Private ruling: Trust resettlement and capital gains tax
Date of advice: 16 August 2016
Published: September 2016
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the gift of residential property from the beneficiary to the Trust cause a resettlement of the Trust to result in a capital gains event for the purpose of Part 3-1 of the Income Tax Assessment Act 1997 to happen? | A1: No | Q2: Will the gift of the unpaid present entitlement balance of the beneficiary to the Trust cause a resettlement of the Trust to result in a capital gains event for the purpose of Part 3-1 of the Income Tax Assessment Act 1997 to happen? | A2: No

Relevant facts and circumstances: The Trust was established by deed. The beneficiary will gift a residential property to the Trust. This property will be held by the Trust for all beneficiaries of the Trust. A deed of gift will be executed. The beneficiary will gift their unpaid present entitlement balance to the Trust. This amount will be held by the Trust for all beneficiaries of the Trust. A deed of gift will be executed. The above transactions will be contributions to the Trust fund. The Trust deed provides for future contributions to the Trust fund.

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: The beneficiary's gift of residential property and gift of unpaid present entitlement balance (transactions) to the Trust are contributions to the Trust's fund, which will be available to all beneficiaries of the Trust. The Trust requested a ruling on whether the transactions would cause resettlement of the trust resulting in a capital gains event. Taxation Determination TD 2012/21 contains the Commissioner's view on whether CGT event E1 or E2 happens if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document. Such a change will not result in CGT event E1 or E2 happening unless: • the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or • the change results in an asset being settled on the terms of a different trust. Will the transactions cause the Trust to terminate for trust law purposes? Pursuant to paragraph 1 of TD 2012/21, neither CGT event E1 nor CGT event E2 happens if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document unless the change causes the existing trust to terminate and a new trust to arise for trust law purposes. As explained by paragraph 21 of TD 2012/21, the approach adopted by the Full Federal Court in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42, as made clear by Edmonds and Gordon JJ in their joint reasons for judgment in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550: …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. The transactions will be contributions to the Trust provided for in the Trust deed. The effect is the contributions form part of the Trust fund and continuity of the Trust. The proposed transactions will not cause the Trust to terminate for trust law purposes. Will the transactions result in an asset of the Trust being settled on the terms of a different trust? Pursuant to paragraph 1 of TD 2012/21, neither CGT event E1 nor CGT event E2 happens if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document unless the effect of the change 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 the terms of a different trust. The residential property and unpaid present entitlement balance will be contributions to the Trust fund (per the Trust deed) that will be held for all beneficiaries and will be subject to the same terms as contained in the Trust deed. The transactions do not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust has been settled on the terms of a different trust. Conclusion Accordingly, there is no trust resettlement causing CGT event E1 or E2 in sections 104-55 and 104-60 of the Income Tax Assessment Act 1997 for the Trust following the occurrence of the transactions.