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14 Jun 12 CGT events E1 and E2 and trust changes - TD 2012/D4

On 13 June 2012, the ATO released for public comment by 13 July 2012 draft Taxation Determination TD 2012/D4 entitled "Income tax: does CGT event E1 or E2 in ss 104-55 or 104-60 of ITAA 1997 happen if, pursuant to a valid exercise of a power contained within the trust's constituent document, the terms of the trust are changed?"

The answer given is:

"No. Unless the amendment causes the trust to terminate for trust law purposes, or the effect of the amendment is 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, neither CGT event E1 nor CGT event E2 in ss 104-55 or 104-60 of ITAA 1997 happens."

In June 1999 in response to the Full Federal Court's decision in FCT v Commercial Nominees of Australia Ltd [1999] FCA 1455; 99 ATC 5115; (1999) 43 ATR 42 (Commercial Nominees) the Commissioner published a 'Statement of Principles' to guide taxpayers, advisers and ATO decision makers on when the Commissioner would treat changes to a trust as giving rise to a new trust estate for income tax purposes. The basic proposition underlying that Statement was that a new trust arises for these purposes where there was a 'fundamental change' to the trust relationship and that a change in the 'essential nature and character' of the trust relationship can result in the creation of a new trust.

In the draft Determination, the Commissioner now concedes that the more recent decision of the Full Federal Court in FCT v David Clark; FCT v Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark ), means the approach formerly set out in the Statement of Principles is not sustainable. Clark was decided adversely to the Commissioner. Special leave sought by the Commissioner to appeal the decision to the High Court was rejected on 2 September 2011.

On this basis, the 'Creation of a new trust - Statement of Principles August 2001' was withdrawn on 20 April 2012.

In paras 18 -19 of the Explanation in the draft Determination, the ATO states as follows:

" light of Federal Court's decision in Clark, and the High Court's disposal of the Commissioner's special leave application, the Commissioner accepts as an accurate statement of the current law that continuity of trust is a function of whether the trust continues in existence under trust law in contradistinction to having terminated...

As so understood, the comments made by the Federal Court in Commercial Nominees relating to amendments to trust obligations represents good law."

The Federal Court, in Commercial Nominees, said at para 56 as follows:

"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, there will be identity of the 'taxpayer' for the purposes of section 278 and sections 79E(3) and 80(2), notwithstanding any amendment of the trust obligation and any change in the property itself."

Thus, the ATO states, at para 20 of the draft Determination:

"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 may happen as a result of changes being made to an existing trust. In light of those principles, the ATO accepts that a valid amendment to a trust pursuant to an existing power will not result in termination of the trust and, therefore, subject to the observation in paragraph 23 below, will not result in CGT event E1 happening."

The qualification to this conclusion, by reference to "paragraph 23 below", is as follows:

"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 amendment to the deed such as to lead to the conclusion that those assets are now held on terms of a distinct trust."


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