Trust Resettlements

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A trust is a relationship whereby a person (the trustee) holds property on trust for the benefit of another person (the beneficiary). A trust deed outlines the terms of the trust including the duties of the trustee in holding the trust property. Whilst these terms are binding, some trusts include a power to amend the terms of the trust. This is known as a power of amendment. There are many reasons why a person would want to make amendments to a trust deed. For example a person may wish to add a new beneficiary, appoint a new trustee, or extend the vesting date of the trust. The difficulty arises in determining what kinds of amendments can be made to a trust deed without causing a resettlement. In other words, when will amendments to a trust deed cause a new trust to be created?

What is a trust resettlement?

A trust resettlement occurs when a trust is varied or amended to the extent that it becomes a new trust. A trust resettlement can also occur when the trust property is transferred to a new trust.

How is a resettlement triggered?

The law relating to what constitutes a resettlement has evolved substantially over the last few years. In 2001 following the decision in FCT v Commercial Nominees of Australia Ltd,[1] the ATO released a Statement of Principles which stipulated that a resettlement would occur when:

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.’

The Statement indicated that even some relatively minor changes might trigger a resettlement in certain circumstances. However following the 2011 decision in Commission of Taxation v Clark,[2] the ATO retracted this Statement of Principles stating that the approach was no longer sustainable. In Clark, significant changes were made to the members of the trust and the trust property yet these changes were held to have not constituted a resettlement. The ATO thus amended its report and confirmed that the decision in Clark was now the correct test. It is now accepted pursuant to Clark, that a trust will be resettled where the variation to the trust disrupts the continuity of the essential features of a trust. These being:

  • the terms of the trust deed
  • the trust property
  • the members of the trust

The ATO’s amended report Taxation Determination 2012/21 further notes that provided there has been a valid exercise of the power of amendment or prior court approval, then changes to the trust deed will not result in a resettlement unless the change:

  • terminates the existing trust; or
  • leads 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.

The powers of amendment in the trust deed are very important to ascertaining what variations to the trust can be made. A trust deed cannot be amended without an express power to do so. Where a trust deed contemplates a change and the correct procedures in making the change are followed then it is unlikely that a trust will be resettled. Clark appears to confirm that there are now few amendments to a trust that will cause a resettlement.

What is the effect of resettlement?

There are significant taxation implications which flow from a resettlement. The disposal of the trust property into a new trust triggers a number of provisions of the Income Tax Assessment Act 1997 (Cth) including a capital gains tax event which the trustee would be liable to pay. In addition, the disruption of continuity of the trust estate means that any losses or gains from the old trust cannot be transferred to the new trust.

How to avoid trust resettlements

It is very important to obtain legal advice before amending a trust deed in any way. Even where the trust deed includes a power of amendment it is important to read the trust deed and check that the power specifically authorises the proposed amendment. Remember one cannot rely on all of the amendments listed in the different state Trusts Acts where the power of amendment in a trust deed stipulates otherwise. It is also very important that amendments made pursuant to a power are done so in accordance with any process outlined in the deed.

For more information regarding trust resettlements

Please do not hesitate to contact our Business Development Team on (07) 3252 0011 to arrange an appointment with one of our experienced commercial lawyers.

This article was written by Kristel Winkler (Special Counsel).

[1] [1999] FCA 1455.

[2] [2011] FCAFC 5.