1 Will the Proposed Amendments cause CGT event E1 in section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997) to happen?
No. Question 2 Will the Proposed Amendments cause CGT event E2 in section 104-60 of the ITAA 1997 to happen? Answer No. Question 3 Will the Proposed Amendments cause CGT event C2 in section 104-25 of the ITAA 1997 to happen? Answer No. This ruling applies for the following periods : Year ending 30 June 20YY Year ending 30 June 20YY Year ending 30 June 20YY The scheme commenced on: 1 July 20YY
The Trust 1. The Trust was established by the Deed of Settlement dated XX XX 19XX between the settlor and the Original Trustee. 2. The 'Eligible Beneficiaries' of the Trust are set out in the Deed of Settlement to include: (a) A (named "the Person A" in the Deed of Settlement); (b) any children, grandchildren or great-grandchildren of B (named "the Person B" in the Deed of Settlement); (c) any future wife of the Person B; (d) any spouse of any child of the Person B; and (e) any such persons, incorporated companies, trusts, charities or bodies of associations (incorporated or unincorporated) having a separate legal identity in the country or place according to the laws of which they have been created as the Person B or after their death their Legal Personal Representatives shall by notice to the Trustee before the Perpetuity Date appoint to be Eligible Beneficiaries for the purposes of this Deed. 3. Under clause X of the Deed of Settlement, the following entities are excluded from being appointed Eligible Beneficiaries: (a) the Person B;
(b) the Person B's legal personal representatives whether in their capacity as such legal personal representatives or in their personal capacity; (c) the settlor; (d) any trustee or former trustee; (e) any trust which would if appointed an Eligible Beneficiary, result in the infringement of the rule against perpetuities; and (f) foreign persons as defined from time to time in Chapter 2A of the Duties Act 1997 (NSW) in relation to certain dutiable transactions in respect to residential land. Perpetuity Date 4. The 'Perpetuity Date' is defined in clause X of the Deed of Settlement as: ...the date being sixty years from the date of execution of this Deed or the date of death of the last survivor of all the lineal descendants male and female of His late Majesty King George the Sixth of England living at the date hereof (whichever shall first occur) or such earlier date as the Trustee shall in its absolute discretion appoint to be the Perpetuity Date for the purposes of this Deed;
5. Currently, absent any appointment by the Trustee of another date to be the Perpetuity Date, the vesting date of the Trust would be XX X 20XX should that occur before the death of the last survivor of all the lineal descendants of King George the Sixth of England. Nominated Beneficiary 6. The Trustee does not currently have a general power or discretion to accumulate income of the Trust in a particular income year. Instead, clause X of the Deed of Settlement provides for the accumulation of income when income in a particular year has not been applied by the Trustee and only where a Nominated Beneficiary exists. 7. There is currently no Nominated Beneficiary. Further, no person holds any right to accumulated income as a former Nominated Beneficiary pursuant to clause X. Default beneficiaries 8. The default beneficiaries of the Trust are set out in clause X of the Deed of Settlement as follows: Subject to any appointment pursuant to clause 3 above and to any payment or application or determination pursuant to clause 4 and 6 hereof the Trustee shall on the Perpetuity Date stand possessed of the Trust Fund and the income therefore upon trust for:
(a) the person A absolutely if they shall then be living and be the spouse or widow of the Person B, AND if not, (b) for all the children of the Person B then living who attain or attains or have or has attained the age of eighteen years and if more than one as tenants in common in equal shares PROVIDED NEVERTHELESS that if any child or children of the Person B shall have died before the Perpetuity Date or shall fail to attain the age of eighteen years and shall leave a child or children who has or have attained or shall attain the age of eighteen years and shall be living at the Perpetuity Date such child or children shall take by substitution and if more than one equally between them per stirpes the share of the Trust Fund and income aforesaid which their his or her parents would have taken if such parent had been living at the Perpetuity Date and had attained the age of eighteen years AND in the event of there being no such child grandchild or great-grandchild of the Person B... (Emphasis added)
9. The sole default beneficiary of the Trust pursuant to clause X of the Deed of Settlement is C (the Default Beneficiary). C is the Child C of the Person B and is also a director of the Trustee. Appointment and removal of Trustee 10. Clause X of the Deed of Settlement contains a power to appoint and remove the Trustee as follows: The Person B shall during their lifetime have the following powers vested in them, viz: (i) to remove any trustee hereof at any time and from time to time, and (j) to appoint a new trustee or new trustees PROVIDED THAT
the removal of a trustee shall not be affected otherwise than simultaneously with the appointment of a new trustee or new trustees in his place. Such power of appointment of new trustee or new trustees in the place of any trustee ceasing for any reason whatsoever to be a trustee hereof and also to the appointment of an additional trustee or additional trustees up to any number subject to such limit (if any) as may for the time being be imposed by law. Upon the death of the Person B the powers of removal and appointment by this clause conferred shall vest in the Legal Personal Representative of the Person B. The person or persons (other than an Eligible Beneficiary) in whom such powers are for the time being vested may at any time appoint himself or themselves to be a Trustee or Trustees. No Eligible Beneficiary shall be appointed or continue (as the case may be) as a trustee hereof. Changes in the Trust 12. On XX XX 19XX, the Person B exercised the power contained at clause X of the Deed of Settlement to appoint the Trustee as trustee of the Trust in place of the Original Trustee by way of the 'Deed of appointment of new trustee'.
13. On XX XX 19XX, the Person B exercised the power contained in clause X of the Deed of Settlement to appoint additional beneficiaries of the Trust by way of the 'Notice of appointment of Eligible Beneficiaries.' 14. On XX XX 19XX, the directors of the Trustee at that time being the Person B and the Person A, held a meeting of directors and resolved to amend the terms of the Deed of Settlement to include additional powers set out in the annexure to the minutes of the meeting. 15. The Person B died in 20XX. 16. The legal personal representative (LPR) of the Person B was L who was the executor appointed under the will of the Person B. 17. Certain provisions within the Deed of Settlement transitioned from the Person B to L as the LPR. For example: (a) the power contained in clause X to appoint additional beneficiaries; and (b) the power contained in clause X to appoint and remove trustees. 18. The person A died on XX XX 20XX.
19. On XX XX 20XX, the Trustee exercised the power contained at clause X of the Deed of Settlement to revoke the power of the Trustee to distribute, pay or transfer any part of the trust fund or income of the Trust to a 'foreign person' as defined from time to time in Chapter 2A of the Duties Act 1997 (NSW). The Deed of Settlement was amended in accordance with the 'Deed of Variation of Trust Deed'. This involved the addition of such foreign persons to the list of entities excluded from being appointed Eligible Beneficiaries under new clause X. Proposed Amendments 20. The Trustee and the Default Beneficiary wish to vary the terms of the Deed of Settlement. 21. The Deed of Settlement does not contain a general variation power. 22. It is submitted by the Trustee that due to the size of the pool of eligible beneficiaries of the Trust, it is not possible to obtain consent to vary the Deed of Settlement from each Eligible Beneficiary of the Trust. 23. The Trustee and Default Beneficiary will therefore make an application to the Supreme Court of New South Wales (NSW) pursuant to section 86A of the Trustee Act 1925
(NSW) to obtain approval to vary the terms of the Deed of Settlement in accordance with the Proposed Variation Deed. Such application for approval will only be made after the Trustee has obtained the LPR's consent to the variations set out in the Proposed Variation Deed. 24. The Proposed Variation Deed contains amendments to the Deed of Settlement (Proposed Amendments), including: (a) Amending the definition of "Perpetuity Date" in clause X of the Deed of Settlement; (b) Inserting a new definition of income and related clauses to allow for streaming of income; (c) Amending clause X of the Deed of Settlement to provide the Trustee the power to accumulate income; (d) Amending clause X of the Deed of Settlement to allow for the power to appoint and remove trustees to be exercised by the Trustee (in place of the LPR); and (e) Inserting new clause X to reinforce the exclusion of foreign persons as defined for the purposes of the Foreign Acquisitions and Takeovers Act 1975 (Cth), as modified by section 104J of the Duties Act 1997 (NSW), from the list of Eligible Beneficiaries.
Income Tax Assessment Act 1997 section 104-25 Income Tax Assessment Act 1997 subsection 104-25(1) Income Tax Assessment Act 1997 section 104-55 Income Tax Assessment Act 1997 subsection 104-55(1) Income Tax Assessment Act 1997 section 104-60 Income Tax Assessment Act 1997 subsection 104-60(1) Income Tax Assessment Act 1997 subsection 108-5(1) Trustee Act 1925 section 86A Duties Act 1997 section 104J Foreign Acquisitions and Takeovers Act 1975
All subsequent legislative references are to the ITAA 1997. Question 1 Will the Proposed Amendments cause CGT event E1 in section 104-55 to happen? Summary No. Where the Deed of Settlement is varied in accordance with the Proposed Amendments and pursuant to an order by the Supreme Court of NSW, this will not cause a termination of the Trust or resettlement of the Trust property. Therefore, CGT event E1 under section 104-55 will not happen. Detailed reasoning A trust resettlement is a trust law concept and occurs 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 CGT events. Under subsection 104-55(1), CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement. When a trust deed is varied or amended, there is a risk that this may cause a resettlement of the trust and potentially giving rise to CGT event E1. However, taxation legislation does not contain a test for determining when a resettlement has occurred. As a result, we must look to the established cases.
Commercial Nominees The High Court of Australia (HCA) in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd [2001] HCA 33; (2001) 75 ALJR 1172; ATR 220; ATC 4336 ( Commercial Nominees ) considered whether a superannuation fund was entitled to utilise prior year losses following amendments to its trust deed (including the appointment of a new trustee, the fund adopting a new set of rules and a change in the nature of benefits from defined to accumulations). The HCA addressed the issue of whether the changes to the deed resulted in a resettlement of the trust. The HCA confirmed that the question is one of continuity and that [at paragraph 36]: ...The three main indicia of continuity [for the purposes of the former taxing regime for superannuation funds] are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity. (Emphasis added) The HCA held that resettlement did not arise because:
• the trusts under which the fund operated were constituted by the original trust deed as varied; • the amendments were authorised by the trust deed; • the trust property and the fund members did not change; and • the fund before and after the amendment was administered as a single fund. Clark The HCA's decision in Commercial Nominees was followed in Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 ( Clark ). Clark considered whether a unit trust was able to utilise carry forward capital losses where the trust deed had undergone significant changes between incurring those losses and seeking to apply them. Edmonds and Gordon JJ in the Full Federal Court held that there was continuity and no resettlement of the trust. Their Honours were of the view [at paragraphs 78 and 79] that the HCA in Commercial Nominees had endorsed the Full Federal Court's reasoning in Commercial Nominees
(1999) 167 ALR 147 that so long as any amendments to the trust obligations is made in accordance with a power conferred by the trust instrument creating the obligations, and continuity of the property that is the subject of the trust obligations is established, then there will be identity of the taxpayer notwithstanding any amendment of the trust obligation and any change in the property itself. Their Honours concluded [at paragraph 87] that: ...When the High Court in Commercial Nominees spoke about trust property and membership as providing two of the indicia for the continued existence of the... trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question... TD 2012/21 The ATO's approach to this matter is set out in 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 the trust are changed pursuant to a valid exercise of power contained within the trust's constituent document, or varied with the approval of a relevant court? (TD 2012/21). Paragraph 21 of TD 2012/21 explains that: ....as a general proposition, it would seem that the approach adopted by the Full Federal Court i n Commercial Nominees , as explained by Edmonds and Gordon JJ in Clark , 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 ... (Emphasis added) Further, paragraph 24 of TD 2012/21 provides that: Even though Clark and Commercial Nominees
were decided in the context of whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying relevant losses, the ATO accepts the principles set out in these cases have broader application. Relevantly, the principles established by those cases are also 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. (Emphasis added) Paragraph 27 of TD 2012/21 cautions 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 - 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. Application to your circumstances The underlying principles encapsulated in paragraphs 21 and 24 of TD 2012/21 provide that, assuming there is some continuity of property and membership of a trust, an amendment to the trust that is made in a proper exercise of a power of amendment contained under the trust deed, or a court approved variation, will not result in a termination of the trust. The Proposed Amendments do not materially alter the constitution or deed of the Trust under which it operates. The changes proposed include: • amending the Perpetuity Date of the Trust which might otherwise occur on XX XX 20XX;
• inserting a new definition of 'income' and related clauses to allow for the streaming of income; • providing the Trustee with power to accumulate income of the Trust; • amending clauses that confer certain powers to appoint Eligible Beneficiaries and to appoint and remove trustees to be exercised by the Trustee in place of L as the LPR; and • inserting a new clause to make the exclusion of foreign persons as Eligible Beneficiaries irrevocable. The Proposed Amendments do not involve any change to the Trust property. The Proposed Amendments are comparable to the situations in Examples 1 and 3 of TD 2012/21, which involve the removal of a particular beneficiary under the trust and the addition of a definition of income, power to stream and extension of the vesting date. The difference is that the amendments in Examples 1 and 3 are made under a valid exercise of power of amendment contained within the trust deed compared to the Proposed Amendments which will be court approved variations. The amendments in Examples 1 and 3 did not give rise to the happening of a CGT event.
Since the Proposed Amendments will be made pursuant to court approved variations, the Commissioner considers that - following the variation of the Deed of Settlement in accordance with the Proposed Variation Deed - there will be continuity: • of the Trust property; • in the membership of the Trust ; and • in the operation of the Trust. On this basis, the Proposed Amendments would not result in a termination of the Trust. This is consistent with the decisions in both the Commercial Nominees and Clark cases. Having regard to paragraph 27 of TD 2012/21, the Commissioner is also satisfied that the Proposed Amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust. Therefore, where the Proposed Amendments to the Trust Deed are made pursuant to an order by the Supreme Court of NSW, this would not result in a termination of the Trust or resettlement of the Trust property such as to give rise to CGT event E1 under section 104-55. Question 2
Will the Proposed Amendments cause CGT event E2 in section 104-60 to happen? Summary No. As concluded in answer to Question 1, the Proposed Amendments to the Deed of Settlement made pursuant to an order by the Supreme Court of NSW will not cause a termination of the Trust or resettlement of the Trust property. Therefore, the Proposed Amendments would not give rise to CGT event E2. Detailed reasoning Under subsection 104-60(1), CGT event E2 happens if you transfer a CGT asset to an existing trust. Paragraph 1 of TD 2012/21 provides that neither CGT event E1 nor CGT event E2 happens if the terms of a trust are changed pursuant to a valid exercise of power contained within the trust's constituent documents or varied with the approval of the court 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.
As concluded in answer to Question 1: • the Proposed Amendments to the Trust Deed in accordance with the Proposed Variation Deed and pursuant to a court order under section 86A of the Trustee Act 1925 (NSW) will not cause a termination of the Trust or resettlement of the Trust property; and • the Commissioner is satisfied that the Proposed Amendments would not result in an asset of the Trust being subject to a separate charter of rights and obligations such as to give rise to the conclusion that an asset of the Trust would be settled on the terms of a different trust. Therefore, the Proposed Amendments would not give rise to CGT event E2 under section 104-60. Question 3 Will the Proposed Amendments cause CGT event C2 in section 104-25 to happen? Summary No. The Proposed Amendments will not cause an end to the rights and interests of any beneficiaries of the Trust since: • the interest of the Default Beneficiary as the taker-in-default remains unaffected;
• the proposed new clause X that will exclude 'foreign persons' from benefiting from the Trust merely confirms an existing exclusion of such entities as Eligible Beneficiaries; and • there is currently no Nominated Beneficiary and no person holds any right to accumulated income as a former Nominated Beneficiary. Therefore, none of the changes in the Proposed Amendments will give rise to CGT event C2 under section 104-25. Detailed reasoning Under subsection 104-25(1), CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged, or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited, or (e) if the asset is an option - being exercised; or (f) if the asset is a convertible interest - being converted. Under subsection 108-5(1), a 'CGT asset' is any kind of property or a legal or equitable right that is not property. Foreign person discretionary objects The discretionary objects of a trust have no interest in the assets or income
of the trustbeforeany exercise of any discretion by the trustee as to the allocation of those assets or income. Rather, they have "a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity" (see Lord Wilberforce in Gartside v Inland Revenue Commissioners [1968] AC 553 at 617-618). They also have a right to enforce the trustee's obligation to properly exercise their discretionary powers and to compel the proper administration of the trust (see Wright v Stevens [2018] NSWSC 548 at [212]). The discretionary objects of a trust therefore possess an equitable right that is also a CGT asset. The Proposed Amendments do not cause an ending to the rights of any discretionary objects. Specifically, new clause X which excludes 'foreign persons' (for the purposes of the Foreign Acquisitions and Takeovers Act 1975 (Cth) , as modified by section 104J of the Duties Act 1997
(NSW))from benefiting from the Trust merely confirms an existing exclusion of such entities as Eligible Beneficiaries under clause X (in accordance with the amendments in the Deed of Variation of Trust Deed executed in 20XX). Therefore, the proposed new clause X does not give rise to CGT event C2. Nominated Beneficiary The proposed new clause X will end the rights of the Nominated Beneficiary to income that may be accumulated under existing clause X. However, since there is currently no Nominated Beneficiary and no person holds any right to accumulated income of the Trust as a former Nominated Beneficiary, the proposed deletion of clause X does not end the rights of any person and therefore does not give rise to CGT event C2. Default Beneficiary The interest of the Default Beneficiary as the taker-by-default is a CGT asset but remains unaffected by the Proposed Amendments. Therefore, the Proposed Amendments will not give rise to CGT event C2 in respect of the interests of the Default Beneficiary. Conclusion In summary, none of the changes in the Proposed Amendments will give rise to CGT event C2 under section 104-25.