Private ruling: Trust - Deed of Variation of Trust
Published: May 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Does CGT Event E1 or E2 in section 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen if the terms of the Trust are changed pursuant to the exercise of a power of amendment contained within the trust deed of the Trust in the way set out in the draft Variation Deed Poll? | A1: No.

Relevant facts and circumstances: By a Trust Deed, the Settlor and the Trustee established a trust for the benefit of the family of Person A and Person B (the Trust). The Trust Deed was varied by a Deed of Amendment. Under a clause of the Trust Deed, the Trustee, subject to certain proscriptions, at any time by deed may revoke, add to, release or vary all or any of the trusts or powers declared under the Trust Deed, and may declare any new or other trusts or powers concerning the Trust Fund. The Trustee wishes to vary the Trust Deed as set out in the Variation Deed Poll. The variation contemplated by the Variation Deed Poll would amend the provisions in the Trust Deed which operate on termination and vesting of the Trust. By the Variation, clause 4 of the Trust Deed would provide that upon termination of the trust if the trustee does not exercise its discretion to allocate capital to a particular Primary Beneficiary, because that Primary Beneficiary has passed away, then their share of the capital is to be taken by their children (called 'second generation family members'). Further, if a second generation family member is deceased then the share which the second generation family member would have received had the second generation family member been alive would be divided equally between the second generation family member's children. The contemplated variation does not seek to change the classes of beneficiaries and operates only upon termination of the trust.

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 in 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 be triggered 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. CGT Event E2 in section 104-60 of the ITAA 1997 happens if you transfer an asset to an existing trust. The decisions in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42 (Commercial Nominees) and Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark) set out a few principles that have broad application in relation to whether a change in a trust is significant as to change the trust enough so that one trust ends and a new trust is created. Following these decisions, the ATO accepts that a change in the terms of an existing trust pursuant to a valid exercise of a power in the deed, including the power to amend will not result in the termination of a trust and therefore CGT Event E1 does not happen. Similarly, CGT Event E2 will not occur provided there is no change in how the trust assets are held. In this case, the Trust deed provides the Trustee with the power to revoke, add to, release or vary all or any of the trusts or powers declared under the Trust Deed, and may declare any new or other trusts or powers concerning the Trust Fund. Further, a clause of the Trust Deed currently provides the trustee with absolute discretion to pay the capital of the trust on termination to such of the Primary Beneficiaries as is thought fit. The Variation Deed Poll intends to replace the clause to provide the trustee with discretion to distribute the capital of the trust, upon termination, to certain family members of the Primary Beneficiary where the Primary Beneficiary is deceased at the date of perpetuity. The proposed variation would not change the classes of beneficiaries. As the variation proposed is in accordance with the power provided under the Trust Deed, and does not vary the main purpose of the Trust Deed, we accept that the change in terms is pursuant to a valid exercise of a power in the deed and therefore will not result in a termination of the trust and therefore neither CGT Event E1 nor E2 will happen.