Private ruling: Trust - resettlement
Published: July 2012
Ruling period: 1 July 2011 to 30 June 2012

Ruling: Question and Answer | Will the proposed appointment of additional beneficiaries to the deed constitute a resettlement or the creation of a new trust under section 104-55(1) of the ITAA 1997 thereby causing Capital Gains Tax event E1 to happen? | No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Trust was established by deed. Clause Y of the deed provides that on the vesting of the trust, in the absence the decision by the trustee, the capital is to be divided among the primary beneficiaries. Clause Z which provides that the income beneficiaries of a decision by the trustee, are to be the secondary beneficiaries. The primary beneficiaries include the children of Individual x and Individual y. The secondary beneficiaries, on the death of Individual x and Individual y are to be their children, i.e. the children of Individual x and Individual y. Individual x and Individual y are married. There are children of the marriage. Each of Individual x and Individual y has children from their respective prior marriages. The description of potential beneficiaries as "the children of Individual x and Individual y" was intended to include all children of each of Individual x and Individual y. The purpose of the trust was to provide benefits for Individual x and their family and extended family. The assets of the trust include real estate and improvements, which would be subject to Capital Gains Tax if a resettlement occurs. The trust does not have any tax losses or capital gains tax credits. Clause X of the Deed allows you to vary the Trusts within or amend the provisions of the deed. You propose to vary the terms of the trust and the relevant details were provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-55 | Income Tax Assessment Act 1997 Section 104-60

Reasons for decision: Summary: Changes to an existing trust may have important taxation implications. In particular, Capital Gains Tax (CGT) event E1, as specified in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997), occurs where a trust is created over a CGT asset. Draft Taxation Determination TD 2012/D4 (the Draft) states that unless the amendment causes the trust to terminate for trust law purposes, or the effect of the amendment is 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, neither CGT event E1 nor CGT event E2 in sections 104-55 or 104-60 of the ITAA 1997 happens. | Detailed Reasoning - For example: The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed the trustee, a private company of which Mr and Mrs Squirrel are directors, has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries defined to include Mr Squirrel, his wife, their children, their grandchildren, and entities associated with the family. 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 add to the class of General Beneficiaries the respective spouses of the children. The making of the resolution, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event. Based on the outcome of Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550; paragraph 18 of the Draft states; "…the Commissioner accepts as an accurate statement of the current law that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated." Further; paragraph 20 states; "……the ATO accepts that a valid amendment to a trust pursuant to an existing power will not result in termination of the trust…" | Detailed Reasoning - Application to your circumstances: Clause X of the Deed allows you to vary the Trusts within or amend the provisions of the deed. You propose to vary the terms of the trust deed and relevant details were provided. As the purposed changes will be made pursuant to a power under the trust deed, and the changes do not go outside the purpose of the trust, being to provide benefits for Individual x and Individual y, and their family and extended family, they should not result in a new trust under section 104-55(1) of the ITAA 1997 thereby causing CGT event E1 to happen.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.