamental change to the trust. | Detailed Reasoning - 1. Express power: Insertion of the proposed Clause 1(f)(i) would provide wide powers to the Trustee to alter all or any of the provisions of the Deed provided any variation, alteration or addition shall not: · infringe the law against perpetuities and excessive accumulations; · be in favour of the Settlor; and · affect the beneficiaries' entitlements. If all the conditions are satisfied, the Trustee may be considered to have the power to change the vesting date under proposed Clause 1(f)(i). In relation to whether the wide powers provided to the Trustee under the proposed Clause 1(f)(i) are sufficient to determine that the Deed confers an Express Power to extend the vesting date we examine the Full Federal Courts comments in Federal Commissioner of Taxation v. Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158: So long as any amendment of the trust obligations relating to such property is made in accordance with any power conferred by the instrument creating the obligations, and the continuity of property that is the subject of trust obligations is established, there will be identity of the taxpayer notwithstanding any amendment of the trust obligation and any change in the property itself (emphasis added). The comments in this case support the conclusion that the implied power conferred in the proposed Clause 1(f)(i) of the Trust Deed would meet the definition of Express Power and is sufficient to allow for the extension of the Vesting Date. The proposed variation to the Deed is to remove the existing definition of the vesting date and to replace it with one that would enable the Trust to continue for an additional 40 years, subject to the Trustee determining to vest the Trust at any time if the Trustee so chooses. The Settlor is not a beneficiary of the Trust. Under no circumstances will the trust assets be returned to the Settlor. The proposed variation will not be in favour of or for the benefit of or result in any benefit to the Settlor. The second condition is satisfied. The proposed variation that is the subject of this ruling request is not altering in any form any amounts that are set aside or vested in any of the beneficiaries prior to the date of variation. All amounts that have already been set aside or vested in any of the beneficiaries will not at all be impacted by the proposed variation of the Vesting Date. The third condition is satisfied. Accordingly, it is considered that the Trustee would have an express power to alter the Vesting Date under proposed Clause 1(f)(i), however without this Clause being inserted, the trust does not confer this right to the Trustee. | Detailed Reasoning - 2. Trust period: It is provided in the Statement of Principles that in some trusts, the specified term may be an essential feature whose variation could be a factor pointing towards the creation of a new trust. In these situations the subject matter of the trust can be most accurately be described as the income and other benefits arising from the trust property over a particular period. In this case the Trust was established for the benefit of the beneficiaries under Clause 1(b). The trust is set up holding a number of specific properties, however, the trust property is specifically not limited to those listed in the Trust Deed by the use of the words: "The Trust Funds" means the said sum of X Dollars ($) all other sums received by the Trustee to be held upon the trusts hereof all accumulation of the income of any such property and the investments for the time being representing the foregoing." The Trust is for the benefit of the beneficiaries and not as a vehicle for a particular project or to hold an asset of intrinsically limited duration. Therefore, the deed and surrounding circumstances do not indicate that the current term of the Trust is a fundamental feature of the Trust. | Detailed Reasoning - 3. Fundamental change to the trust: The Deed provides for the Trust Fund to vest in the beneficiaries when the trust ends. Although the Trustee has absolute discretion to determine shares and proportions on distribution of the trust assets, the Trust Fund has to be transferred to at least one of the beneficiaries once the Trust ends. In Stein v. Sybmore Holdings Pty Ltd [2006] NSWSC 1004; 2006 ATC 4641; 64 ATR 325 (Stein's case), an application was made to the New South Wales Supreme Court for an order under section 81 of the Trustee Act 1925 (NSW) empowering the Trustee to defer the vesting date. The Court was aware that the effect of the extension of the vesting date would be to change the beneficial interests in the Trust Fund from what they were at the time of the application. Campbell J considered, at page 4747, that section 81 of the Trustee Act 1925 (NSW) could be used in a way that altered beneficial interests and the fact that the extension of the vesting date would likely to alter who ultimately had beneficial interests in the Trust Fund, was not necessarily fatal to the application. The facts of Stein's case were such that the Supreme Court had the jurisdiction to change the vesting date of the trust. No such powers were extended to the Trustee. The Statement of Principles, at chapter 5.1, considers the addition and removal of beneficiaries and confirms that the identity of those for whose benefit the trust exists is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amounting to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust. The relevant beneficial interests in a trust fund obviously constitute a critical element in a trust relationship. In circumstances where default beneficiaries have vested, but defeasible, interests in the trust capital, an extension to the vesting date means there may be changes in those beneficial interests. That is, the change may be considered likely to alter who ultimately has the beneficial interests. But, even before the existing vesting date, those interests might have been defeated. That is, the beneficial interests remain vested and defeasible, both before and after the change to the vesting date, though the likelihood of their being defeated may in some cases be considered greater after the change. Further, the class of beneficiaries may be unchanged. Where the class of beneficiaries includes children unborn at the original vesting date, any children who may come to hold relevant beneficial interests after that date, were always part of the original class of beneficiaries who might ultimately take. In your case the extension of the vesting date will potentially vary the beneficial interests. The question is whether this potential change to beneficial interest is fundamental enough to cause a resettlement of the Trust. It is the Commissioners opinion that whilst there will be a potential variation in the beneficial interest as a result of the amendment of the vesting date, the variation is consistent with changes in the membership of a continuing class and therefore not significant enough to cause a resettlement. The facts in this case do not disclose any fundamental change in the trust relationship. As discussed above the potential variation to beneficial interests in the Trust fund is not considered to result in a fundamental change in the essential nature and character of the Trust. However as there is no current provision in the Trust to change the vesting date or grant the powers to change the vesting date, this change could not occur without changing the nature of the trust, therefore triggering a CGT event E1. | Detailed Reasoning - The addition of proposed clause 1(f)(i): In relation to whether the wide powers provided to the Trustee under the proposed Clause 1(f)(i) are sufficient to determine that the Deed confers an Express Power to extend the vesting date we examine the Full Federal Courts comments in Federal Commissioner of Taxation v. Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158: So long as any amendment of the trust obligations relating to such property is made in accordance with any power conferred by the instrument creating the obligations, and the continuity of property that is the subject of trust obligations is established, there will be identity of the taxpayer notwithstanding any amendment of the trust obligation and any change in the property itself (emphasis added). However, as this clause is not currently in the Trust Deed, adding it would seem to be changing the nature of the Trust deed sufficiently enough to create a new Trust. As per the above ruling, the Trustee does not hold the power to change the trust and as such giving the trustee this power alters the essential nature of the trust, thus creating a new trust which therefore triggers a CGT event E1, as per the comments made in Federal Commissioner of Taxation v. Commercial Nominees Australia Ltd (1999) 167 ALR 147; at 157-158. The decision in Bowmill Nominees Pty Ltd [2004] NSWSC 161 back up that the trust can be changed where all beneficiaries are ascertained and sui juris agree to the variation. This does not, however, change the fact that although the trust can be changed, it is being changed to a form which is different enough in nature to the original trust as to be in effect creating a new trust, therefore triggering a CGT event E1. The vesting date could be changed without triggering the CGT event E1 if the Trustee had the powers to make this change. As the trust does not convey this power to the Trustee, inserting a clause into the trust to give the Trustee this power changes the essential nature of the trust therefore triggering the CGT E1 event.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Will the change to the vesting date of the X Trust trigger CGT Event E1 in relation to the Trust's CGT Assets?