Private ruling: Trust resettlement
Date of advice: 21 February 2018
Published: June 2018
Ruling period: Income year ending 30 June 2018.
Date scheme commenced: 1 July 2017.

Ruling: Q1: Will the proposed amendments to the Trust Deed cause a resettlement of the Trust for capital gains tax purposes? | A1: No.

Relevant facts and circumstances: The Trust was established by a deed of settlement (the Trust Deed) after 20 September 1985, with Person A as the settlor and Persons B and C as the trustees (the Trustees) for the Trust. The Trust is a discretionary trust whose assets consist of a portfolio of shares. The Trust Deed provides powers for: ● the Trustee to change the persons or legal entities who are the beneficiaries of the Trust; and ● the Appointer the power to appoint new trustee/s, or remove existing trustee/s. The Appointer as named in the Trust Deed is Person A. The Trustees and the beneficiaries now wish to amend the Trust Deed to: ● add Persons D and E as Trustees of the Trust; ● add Persons D, E and F as beneficiaries of the Trust; and ● remove Person C as trustee of the Trust. To facilitate the change of the Trust’s trustees and beneficiaries, the following will occur: ● a Deed of Amendment will be prepared to reflect the addition of the new trustees and beneficiaries, as outlined above, and to remove Person C as trustee; ● a direction from the Appointer, Person A, will be prepared to remove Person C as Trustee and to appoint Persons D and E as Trustees of the Trust ● a Deed of Removal will be prepared which will include direction from the Appointer, Person A, to remove Person C as Trustee of the Trust. ● the account holders of the Trust’s portfolio will be amended to reflect the additional trustees who will be added as account holders, and the removal of Person C as an account holder. The Settlor, Person A, and the Trustees will consent to the changes to the Trust Deed in accordance with the Deed of Amendment and will join in the Deed of Amendment to confirm their consent. No Trust asset/s will be transferred as a result of the changes under the Deed of Amendment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3

Reasons for decision: Detailed Reasoning - Trust resettlement: A trust resettlement will occur for income tax purposes where one trust estate has ended and another has replaced it. The effect of such a resettlement is that a disposal of the trust assets is deemed to occur. In consequence, capital gains could accrue to beneficiaries as a result of various capital gains tax (CGT) events such as CGT event E1 which is triggered when a trust resettlement occurs, that is, when one trust estate has ended and another has replaced it. The Commissioner has released Taxation Determination TD 2012/21 (TD 2012/21) which was published as a result of the court case CoT v. Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark’s case). Whilst Clark’s case dealt with whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, TD 2012/21 accepts that the principles set out in Clark’s case have broader application. TD 2012/21 states that a valid amendment to a trust pursuant to an existing power will not result in CGT event E1 or CGT event E2 happening unless: ● the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or ● the effect of the change or court approved variation 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 terms of a different trust. | Detailed Reasoning - Application to this situation: The trustees wish to amend the Trust Deed to remove an existing trustee, and add new trustees and beneficiaries. It is proposed that a Deed of Amendment will be prepared to reflect the changes to the Trust Deed. The Trustees and the Settlor will consent to the changes in the Trust Deed in accordance with the Deed of Amendment. It is viewed that the intended changes to the Trust Deed that will be contained in the Draft Deed of Amendment are within the powers provided in the Trust Deed. In this case it is accepted that neither of the two exclusions mentioned above will apply as a result of the proposed Deed of Amendment being implemented. Therefore, neither CGT event E1 nor CGT event E2 will occur as a result of the implementation of the Deed of Amendment. It is also considered that no other CGT event will occur as a result of the implementation of the Deed of Amendment. It is viewed that resettlement of the Trust will not occur on the amendment of the Trust Deed.