Trust deeds – Resettlements settled?
The judgment in FCT v Clark and Anor  FCAFC 5 (Clark) and subsequent withdrawal of the Commissioner's Statement of Principles on 20 April 2012 created uncertainty on the ATO's view on resettlement of trusts. We discussed many of these points in our Taxation Updates of 16 September 2011 and 3 May 2012. On 24 October 2012, the Commissioner released TD 2012/21, confirming his position in relation to CGT events E1 and E2 and the creation of a trust over CGT assets. Some changes have been made from the previously released draft TD 2012/D4 in finalising this TD.
the valid exercise of the amendment power will become even more important in light of proposed changes to the taxation of trusts legislation expected from 1 July 2014, which have been flagged in Treasury's 'Taxing trust income – options for reform' paper that was released on 24 October.
While the TD provides some comfort on potential CGT events E1 and E2, uncertainties remain at a broader level. Clark's case concerned the continuity of a trust in the context of carry forward losses. It is reasonable to assume that the ATO found it offensive that such fundamental changes occurred to the control and funding of that trust, yet the carry forward losses were still available. It would not be surprising that, as part of the broader review of the taxation of trusts, Treasury introduces measures to prevent access to carry forward losses in situations similar to Clark.
Changing the beneficiaries of discretionary trust: A discretionary trust was established to benefit the members of a specified family. The trustee validly exercises its power under the trust deed to amend the deed to remove an existing beneficiary (a company that was sold by the family), and add new beneficiaries (the spouses of the children, trusts and companies that the family has a majority interest in, and a charity unrelated to the family). As the amendments were a valid exercise of the power to amend (in this case by resolution of the trustee), no CGT event occurred.
Expansion of a power to invest: A unit trust was established, which provided the trustee with a power to invest in listed securities. The trustee validly exercised its power to amend the trust deed to expand the class of investments. As the amendment was a valid exercise of the power to amend (in this case with the unanimous consent of the unit holders), no CGT event occurred.
Addition of a definition of income, power to stream and extension of vesting date: A discretionary trust contained no income definition, no power to stream income and vested on 30 September 2020. It contained an unfettered power of amendment. The trustee resolved to amend the deed to insert an income definition, to give the trustee the power to stream, and to extend the vesting date to 2050. As the amendments were a valid exercise of a power of amendment under the trust deed, no CGT event occurred.
Settling of assets on a new trust: A discretionary trust deed gives the trustee power to declare particular assets of the trust are held exclusively for one beneficiary to the exclusion of the other beneficiaries. The trustee declared that certain trust assets were held exclusively for one of the beneficiaries, and makes a later declaration in relation to further trust assets being held for that beneficiary. While the terms of the trust were not varied, the effect of the declaration is that those assets are held on terms of a separate trust, and only for that beneficiary (as opposed to the broader class of beneficiaries). The first declaration results in CGT event E1, and the second declaration CGT event E2 (as the trust already exists due to the first declaration).
The TD provides assurance (in the context of CGT events E1 and E2) that the majority of amendments to trust deeds, where the amendment power is validly exercised, will not create a new trust over the trust assets. This includes changes to beneficiaries, insertion of income and streaming provisions, and extending the vesting date.
The common theme throughout the TD examples is that the amendments were valid exercises of a power of amendment. This highlights the importance of reviewing the terms of the trust deed, as some amendment powers are broad, whereas others are narrow and require specific steps to be followed to be valid.
Trustees should be cautious where unusual amendments are being proposed, to ensure that these do not cause trust assets to be held on a separate charter of rights and obligations. If you are unsure of the effect of a proposed amendment, or the how an amendment power operates, seek advice before any proposed amendment is finalised.
It is also important to consider that the TD only provides guidance, and is limited to CGT events E1 and E2. Advice should always be sought to ensure there are no other taxation issues or stamp duty concerns that may arise from any proposed amendment.
The exercise of the amendment power will also become more important in light of proposed broad reforms to the taxation of trusts legislation that are expected to be introduced in the 2013 / 2014 financial year.
extending the time to determine entitlements to all classes of income to 31 August.
'The Government is aware that decisions taken to change the taxation of trust income may lead users of trusts to alter their trust deeds. Such changes may lead to a resettlement of the trust estate, potentially triggering tax consequences at the federal level such as CGT, and stamp duty liabilities at the state level.
It will be interesting to see what comes of the 'transitional relief' and 'continuity of the trust estate' comments. We will provide a more detailed update on the paper soon.