Private ruling: Capital gains tax (CGT) events on variations of the terms of a trust
Published: October 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Will a CGT event happen under the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the Trust if the Trustee excludes persons from the class of General Beneficiaries, determines additional members of the class of General Beneficiaries, and additional members of the Excluded Class, as set out in the proposed Deed Poll? | A1: No.

Relevant facts and circumstances: The Trust was established by a Trust Deed entered between the Settlor and the Trustee. The Trust Deed nominated two persons as Guardians of the Trust. The Trustee proposes to exercise the powers under Trust Deed to add additional members to the class of General Beneficiaries, to add members to the Excluded Class and exclude persons from the class of General Beneficiaries. Schedule L of the Trust Deed contains the general power of variations by the Trustee. Schedule Q of the Trust Deed provides the Trustee with specific powers to: · add certain classes of persons as additional members of the class of General Beneficiaries (clause Q2) · declare certain persons and classes of persons to be members of the Excluded Class (clause Q3) · exclude certain classes of persons from the class of General Beneficiaries (clause Q5). Clauses Q6 and Q7 of Schedule Q require that the powers above cannot be exercised so as to derogate from any interest in the trust fund or the trust income to which any beneficiary has previously become indefeasibly entitled and that if there is a Guardian or Guardians in existence, the powers can only be exercised if prior written notice of the intention to exercise any of such powers is delivered to the Guardian/s personally. The Trust Deed also requires that such powers are not to be exercised within 14 days of the date of service unless the Guardians provide a written consent otherwise, and that such powers, if not exercised by the Trustee within 60 days of the date of service, shall lapse and cease to have effect. The Trustee proposes to make the following declarations by Deed Polls. · Pursuant to the provision of clause Q5 the Trustee declares that certain class of persons described in Schedule A of the proposed Deed Poll shall be excluded from the class of General Beneficiaries · Pursuant to the provision of clause Q2 the Trustee declares certain class of persons described in Schedule B of the proposed Deed Poll as additional members of the class of General Beneficiaries. · Pursuant to the provision of clause Q3 the Trustee declares certain class of persons described in Schedule C of the proposed Deed Poll as permanent members of the Excluded Class. The Australian Taxation Office has been provided with confirmation that all the relevant procedural requirements in relation to the written notice to be served on the Guardians would be strictly adhered to by the Trustee and that the proposed declarations as set out above shall not affect any beneficial entitlement to any amount set aside for any beneficiary.

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: CGT event E1 under section 104-55 of the ITAA 1997 happens when a trust over a CGT asset is created by declaration or settlement. CGT event E2 under section 104-60 of the ITAA 1997 happens if a CGT asset is transferred to an existing trust. 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? states that CGT event E1 and CGT event E2 will not generally happen if the terms of a trust are changed pursuant to a valid exercise of a power contained in the trust's constituent document, or are varied with a court's approval. Example 1 in TD 2012/21 is relevant and provides guidance where a trustee exercises a power conferred upon him to add entities to or exclude entities from a class of beneficiaries. | Detailed Reasoning - Example 1: addition of new entities to, and exclusion of existing entities from, class of objects: …. 4. 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 trustee 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 . 5. 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 . Paragraphs 24, 26 and 27 of TD 2012/21 provide further clarification that: 24. …. the ATO accepts 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), or court approved variation, will not result in a termination of the trust and, therefore, subject to the observation in paragraph 27 below, will not result in CGT event E1 (or CGT event E2) happening. 26. 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. Relevant to this question will be whether the deed itself explicitly specifies conditions (including procedural conditions) that need to be satisfied for the exercise of the power to be effective. 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. The Trustee's power to add additional members to the class of General Beneficiaries is contained in clause Q2, the power to add a certain class of persons to be members of the Excluded Class is contained in clause Q3 and the power to exclude persons from the class of General Beneficiaries is contained in clause Q5. The Trust Deed also provides that the Trustee's exercise of the powers under clauses Q2, Q3 and Q5 is subject to the procedural requirement as set out in the Trust Deed. The Tax Office has been provided with confirmation that all procedural matters as set out in the Trust Deed shall be complied with. | Detailed Reasoning - Conclusion: The proposed declarations by the Trustee to exclude persons from the class of General Beneficiaries, to add additional members to the class of General Beneficiaries and to declare certain class of persons to be members or the Excluded Class are made pursuant to a valid exercise of the Trustee's power contained within the Trust Deed and will not result in CGT event E1 or E2 happening nor any other CGT event.