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Edited version of your written advice
Authorisation Number: 1051521672967
Date of advice: 24 May 2019
Ruling
Subject: CGT Event E1 or E2
Question
In relation to the proposed amendments to the current trust deed, would they cause CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 to happen?
Answer
No.
This ruling applies for the following period:
01 July 20XX to 30 June 20XX
The scheme commences on:
01 July 20XX
Relevant facts and circumstances
The taxpayer is a trust (the Trust), and it was established by an indenture between the Settlor and its Trustee (the Trustee) on a specified date.
Since establishment, the trust deed of the Trust has been amended at various times.
Trustee of the Trust remains the same.
The Trustee proposes to make several amendments to the current trust deed.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 104
Reasons for decision
Paragraph 1 of the 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? (TD 2012/21) makes references to sections 104-55 and 104-60 and states that, neither CGT event E1 nor CGT event E2 happens 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.
Following the Full Federal Court’s judgement in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (the Clark case), as a general proposition, paragraph 21 of the TD 2012/21 states that, assuming there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power.
Relevantly, in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33; 2001 ATC 4336; (2001) 47 ATR 220 (the Commercial Nominees case), the full federal court had stated that,
So long as any amendment of the trust obligations relating to such trust property is made in accordance with any power conferred by the instrument creating the obligations, and continuity of the property that is the subject of trust obligation is established……
In relation to continuity of a trust estate, paragraph 20 of the TD 2012/21 refers to the decision made in the Clark case that, at least in the context of recoupment of losses, continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purpose.
Furthermore, paragraph 24 of the TD 2012/21 recognises the principles established by the Clark case and the Commercial Nominees case, which are relevant to the question of the circumstances in which CGT event E1 or E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of a power in the deed (including a power to amend). In light of those principles, 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.
The consideration in paragraph 27 of the TD 2012/21 is that, 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 …… such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.
In the present case, pursuant to its amendment powers conferred under the trust deed, the Trustee wishes to make a number of amendments to the current trust deed.
On the facts, the making of the proposed amendments would not cause termination of the Trust or give rise to any asset under the Trust estate being settled on terms of a distinct trust, and nothing indicates otherwise. The proposed amendments constitute a valid exercise of a power of amendment contained within the current trust deed. Therefore, it is considered that, the proposed amendments would not give rise to the happening of a CGT event E1 or E2 under sections 104-55 or 104-60.
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