Private ruling: Capital gains tax implications on trustee resolution
Published: May 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the proposed trustee resolution to exclude a beneficiary trigger Capital Gains Tax (CGT) event E1 under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) due to the creation of a new trust over the CGT assets held by the taxpayer? | A1: No

Relevant facts and circumstances: The Trust was settled in 2008. The appointor of the trust was one of two trustees of the trust. The trustees were husband and wife. You have provided : · a copy of the Deed of settlement for the Trust. · a copy of a Deed to change trustee. · a copy of the proposed resolution of the trustee for the exclusion of a beneficiary from the trust. The trust is a discretionary trust as to income and capital. Under the trust deed, the trustee has the discretion to distribute the income of the trust to or for any one or more of the Beneficiaries as the trustee may determine. Alternatively, the trustee may accumulate all or any part of the income from the trust fund. Any income that is accumulated becomes capital. Under the trust deed, the trustee must pay or transfer the capital on the vesting date as provided by the appointor's last will. Alternatively, in default of that appointment, to any one of the beneficiaries as the trustee thinks fit. In default of a determination, through the first, second and third group as provided by the trust deed. The beneficiaries of the trust are as follows: · First Group Beneficiaries · Named Trustee (husband), and · Named Trustee (wife) · Second Group Beneficiaries · the children of the first group of beneficiaries · Third Group Beneficiaries · the grandchildren and further issue of the first group of beneficiaries Clause 7 of the trust deed provides the following; 7. Exclusion of Beneficiaries 7.1 The Trustees can exclude any person, or any group of persons identified in this deed by description, as a Beneficiary or Beneficiaries, but only with the Appointor's written consent. 7.2 Any person excluded as a Beneficiary has no entitlement to a distribution of income or capital. Under clause 10.1 the trust deed, the trustee has the power to amend the trust deed in any way. The marriage between the trustees has broken down and they have separated. They have entered into an agreement in regard to financial support. The trustee of the trust was changed to by deed. The deed was signed by both the prior trustees. The trustee proposes to pass a resolution that: The spouse is excluded as a beneficiary of the Trust. This resolution is made in accordance with Clause 7 of the deed creating the Trust dated June 2008. You provide that the objective purpose of the Trust is primarily to benefit the family of one of the original trustees and their lineal descendants.

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

Reasons for decision: Summary: Detailed reasoning On 20 April 2012, the ATO publication, Creation of a new trust - Statement of principles August 2001 , was withdrawn following the recent decision in Federal Commissioner of Taxation v Clark and Anor (Clark) [2011] FCAFC 5 (Clark's case) and the High Court's refusal to grant the Commissioner special leave to appeal that decision. The decision in Clark' case is relevant to the question of the circumstances in which, as a result of changes being made to an existing trust, a new trust comes into existence, triggering CGT event E1. In that context, the ATO accepts that the reasoning of the court has the effect that a valid amendment to a trust, not resulting in a termination of the trust will not itself result in the happening of CGT event E1. In your case, the trust deed, at clause 7.1, allows the trustee, with the consent of the Appointor, to exclude any person or group of persons as a beneficiary of the trust. Therefore, there is no difficulty in removing the spouse as a beneficiary from the trust deed and the proposed amendment would be considered a valid amendment. There are no other changes or amendments to the trust, the separate classes of beneficiaries (first, second and third groups) still remain and, the trust still benefits the family of one of the original trustee's and their lineal descendants. There has been no loss of continuity of the trust. Accordingly, as the proposed change will not result in the termination of the trust, a new trust will not come into existence and CGT event E1 will not occur.

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