Private ruling: Capital gain tax (CGT) event and appointments of income and capital of trust fund
Published: October 2014
Ruling period: 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will a capital gain tax (CGT) event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the Trustee executes the Deed of Appointment? | A1: No. | Q2: Will the transfer a property of the trust by the Trustee in accordance with the Deed of Appointment, cause a CGT event in Division 104 of the ITAA 1997 to happen in respect of any other property of the trust? | A2: No.

Relevant facts and circumstances: The Family Trust was established by a deed of settlement (Trust Deed) between the Settlor and the Trustee. The Trustee proposes to make appointments of income and capital of the Trust Fund upon the occurrence of a certain event as set out in the proposed Deed of Appointment. The Trustee will ensure that procedural matters in relation to the appointment of income and capital required under the terms of the Trust Deed are satisfied.

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 occurs when a trust over a CGT asset is created by declaration or settlement. CGT event E2 occurs if a CGT asset is transferred to an existing trust. The effect of a change to an existing trust might lead to a termination of the trust. Even where the trust does not terminate in some circumstances it may be concluded that a new trust has been created over particular trust property to which the change relates. 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. However, a CGT event will occur if the change: • causes the existing trust to terminate and a new trust to arise for trust law purposes; or • results in 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 terms of a different trust. Paragraph 24 of TD 2012/21 states that: …. 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 happening. Paragraph 27 of TD 2012/21 states that: 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 proposed appointment of income and capital of the Trust Fund is made pursuant to existing powers granted to the Trustee under the Trust Deed. Furthermore, the changes proposed to the appointment of income and capital under the terms of the Deed of Appointment are actions which the Trustee is permitted to undertake under the existing powers under the Trust Deed, and does not cause trust property to be held under a separate charter of obligations as a result of execution of the Deed of Appointment. In addition, it is noted that the Trustee will ensure that procedural matters required by the Trust Deed will be satisfied on the execution of the Deed of Appointment. Based on the analysis above, CGT event E1 or E2 under Division 104 of the ITAA 1997 will not arise upon the execution of the Deed of Appointment. At the occurrence of a certain event and subject to a particular property still forming part of the Trust Fund, the Trustee will transfer this property in accordance with the terms of the Deed of Appointment. The transfer of this property will trigger CGT consequences in respect to this property alone and will not cause any CGT consequences in respect to other assets of the Trust. Any capital gain or loss that arises as a result of the transfer of this property is to be determined in accordance with the relevant provisions under Part 3-1 of the ITAA 1997. Note : It is, however, noted that the appointment or accumulation of income in accordance with the Deed of Appointment may trigger taxation consequences in respect of the Trust's net income (under Division 6, in conjunction with Division 6E of the Income Tax Assessment Act 1936 , and Subdivision 115-C and Subdivision 207-B of ITAA 1997, as relevant).