Trust Resettlement

Contents

• Taxation determination 2012/21
• Taxation determination 2019/14 (related to CGT on trust splitting arrangements)
• Private rulings
• Transfer duty considerations

A Trust is a very common legal structure used to hold investments. Technically, a trust is not itself a stand-alone legal entity but more accurately describes a relationship between persons over property. The relevant ‘relationship’ can be summarised as follows: the trustee of the trust holds trust property for the benefit of beneficiaries of the trust and in so doing must follow the terms of a trust deed. An issue can arise where the terms of a trust are amended to change fundamental aspects of the trust relationship.

This includes amendments which alter, for example, the property held on trust or the persons who are beneficiaries under the trust. The impact of such a change is a potential ‘trust resettlement’ under trust law which results in the original trust terminating and a new trust being established. This only occurs where the amendments to the substance of the trust are sufficiently significant – such that it can be said that the trust terminated and assets of the trust were settled on terms of a different trust.

From a taxation perspective, a trust resettlement has various potential tax consequences. This includes capital gains tax by the happening of CGT events E1 (where a trust is created over a CGT asset by declaration or settlement) and / or CGT event E2 (where assets are transferred to an existing trust). Note that where two or more CGT events result from a single incident, the most appropriate CGT event will apply. That is, there is no double-taxation because of the applicability of two or more CGT events. Other tax consequences of resettlement include the trust being unable to utilise previous accumulated losses.

See our Trust Tax article for general information on trust taxation.

The somewhat difficult question worth exploring is therefore, what amendments to the trust will cause it exceed the threshold for resettlement? Put another way, what has to occur for a trust to change so fundamentally that it is deemed to have terminated and a new trust established?

According to judicial development in this area, a resettlement will generally not happen unless one of the following occur:

• There is less than ‘some’ continuity in membership of the trust
• There is less than ‘some’ continuity in the property of the trust

Additionally, any amendments must be made validly and with the support and authority of a power of amendment contained within the trust. It is important therefore to firstly consider if the trust deed allows for the proposed amendments and secondly to ensure the procedures and requirements for amendment as set out in the deed are actually complied with. Any action which purports to amend the operation of the trust without the backing of the trust deed may trigger a CGT response.

The Australian Tax Office largely holds the view that a resettlement according to trust law is the trigger point for CGT event E1 and / or E2. However, note the ATO (in Taxation Determination 2012/21) does clarify that it is possible that capital gains tax could apply to trust amendments that fall short of a trust law resettlement. This includes instances where there are changes to trust assets that result in those relevant assets being made subject to a separate character of rights and obligations.

Such amendment would give rise to the conclusion that the asset has been settled on terms of a different trust (even where the original trust itself is not resettled for trust law purposes). An example could include the following amendment to a trust deed: ‘the terms of this deed are amended such that the property at 123 XYZ Street is to be held on a separate trust for the benefit of beneficiary A’. In this scenario the trust property is being made subordinate to the governance of an alternative trust and this would invoke the application of CGT event E1 and / or E2.

The ATO have provided useful determinations and private rulings attempting to answer the question of when a trust resettlement will occur as a result of amendments to trusts. We have attempted to summarise some of material below. Please note that while the ATO resources can be a useful reference, following the material is not always a foolproof way to ensure compliance with taxation law.

Taxation determination 2012/21

Example 1

XYZ Discretionary Family Trust was settled to benefit members of the XYZ family. The trust deed permitted the trustee to appoint income to any beneficiary including Mr XYZ, Mrs XYZ and their children and grandchildren and a private company used to run the family business. The family sells the company to a third-party outside of the family and the trust deed is therefore amended to exclude the company from the list of beneficiaries. The trustee also resolves to add beneficiaries to the existing list. This includes spouses of children and trusts and companies in which the family has a controlling interest. As this amendment is a valid exercise of an amendment power contained within the deed, there is no resettlement.

Example 2

The XYZ Trust is a unit trust. Per the terms of the trust deed, the trustee has power to invest in only a limited class of assets. The trustee is permitted to amend the scope of the power of investment within the deed with the consent of all unitholders. Therefore, the unitholders meet and amend the deed to change the range of assets which can be invested in. As this amendment is a valid exercise of an amendment power contained within the deed, there is no resettlement.

Example 3

XYZ Discretionary Family Trust was settled to benefit members of the XYZ family. The trust deed does not contain a definition of income or a provision permitting the trustee of the trust to stream income. The trustee, pursuant to an unfettered power to amend the deed, inserts clauses defining income of the trust, authorising the trustee to separately identify and label various sources of income and authorising the streaming of income. As these amendments are a valid exercise of an amendment power contained within the deed, there is no resettlement.

Example 4

XYZ Discretionary Family Trust was settled to benefit members of the XYZ family. The trustee has wide powers to declare that a particular asset of the trust is to be held exclusively for one or more of the trust beneficiaries to the exclusion of other beneficiaries of the trust. In exercise of this power, the trustee declares that one of several assets forming part of the corpus of the trust is to be held exclusively ‘in trust’ for one of the beneficiaries. In this instance, the trust obligations attaching to that asset have changed in a manner consistent with the conclusion that the assets have commenced to be held on the terms of a separate trust. The original trust does not terminate, but CGT event E1 will occur for the trust in relation to that asset.