Edited version of private advice

Authorisation Number: 1052069980696

Date of advice: 12 December 2022

Ruling

Subject: CGT - trust variation

Question

Will the execution of the Amending Deed A cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997to happen?

Answer

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust was established by indenture in XXX 19XX (the Deed).

Mr ABC and Ms XYZ (herein referred to as 'the Trustees') are the current trustees of the trust.

The sole appointor of the Trust is Ms XYZ (herein referred to as the Appointor when acting in her capacity of that role).

Amending Deed A

The Trustees will execute a deed of variation labelled Amending Deed A (the Variation Deed).

The Appointor will provide her consent to the execution of the Variation Deed.

Clause 1 of the Variation Deed provides:

Variation

In exercise of the power contained in clause 7 of the Trust Deed and all other enabling powers, the Trustees vary the Trust Deed as follows:

(a)  by deleting the passage beginning with the words 'PROVIDED THAT at the time' and ending with the words 'of this clause' from clause 1(d) of the Trust Deed;

(b)  by deleting clause 1(i) of the Trust Deed and inserting the following clause in its place:

'i.     "Vesting Day" means the day that the Trustees determine by deed to be the Vesting Day.'

(c)   by deleting clause 5 of the Trust Deed and inserting the following clause in its place:

'5.   On the Vesting Day, the Trustees must hold the Trust Fund on trust to pay, transfer or apply the whole of it to or for the benefit of any one or more of the General Beneficiaries then living or in existence in such proportions and in such manner as the Trustee thinks fit. If at the Vesting Day there is no General Beneficiary living or in existence, then the Trustees must hold the Trust Fund on trust for such charitable purposes as the Trustees then determine and any resulting trust to the settlor is negatived.'

Trust Deed

Clause 7 of the Deed provides:

The Trustees may with the written consent of the Appointor at any time or times by any deed or deeds 'revocable or irrevocable wholly or partially revoke and make void all or any of the trusts powers and provisions herein declared and contained of and concerning the Trust Fund or any part or parts thereof insofar as the same shall not have become absolutely vested in possession in the beneficiaries entitled thereto pursuant to the provisions hereinbefore contained as varied by any deed or deeds executed pursuant to the provisions of this Clause PROVIDED THAT in the event of the revocation as aforesaid of any of the said trusts the Trustees shall by the same instrument declare such new or other trusts powers and provisions including trusts involving the exercise of a discretion as the Trustees may think fit of and concerning the same and PROVIDED FURTHER that nothing herein contained shall extend to or authorise any resettlement variation or declaration of a new trust under which an excluded person or any of them could acquire either directly or indirectly and whether contingently or not any beneficial interest in the Trust Fund or any part or parts thereof or in any income thereof.

Clause 1(d) of the Deed provides:

"eligible trust" shall mean the trustee or trustees of another trust fund (constituted otherwise than by the Will or Codicil of any person) in which any of the Beneficiaries specified in paragraphs (i) (ii) and (v) of subclause (b) hereof have an interest whether absolute or contingent or vested or by way of expectancy and whether liable to be defeated by the exercise of any power of appointment or revocation or to be diminished by the increase of the class to which they belong PROVIDED THAT at the time when the income or capital of the Trust Fund is vested in such Trustee the whole of the beneficial estate or interest in such income or capital must vest in interest absolutely in the beneficiaries or other objects of such other Trust Fund within twenty one years of the period specified in paragraph (b) of sub clause (i) of this clause;

Clause 1(i) of the Deed provides:

"The Vesting Day" means the first to occur of the following days namely:-

(a)  The day set forth in item 3 of the Schedule hereto;

(b)  The day of the death of the last survivor of the lineal descendants born in wedlock of His late Majesty King George V and living at the date hereof;

(c)   Such day as the Trustees may determine with the consent in writing of the Appointor being a day not earlier than the 1st day of July next and not earlier than the day when such determination is made.

Clause 5 of the Deed provides:

The Trustees shall from and after the Vesting Day stand possessed of the capital (or any balance thereof) and the income of the Trust Fund UPON TRUST for such of them the children of the Specified Beneficiary as shall be living on the Vesting Day and the issue then living of any then deceased child of the Specified Beneficiary who shall attain the age of twenty one years or die under that age leaving issue and if more than one in equal shares but so that such issue of a deceased child shall take equally between them only the share which their his or her parent would have taken had he or she been living and attained a vested interest PROVIDED THAT if on the Vesting Day there are no such children then UPON TRUST for such of them the General Beneficiaries as are described in paragraph (ii) of sub clause (b) of clause 1 hereof as shall be living on the Vesting Day and if more than one in equal shares as tenants in common.

Assumption

The variations set out in the Variation Deed constitute a valid exercise of the amendment power contained in clause 7 of the Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-55(1)

Reasons for decision

Subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 97) provides:

CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement.

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) provides at paragraph 1 that in circumstances where the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, CGT event E1 or E2 will not happen 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.

TD 2012/21 provides at paragraph 21:

Furthermore, as a general proposition, it would seem that the approach adopted by the Full Federal Court in Commercial Nominees, as explained by Edmonds and Gordon JJ in Clark,[3] is authority for the proposition 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.

In accordance with the assumption made for this ruling, the execution of the Variation Deed will constitute a proper exercise of the power of amendment contained in the Deed. The Variation Deed will not result in the discontinuance of property or membership of the Trust. It is considered that the Trust will therefore not terminate on execution of the Variation Deed.

TD 2012/21 provides at paragraph 27:

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 - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.

TD 2012/21 provides at paragraph 29:

...depending on the facts, the effect of a change to the terms of a trust might be such as to lead to the conclusion that a particular asset has been settled on terms of a different trust by reason of being made subject to a charter of rights and obligations separate from those pertaining to the remaining assets of the trust.

It is not considered that execution of the Variation Deed has the effect of assets of the Trust being held to a separate charter of rights or obligations causing those assets to be held on terms of a distinct trust, or cause continuity of property to cease.

Conclusion

Based on the assumption that the execution of the Variation Deed will be a valid exercise of the Trustee's amendment power, CGT event E1 will not happen on execution of the Variation Deed.

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