Private ruling: Resettlement of trust
Date of advice: 16 March 2016
Published: May 2016
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the proposed change to broaden the objectives of the trust deed result in a resettlement or the creation of a new trust giving rise to a capital gains tax (CGT) event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If the answer to Question 1 is yes, is there the discretion for the Commissioner to waive any potential tax implications under a provision of the ITAA 1997? | A2: No.

Relevant facts and circumstances: You are a trust established under a deed. You were established with the sole purpose of providing funds for the construction and fit out of a specific unit at Entity A. Recently, you were advised you that it will not be possible to establish the unit at Entity A. You are considering whether to broaden your purpose in the trust deed to allow the larger community to benefit from the fund. As Entity A has abandoned its intention to develop a unit, you are seeking to allocate the funds to another similar activity. You have received advice from your legal representative that broadening your purpose or distributing the funds to another similar activity could result in the resettlement of the trust and therefore, have taxation consequences.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-55 and | Income Tax Assessment Act 1997 section 104-60.

Reasons for decision: Summary: There is no legislative provision in the ITAA 1997 giving the Commissioner the discretion to waive any potential tax implications resulting in a resettlement or the creation of a new trust giving rise to either CGT event E1 under section 104-55, or CGT event E2 under section 104-60 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 104-55 of the ITAA 1997 outlines what happens when creating a trust over a CGT asset. 104-55(1) CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement 104-55(2) The time of the event is when the trust over the asset is created 104-55(3) You make a capital gain if the capital proceeds from the creation are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base 104-55(4) If you are the trustee of the trust and no beneficiary is absolutely entitled to the asset as against you (disregarding any legal disability), the first element of the asset's cost base and reduced cost base in your hands is its market value when the trust is created 104-55(5) CGT event E1 does not happen if you are the sole beneficiary of the trust and: a) You are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and b) The trust is not a unit trust 104-55(6) A capital gain or a capital loss you make is disregarded if you acquired the asset before 20 September 1985. Similar wording is used in section 104-60 of the ITAA 1997 in considering the transfer of a CGT asset from one trust to another trust, and this action again results in the operation of CGT event E2. As outlined in Question 1, the broadening of the purpose of the trust deed to allow a larger community to benefit from the trust will result in a resettlement or the creation of a new trust giving rise to a CGT event E1 under section 104-55 of the ITAA 1997. Based on information you have provided in your ruling application, if you decided to establish another trust and the assets of the current fund were transferred to the newly established trust, pursuant to subsection 104-60(1) of the ITAA 1997, CGT event E2 would apply which may result in taxing implications for you. After reviewing the above information, there is no legislative provision in the ITAA 1997 giving the Commissioner any discretion to waive any potential tax implications resulting in a resettlement or the creation of a new trust giving rise to a CGT event E1 under section 104-55 of the ITAA 1997 or the transferring of CGT assets to a new trust giving rise to a CGT event E2 under section 104-60 of the ITAA 1997.

Reasons for decision: Section 104-55 of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. | CGT Event E1 will happen where 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. | As a result of the Full Federal Court decision in FCT v. Commercial Nominees of Australia Ltd [1999] 43 ATR 42 the Commissioner published a Statement of Principles regarding trust resettlements. The basic proposition underlying the Statement was that a new trust arises where there was a 'fundamental change' to the trust relationship and that a change in the 'essential nature and character' of the trust relationship can result in the creation of a new trust. | However, in January 2011 the Full Federal Court handed down a decision in the C ommissioner of Taxation v. David Clark (2011) 79 ATR 550 and as a result the Commissioner published Taxation Determination 2012/21 (TD 2012/21) to clarify when CGT event E1 or E2 happens. | Paragraph 19 of TD 2012/21 states in part: | The Commissioner considers that the decision of the Full Federal Court in Clark does not change the basic proposition that, based on the authority in Commercial Nominees, the relevant focus is on whether continuity of the trust estate has been maintained. | As decided by the High Court in Commercial Nominees considers that the test to be applied looks to whether changes to one or more of the trust's constituent documents, the trust property, and the identity of those with a beneficial interest in the trust property are such as to terminate the existence of the trust. | In your case, you are proposing to broaden the objectives of the trust deed to allow a larger community to benefit from the trust. Currently, the objects of the trust are specifically to provide money, property or benefits for the construction and fit out of a unit located at Entity A. Changing the objectives or purpose of the trust to be broader would be viewed as a resettlement of the trust. | Further, it is considered that the Powers exercisable by the Trustee pursuant to the Trust Deed do not extend to include the power to amend the Purpose or Objects of the Trust. | Based on the above information, the broadening of the purpose of the trust deed to allow a larger community to benefit from the trust will result in a resettlement or the creation of a new trust giving rise to a CGT event E1 under section 104-55 of the ITAA 1997.