Private ruling: Trust Resettlement
Published: June 2012
Ruling period: 1 July 1997 to 30 June 1998
Date scheme commenced: 19 June 1998

Ruling: Q1: Does the variation to the Trust deed give rise to a change in the ownership of the Trusts assets pursuant to paragraph 160M(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No

Relevant facts and circumstances: The following description of the scheme is based on information provided by the applicant. The following documents, or relevant parts of them, form part of and are to be read with the description: Application for private ruling, including the following attachments: · Copy of the Trust Deed of settlement; · Copy of the Minutes of Directors Meeting appointing the new Trustee of the Trust; · Copy of the Deed of Appointment appointing new appointors of the Trust as from the date of death of the Appointor; · Copy of the Deed of Variation detailing changes to the primary and income beneficiaries; · Copy of the Deed of Variation removing a new appointor from the Deed of Appointment; · Copy of Deed of Resignation accepting the resignation of an Appointor of the Trust; and · Copy of Deed of Variation and Appointment dealing with additions to clause 17 of the Trust Deed and appointing an additional Appointor. Scheme: The Trust is a discretionary. The Trust was settled in mid 1980. The original Trustee was G Pty Ltd. The Trustee was changed to B Pty Ltd. The Trustee, with the written consent of the Appointor, has the power to amend the Trust Deed (clause 15). The primary beneficiaries as per Clause (1) of the Fourth Part of the Schedule of the original Trust Deed were "the children or child (if one only) of Father and Mother who are born after the date hereof". Clause (3) of the Fourth Part of the Schedule includes any individual "whom the Trustee with the consent of the Appointor may nominate from time to time to be a beneficiary". The income beneficiaries as per the Sixth Part of the Schedule of the original Trust Deed were "the children or child (if one only) of Father and Mother who are born after the date hereof". Clause (3) of the Sixth Part of the Schedule includes any individual "whom the Trustee with the consent of the Appointor may nominate from time to time to be a beneficiary". Father and Mother had X children. The X children were born prior to the establishment of the Trust. The Trust Deed was subsequently varied with effect to alter the primary and income beneficiaries as per the Fourth and Sixth Parts of the Schedule of the original Trust Deed to be "Child A and Child C only". The Trust Deed was varied on other occasions.

Relevant legislative provisions: Income Tax Assessment Act 1936 paragraph 160M(3)(a) Issue 1: | Question 1: | Summary | The Deed of Variation does not give rise to a change in the ownership of the Trusts assets pursuant to paragraph 160M(3)(a) of the ITAA 1936. | Detailed reasoning | The Creation of a New Trust - Statement of Principles August 2001 (Statement of Principles) was withdrawn on Friday 20 April 2012 as a result of the decision in Federal Commissioner of Taxation v. Clark and Anor (Clark) [2011] FCAFC 5 and the High Court's refusal to grant the Commissioner leave to appeal that decision. | The Decision Impact Statement issued in relation to Clark outlines the ATO view of the case. It provides that, "following Clark, there will not be a loss of continuity sufficient to deny a trustee access to any capital losses being carried forward without a termination of the existence of the trust estate." | As a result of Clark the ATO has stated that it accepts that the principles set out in Clark may have broader application. In relation to this the Decision Impact Statement provides "In particular, the case is relevant to the question of the circumstances in which CGT Event E1 may happen by reason of a new trust coming into existence consequent on changes being made to an existing trust". | As section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), which is the section that addresses CGT Event E1, did not start to apply until 1 July 1998 which is after the date of the Deed of Variation, we must consider the consequences of the variation under Section 160M of the ITAA 1936, as this was the relevant section at the time. Section 160M of the ITAA 1936 advises, in relation to capital gains and capital losses, what constitutes a disposal or acquisition of an asset. | Paragraph 160M(3)(a) of the ITAA 1936 provides the following in relation to declaration of trust: | Without limiting the generality of subsection (2), a change shall be taken to have occurred in the ownership of an asset by: | · the creation of a trust, by declaration or settlement , over the asset, other than where either: | · all of the following sub-subparagraphs apply: | · the person who owned the asset immediately before the creation of the trust is the sole beneficiary of the trust; | · that person is absolutely entitled to the asset as against the trustee or would, but for a legal disability, be so entitled; | · the trust is not a unit trust; or | · all of the following sub-subparagraphs apply: | · the trust is created by the transfer of an asset to a trust from another trust; | · the beneficiaries of the trusts are identical; | · the terms of the trusts, including the interest of each beneficiary in the income and corpus of the trusts, are identical; | Under paragraph 160M(3)(a) a new trust would be created where there has been an acquisition or disposal of an asset which has been triggered by a change in ownership. To determine this we need to look at trust law and the trust resettlement principles from Clark. | The three main indicia of continuity of a trust as identified by the High Court in Federal Commissioner of Taxation v Commercial Nominees (2001) 75 ALJR 1172) were; the constitution of the trust, the trust property and membership. These indicia were considered in Clark and need to be considered when determining whether the Deed of Variation gives rise to a change in the ownership of the Trust assets. | The Trust was settled in June 1980 for the benefit of the Primary Beneficiaries and the General Beneficiaries. | Under Clause 1 of the Trust Deed the classes of beneficiaries are defined as follows: | The "Primary Beneficiary" and the "Primary Beneficiaries" shall mean the person or persons named described or defined as such in the Fourth Part of the Schedule. | "General Beneficiaries" mean and include:- | The Primary Beneficiary or the Primary Beneficiaries (as the case may be); | The children of the Primary Beneficiary or the Primary Beneficiaries and the children of such brothers, sisters and children of the Primary Beneficiary or the Primary Beneficiaries; | Any body corporate wherever incorporated or resident any share in which is beneficially owned or held by any Beneficiary, or by the trustee of any trust or settlement under which any Beneficiary has any interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power of appointment or revocation or to be diminished by the increase of the class to which that Beneficiary belongs which the trustee may at any time and from time to time with the consent of the Appointor nominate in writing as a General Beneficiary and whether or not such trust or settlement is in existence at the date of this Deed; | The Trustee (in his capacity as such trustee) of any trust or settlement in which any Beneficiary has an interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power of appointment or revocation or to be diminished by the increase of the class to which that Beneficiary belongs which the Trustee may at any time and from time to time with the consent of the Appointor nominate in writing as a General Beneficiary and whether or not such trust or settlement is in existence at the date of this Deed; | Any relative by blood or marriage of the Appointor first described in the Ninth Part of the Schedule who the Trustee may at any time and from time to time with the consent of the Appointor nominate in writing to be a General Beneficiary; | Such additional persons corporations and trusts (if any) as are named and described or defined in the Fifth Part of the Schedule as additions to the class of general Beneficiaries; | PROVIDED HOWEVER that any person who is either the Settlor or a person claiming through the Settlor or the Trustee or where the Trustee consists of more than one person any of those persons or a person who has donated property to the Trustee to be held as an addition to the Trust Fund (the same being herein called "the excluded person") or any corporation in which and the trustee of any settlement or trust in or under which any excluded person has an actual or contingent beneficial interest so long as such interest continues is excluded from the class of General Beneficiaries unless specifically named or defined in the Fifth Part of the Schedule. | "Income Beneficiary" or "Income Beneficiaries" means and includes:- | · The persons named described or defined in the Sixth Part of the Schedule. | · Any relative by blood or marriage of the Appointor first described in the Ninth Part of the Schedule (including where that appointor is not named described or defined in the Sixth Part of the Schedule hereto that Appointor) whom the Trustee may at any time and from time to time with the consent of the Appointor nominate in writing to be an Income Beneficiary. | · The Trustee (in his capacity as such Trustee) of any trust or settlement in which any Beneficiary has an interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power of appointment or revocation or to be diminished by the increase of the class to which that Beneficiary belongs which the Trustee may at any time and from time to time with the consent of the Appointor nominate in writing as an Income Beneficiary and whether or not such trust or settlement is in existence at the date of this Deed; | PROVIDED THAT no person who is an excluded person shall be a member of the class of Income Beneficiaries unless specifically named or defined in the Sixth Part of the Schedule. | The Primary Beneficiaries are set out in the Fourth Part of the Schedule to the Trust Deed as follows: | · The children or child (if one only) of FATHER and MOTHER who, are born after the date hereof. | The University. | Any person or persons, any body corporate wheresoever incorporated or resident partnership, unit partnership, corporation, individual, firm incorporated or unincorporated association, condominium, society, council, body, concern, organisation, institute, guild or other legal or non-legal entity or any combination thereof recognised in any part of the world whom the Trustee with the consent of the Appointor may nominate from time to time to be a Beneficiary. | The Income Beneficiaries are set out in the Sixth Part of the Schedule to the Trust Deed as follows: | The children or child (if one only) of FATHER and MOTHER who, are born after the date hereof. | The University. | Any person or persons, any body corporate wheresoever incorporated or resident partnership, unit partnership, corporation, individual, firm incorporated or unincorporated association, condominium, society, council, body, concern, organisation, institute, guild or other legal or non-legal entity or any combination thereof recognised in any part of the world whom the Trustee with the consent of the Appointor may nominate from time to time to be a Beneficiary. | The Deed of Variation varied the Primary Beneficiaries and the Income Beneficiaries in the Fourth and Sixth Parts of the Schedule to the Trust Deed as follows: | "Fourth Part | Primary Beneficiaries: (1) Child 1 and Child 3 only." | " Sixth Part | Income Beneficiaries: (1) Child 1 and Child 3 only." | Constitution of the trust | The Decision Impact Statement for Clark provides the following comment in relation to the constitution of the trust: | 'Their Honours observed [at para 76] that it was not without significance that all of the arrangements | · were effected without making any alteration to the terms of the [deed of the CUT]. In other words, there was no alteration to the terms of the trusts embodied in that document even if a beneficial interest in the trust fund was affected, even extinguished, by virtue of the arrangements...' | When considering whether the Deed of Variation has been a valid exercise of the Trustees power we must determine whether the terms of the Trust Deed provides the Trustee with the ability to first amend the Trust. | Clause 15 of the Trust Deed provides the Trustee with the power of variation: | The Trustee for the time being may at any time and from time to time by Deed with the written consent of the Appointor revoke add to or vary all or any of the provisions of this Trust Deed or any variation alteration or addition made hereto from time to time and may by the same or any other deed or deeds declare any new or other trusts or powers concerning the Trust Fund or any part or parts thereof but so that the law against perpetuities is not thereby infringed and so that such new or other trust powers discretions alterations or variations: | · may relate to the management or control of the Trust Fund or the investment thereof or to the Trustee's powers or discretions in these presents contained; | · shall not be in favour of or for the benefit of the Settlor Appointor or Trustee or any of them or result in any benefit to the Settlor Appointor or Trustee or any of them. | · shall not affect the beneficial entitlement to any amount set aside for any Beneficiary prior to the date of the variation alteration or addition. | · The Trust Deed gives the Trustee the ability to revoke, add to or vary all or any of the provisions of the Deed with the written consent of the Appointor. This consent was provided within the Deed of Variation. | Trust property and membership | The Decision Impact Statement for Clark provides the following comment in relation to trust property and membership: | 'Their Honours found [at para 87] that whilst the identity of the trust property and objects of the CUT changes over time, there had not been any severance in their continuum.' | Prior to the Deed of Variation none of the four children of Father and Mother fit into Clause (1) of the Fourth and Sixth Parts of the Schedule to the Trust Deed, as all four children were born before the date of the Deed. | The Trustee, however, had discretion under the Deed to nominate from time to time any/all of the four children to be a Beneficiary under Clause (3) of the Fourth and Sixth Parts of the Schedule to the Trust Deed. | After the Deed of Variation, Clause (1) of the Fourth and Sixth Parts of the Schedule to the Trust Deed specifically named Child 1 and Child 3 only as Primary and Income Beneficiaries. | Specifically naming Child A and Child C as Primary and Income Beneficiaries does not limit the potential pool of Beneficiaries available to the Trustee, as the definitions of Primary, General and Income Beneficiaries under Clauses 1 of the Trust Deed have not been changed. | The Trustee still maintained absolute discretion under Clause 3 of the Trust Deed to determine which Beneficiaries, if any, would benefit from the net income of the Trust in each accounting period. | Further, the Trustee maintains discretion under Clause 4 of the Trust Deed to determine which Beneficiaries will benefit from the capital of the Trust on the Vesting Day. | Conclusion | As the Trustee has validly exercised a power of variation contained within the Deed, the Deed of Variation does not give rise to a change in the ownership of the Trusts assets pursuant to paragraph 160M(3)(a) of the ITAA 1936.


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