CGT - trust deed amendment

Will CGT event E1 happen if the trustee and the appointor of the XYZ Trust execute the proposed Deed of Amendment?

No This ruling applies for the following period: DD MM 20YY to DD MM 20YY

1.            The XYZ Trust was established by a deed of settlement. 2.            The applicant gave us a copy of the trust deed. We will treat the terms of the trust deed as incorporated into the facts and circumstances of this private ruling. (The terms of the trust deed prevail over any summary description in these facts and circumstances.) 3.            We'll describe the general effect of some significant clauses in the trust deed in Table 1. Table 1: summary of significant clauses in the trust deed Table 1: Significant clauses in the trust deed Topic and reference Details Income The trustees have the power to apply or set aside the income for any one or more of the general beneficiaries, or accumulate it, so long as this doesn't create a perpetuity. [1] Where income hasn't been distributed or accumulated, income is held under a separate trust for the default capital beneficiaries. When the trust vests, the trustees hold the income for the capital beneficiaries absolutely. Capital From vesting, the trustees hold the trust fund in trust for each of the beneficiaries. The trustees may choose the proportions and exclude one or more beneficiaries to the exclusion of others.

However, the trustees can't appoint capital in a way that a) creates a perpetuity, or b) infringes conditions applying to trustee discretions set out in clause Y. If the trustees don't appoint capital beneficiaries in this way, the trustees will hold the capital for: •                natural persons in the appointed class (with arrangements for descendants) •                otherwise, brothers and sisters of the appointed class (with arrangements for descendants) •                otherwise, next of kin •                finally, charities, so long as the charities aren't disqualified. Power of advancement The trustees may benefit beneficiaries by: •                transferring the whole or part of the trust fund •                making payments out of the capital or income of the trust fund •                lending money to beneficiaries •                investing any amount as a separate trust fund •                allowing beneficiaries to occupy, have custody of, or use property. These powers can't be applied to create a perpetuity or infringe conditions applying to trustee discretions set out in clause Y. Power to appoint to eligible trusts

The trustees may transfer all or part of the trust income or capital to another trust, so long as it doesn't infringe conditions applying to trustee discretions set out in clause Y. Variation of trusts (Clause X) The variation clause allows the trustees, before the vesting day, to revoke, add to, or vary all or any of the trust's terms and conditions, and declare any new or other trust terms and conditions about the trust fund. These amendments may be made by oral declaration, resolution, or deed. The following conditions apply. •                The amendments can't infringe the conditions applying to trustee discretions set out in clause Y. •                The amendments can't create a perpetuity. •                The amendment must, in the trustee's opinion, be for the benefit of all or any one or more of the general beneficiaries (or the next of kin). •                A variation can't benefit any member of the excluded class. •                A variation can't affect the beneficial entitlement to amounts set aside for any beneficiary before the variation. •                The variation can't enlarge the class of persons capable of falling within the beneficiary description.

•                The oral declaration, resolution, or deed must provide that the provisions of the variation clause will apply to the terms and conditions upon which the trust will be held. Excluded class The trustees can't: •                distribute or lend income or capital to any member of the excluded class, or •                apply any provision or power in a way that benefits any member of the excluded class. Restricted exercise of trustee's powers Every discretion and power shall be absolute and uncontrolled. However: •                the trustees may consult the guardian's wishes, but aren't obliged to follow or give weight to them •                the trustees may by deed release powers conferred upon them under the deed •                where a guardian is named and there has ceased to be a guardian, the trustees won't a) exercise the reserved powers, or b) exercise the restricted powers in a manner that will impair or diminish the expectations of a general beneficiary (or other person) who has had a valid appointment of capital (to devolve on vesting) under the capital power

•                where no guardian is named, the trustees may exercise all the reserved powers and restricted powers, in their absolute discretion, without notice. 'Reserved powers' includes the power to vary the trust deed. 'Restricted power' includes the power to extend the vesting day, and the powers of advancement. Appointment of additional beneficiaries The trustees may (with the appointor's written consent) any time (before the vesting day and without creating a perpetuity) nominate members to the appointed class or general beneficiary class (except members of the excluded class). Details in the schedule Members of the appointed class: Person A and the children of Person A. Distribution date: X (within 80 years of the date of the deed). The perpetuity date: the date of the deed. The proper law : the law of NSW. The appointor: Person A. Additional members of the class of general beneficiaries: none specified. Additional members of the class of excluded beneficiaries: none specified. Guardian: none specified. General beneficiaries General beneficiaries means: a)         each member of the appointed class

b)         the parents, brothers, sisters, spouses, de facto partners, widows, widowers, children, and grandchildren of each member of the appointed class (and the parents, brothers, sisters, spouses, de facto partners, widows, widowers, children, and grandchildren of people already covered by this paragraph) c)         trustees of eligible trusts, and eligible corporations d)         persons or corporations named as additional members of the class of general beneficiaries in the schedule e)         eligible charities f)         nominated individuals or corporations g)         past, present, and future employees of the trustees. Broadly, 'eligible trust' means any trust under which a beneficiary has any interest, including as a discretionary object, and 'eligible corporation' means any company in which a beneficiary holds shares, or is a member, director, or secretary. Excluded class The settlor, any child of the settlor, or additional members of the excluded class. 4.            As mentioned in Table 1, clause X of the trust deed allows the trustee to amend the terms of the trust under specified conditions. 5.            The trustee is considering executing a deed of amendment.

6.            The deed of amendment is currently in draft form and hasn't yet been signed by the trustee or the appointor. 7.            The applicant gave us a draft of the proposed deed of amendment. We will treat the terms of this draft deed of amendment as incorporated into the facts and circumstances of this private ruling. (The terms of the deed of amendment prevail over any summary description in these facts and circumstances.) 8.            The recitals to the draft deed of amendment refers to clause X of the trust deed and make the following comments. •                    The trustee desires to vary the trust deed, and is of the opinion that the amendments are in the interest of the general beneficiaries or their next of kin. •                    The appointor consents to the proposed variation. •                    The trustee and appointor have formed the opinion that the amendments are authorised by clause X of the trust deed. 9.            Clause A of the draft deed of amendment proposes to effect variations to the deed. •                    The deed introduces new clauses about units, and says these clauses apply in priority to any inconsistent provision.

•                    These new clauses allow the trustee to issue a unit or units in the trust. •                    While units are on issue, the trustee will hold the trust fund for the members in proportion to each member's proportion. •                    Each unit will entitle the member to a proportionate share of the trust fund and a proportionate share of the income each year. However, members aren't entitled a particular security or investment in the trust fund, or a particular part of the trust fund. •                    All units must be issued at market value. •                    If a member agrees, the trustee may redeem units at market value. •                    'Market value' means a valuation price fixed by an accountant that reflects the fair market value of the units. •                    The definition clause is amended so that 'member' means a person registered as a unitholder (who can't be an excluded person or member of an excluded class), and 'member's proportion' means the number of units held by the member out of the total number of issued units.

•                    The deed of amendment amends the income and capital clauses of the trust deed to make the trustee's discretions over income and capital subject to the new clauses about units. 10.          Clause B of the draft deed of amendment says: •                    nothing in this deed shall effect, acknowledge, evidence, or record, or be taken or deemed to effect, acknowledge, evidence, or record an instrument of settlement, declaration of trust, or a resettlement •                    the terms of this deed have no effect if they record, are taken to record, or are deemed to effect an instrument of settlement, declaration of trust, or a resettlement. 11.          Clause C of the draft deed of amendment says the amendments introduced by the deed take effect in addition to, and augmentation of, the terms and conditions presently contained in the trust deed 'which are hereby confirmed' (except that in the event of any inconsistency, the terms and conditions in the amending deed prevail).

Income Tax Assessment Act 1997 Section 104-55

Question Will CGT event E1 happen if the trustee and the appointor of the XYZ Trust execute the proposed deed of amendment? Answer No Summary 12.          Broadly, ATO guidance says that if the terms of a trust are validly changed under an amendment power CGT event E1 won't happen, so long as that amendment doesn't have the effect of either a) terminating the relevant trust and creating another trust), or b) settling a particular asset under a separate trust. 13.          The same guidance says a valid exercise of an amendment power won't create a new trust wherever there is continuity of property and membership of the relevant trust. 14.          For the XYZ Trust, we're satisfied that the proposed variation is consistent with the amendment power, will maintain continuity of property and membership, and doesn't settle a particular trust asset under a separate trust 15.          It follows that CGT event E1 won't happen if the trustee and appointor execute the proposed deed of amendment. Explanation

The ATO view is that a valid exercise of an amendment power won't trigger CGT event E1 if a) there's continuity of membership and property, and b) the change doesn't settle a particular asset under a different trust. 16.          Subsection 104-55(1) of the Income Tax Assessment Act 1997 says CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. 17.          TD 2012/21 [2] addresses whether CGT event E1 happens if the terms of a trust are validly changed under an amendment power in a trust deed. 18.          The TD's answer is 'no'. It says CGT event E1 doesn't happen unless: •                    the change causes an existing trust to terminate and a new trust to arise for trust law purposes, or •                    the effect of a change leads to a particular asset being subject to a separate charter of rights and obligations that gives rise to the conclusion that the asset has been settled on terms of a different trust. 19.          In the explanations section, TD 2012/21 makes these points.

•                    For loss recoupment purposes continuity of a trust estate will be maintained so long as the relevant trust isn't terminated for trust purposes. [paragraph 20] •                    Assuming there is some continuity of property and membership of a trust, an amendment made properly exercising an amendment power under a deed won't have the result of terminating a trust, irrespective of the extent of the amendments, so long as the amendments are properly supported by the power. [paragraph 21] •                    The test for distinguishing a variation from a resettlement is that a variation is an arrangement that, while leaving the substratum, effects the purpose of an original trust by other means, even though the means are wholly different and the form completely changed. [footnote 4] •                    The ATO accepts that a change in the terms of a trust under an existing variation power won't terminate a trust and won't result in CGT event E1 happening. [paragraph 24]

•                    Where a trustee was found not to have the power to vary a trust, invalid amendments, being of no effect, wouldn't in themselves result in CGT events E1 or E2 happening. [footnote 6] •                    Even where a pre-existing trust doesn't terminate, it's possible that assets held originally as part of the trust property begin to be held under a separate charter of obligations as a result of a change to the terms of a trust, such as to mean that the assets are now held on the terms of a different trust. [paragraph 27] 20.          Therefore, applying TD 2012/21, we need to ask 3 questions in determining whether an amendment to a trust deed, under an amendment power in a trust deed, triggers CGT event E1. •                    First, is there continuity of property and membership? •                    Second, does the proposed amendment lead to a particular asset being settled on terms of a different trust? •                    Third, is the proposed amendment a valid exercise of an amendment power in the relevant trust deed?

Does the proposed amendment maintain continuity of membership and property? Yes. Existing trust property will be held on trust for unitholders who are already beneficiaries. 21.          We think the answer to the first question in paragraph 20 is yes. The proposed amendment to the trust deed will maintain continuity of trust property and trust membership. •                    There will be continuity of beneficiaries. While the variation will effectively remove discretionary rights for existing beneficiaries once unitholders subscribe, [3] only existing beneficiaries may subscribe for units. Therefore, the variation, in combination with a future issue of units, would only narrow the class of beneficiaries and vary their entitlements rather than replace them with an entirely new set of beneficiaries. Further, the trust will continue to be held on trust for existing beneficiaries until the trustee issues units, so there will be no period where the trust has no beneficiaries (e.g. between amendment and before the first unitholders subscribe).

•                    There will also be continuity of trust property because the existing trust funds (supplemented by new subscription funds) will continue to be held on trust (for a narrower class of beneficiaries) after the trust is varied and units have been issued. Does the proposed amendment settle a particular asset on terms of a separate trust? No. The facts don't disclose any asset will be carved out from the trust fund. 22.          We think the answer to the second question in paragraph 20 is no. We don't see anything on the facts to suggest any specific asset or other trust property will be carved out from the rest of the fund under another trust. All existing property will be held under a single trust. The only change is that the trust funds are held for a narrower class of beneficiaries, and their entitlements will be varied. Is the variation a valid exercise of an amendment power in the trust deed? Yes. The amendment complies with the variation conditions in the trust deed, and we don't think the amendment would cause a change in substratum.

23.          To answer the third question in paragraph 20, we need to address both a) whether the proposed variation complies with any express conditions in a trust deed for exercising the variation power, and b) whether the amendment would be nevertheless ineffective for causing a change in the trust's substratum. 24.          We think the answer to the third question is yes. We think the proposed amendment will a) comply with the express conditions for exercising the variation power in clause X of the trust deed, and b) will preserve, rather than change, the trust's substratum. Does the amendment comply with the express conditions in the trust deed? 25.          TD 2012/21 at footnote 6 says the scope of the relevant power is determined by the words of the trust deed, the surrounding context, and any relevant admissible evidence. 26.          Clause X of the trust deed gives the trustee a power to vary the deed, with conditions. Clause X, read with clause Y, also creates conditions that apply to that power: we list and apply them in Table 2. 27.          We think the proposed amendment will comply with all those conditions for the reasons given in Table 2 .

Table 2: explicit limitations on the amendment power Table 2: Condition about revocations, additions or variations Condition (about revocations, additions, or variations) Applied here Doesn't create a perpetuity. The definitions clause defines 'perpetuity' to mean a disposition or trust that would be void because of infringing the rule against perpetuities. [4] Met. The trust deed was settled in X, and it has a distribution date of Y. This is within the perpetuity period of 80 years that applies in NSW (which is the relevant law applying to this trust). The proposed amendments don't purport to vary or extend that perpetuity period. Any revocation, addition, or variation must (in the trustee's opinion) be for the benefit of all or any one or more of the general beneficiaries (or next of kin). Met. We think requirement will be met for similar reasons to why we think the amendment doesn't change substratum. See paragraphs 29 to 32. Any revocation, addition, or variation shall not be in favour of or result in any benefit to a member of the excluded class.

Met. The variation deed will allow the trust to issue units to members (the trustee will hold the trust funds on trust for the members) and adds a definition of 'members' to say they can't be members of an excluded class. Any revocation, addition, or variation shall not affect the beneficial entitlement to any amount set aside for any beneficiary before the date of the variation, alteration, or addition. Met, because we've assumed the trustee will satisfy any beneficiary entitlements that are outstanding before issuing units. Any revocation, addition, or variation shall not enlarge the class of person capable of being beneficiaries. Met. The variation deed says a person can only be a member if they are otherwise a beneficiary or general beneficiary of the trust. Any oral declaration, resolution, or deed shall provide that the provisions of this clause will apply to the trust's terms and conditions upon which the trust fund (or any part the subject of that oral declaration or resolution) are held from that point.

Met. Clause C of the amending deed confirms that the amendment takes effect 'in addition to and augmentation of' the terms and conditions presently contained in the trust deed and confirms those conditions. We think this explicitly recognises that the trust's terms and conditions, including the variation clause, would also apply to clauses introduced by the amending deed. Where a guardian is named in the schedule, and there ceases to be a guardian, the trustees can't exercise the reserved powers (which include the variation power in clause X). Where a guardian isn't named in the schedule, the trustees may exercise all the reserved powers in their absolute and uncontrolled discretion. Met. The schedule doesn't name a guardian, so the trustees may exercise reserved powers including the variation power. Could the proposed amendments cause a change in substratum? 28.          Comments in caselaw have suggested a variation power may not allow a trustee to amend a deed in a way that would change or defeat the substratum or purpose of a trust. [5]

29.          Considering the trust deed as a whole, we think the purpose of the XYZ Trust is to benefit all or any of the general beneficiaries (broadly, Person A, members of Person A's family, and related trusts or companies). 30.          The proposed amendments effectively convert the XYZ Trust from a discretionary trust into a unit trust. The trustee will be able to issue units giving unitholders proportionate interests in the trust's income and capital. The trustee's discretionary powers about income and capital will be superseded. However, only existing beneficiaries may become unitholders, and existing trust funds will be held on trust for unitholders who subscribe. 31.          We're satisfied that this purpose would be preserved by the proposed amendments. While family members must subscribe to become unitholders, the trustee will hold both existing trust funds as well as subscribed funds on trust for the unitholders. Since the benefit from the existing funds flows through to people within the current class of beneficiaries, we think the trust, after the amendments, will still have the purpose of benefitting Person A and Person A's family.

32.          Since the trust is still for the benefit of family members, we think the proposed amendment won't trigger a change in substratum. Conclusion: CGT event E1 won't happen: the proposed amendment is within power, won't create a new trust, and won't settle an asset on a different trust. 33.          For the XYZ Trust, CGT event E1 won't happen if the parties execute the proposed deed of amendment to the trust deed. •                    The proposed amendment is authorised by the trust deed and won't cause a change in substratum (in other words, it's within power). •                    The proposed amendment won't otherwise be treated as creating a new trust at general law because there's continuity of beneficiaries and trust property. •                    The proposed amendment won't settle a specific CGT asset under a new or separate trust. •                     Therefore, applying TD 2012/21, we accept that the proposed deed of amendment won't trigger CGT event E1 > [1] The definitions clause defined 'perpetuity' to mean a trust that would be void because it infringed the rule against perpetuities. [2] Taxation Determination TD 2012/21

Income tax: does CGT event E1 of 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? [3] We don't think discretionary beneficiaries would have residual income or capital rights after the trustee issues units. The trust funds will be held on trust proportionately for the unitholders from that time. If the trustee redeems all units, making redemption payments at market value, the fund will have no remaining assets, so there would be no trust property, and no trust. [4] Jacob's Law of Trusts in Australia relevantly explained the rule of perpetuities in NSW, as modified by sections 7 and 8 of the Perpetuities Act 1984

(NSW), this way. The rule known as the 'rule against perpetuities' requires that an interest in property, if unvested when created, must vest no later than 21 years after the termination of a life in being at creation. Current statutory rules now adopt a 'wait-and-see' approach, validating all interests until it's certain that a disposition must vest outside the period. The perpetuity period in NSW is 80 years from either the time when the settlement takes effect, or (if the interest is appointed under a special power of appointment) the time when the power is created. See Heydon JD and Leeming MJ (2016), Jacob's Law of Trusts in Australia, 8 th edn, LexisNexis Butterworths, at [9-28 and 9-29] accessed at https://advance.lexis.com on 24 October 2025. [5] For example, Lock v Westpac Banking Corporation (1991) 25 NSWLR 593at p.602 (per Waddell CJ in Equity) and Kearns v Hill (1990) 21 NSWLR 107 at pp.110-111 (per Meagher JA).