ATO View on Discretionary Trust Variations and Resettlement

Trust Resettlement Ruling 2012/21 

What we are looking at: does a CGT event E1 or 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?

Key Words:

Resettlement – creation of a new trust

Discretionary Trust – an arrangement under which a person holds property, and the beneficial interest in all or any part

of that property may be vested in a person on the exercise of discretion

Potential Beneficial Interest – refers to the rights, expectancies, or possibilities of an object of a discretionary trust

Interest – in property means a legal or equitable interest

Rulings:

1. In the circumstances listed above, neither a CGT E1 or E2 occurs unless1:
   1. The change causes the existing trust to terminate and a new trust to arise for trust law purposes or
   2. The effect of the change/ court approved variation leads to a particular asset being subject to a separate charter of rights and obligations, assuming that the asset has been settled on terms of a different trust

Date of effect:

Subject to the exception mentioned in paragraph 13, this Determination applies both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination2.

Example: addition of new entities to, and exclusion of existing entities from class of objects (directly from ruling, accessible via this link)

The Acorn Trust is a family discretionary trust that was settled to benefit the members of the Squirrel Family. Under the terms of the trust deed, the trustee (a private company of which Mr and Mrs. Squirrel are directors) has the power at its absolute discretion to appoint income to any one or more of the General Beneficiaries. The General Beneficiaries are defined under the terms of the trust deed to be Mr. Squirrel, his wife, their children, their grandchildren, and Oak Pty Ltd, a private company through which the family runs a business of growing flowers to supply local florists.

Having decided to get out of the flower industry, the Squirrel Family dispose of their interests in Oak Pty Ltd to an unrelated third party.

The trust deed for the Acorn Trust provides for a procedure for the trust to be amended, namely by trustee resolution recorded in writing. Pursuant to this procedure the trustee resolves in writing to amend the deed to specifically remove Oak Pty Ltd by name from the class of General Beneficiaries. The trustee further resolves to add to the class of General Beneficiaries:

• the respective spouses of the children;
• trusts and companies in which the family has a majority controlling interest; and
• a philanthropic charity unrelated to the Squirrel Family.

The making of these resolutions, being a valid exercise of a power of amendment contained within the deed, does not give rise to the happening of a CGT event.

Explanation from new rulings – key takeaways:

Resettlements as per ‘Statement of Principles’ regarding resettlements:

• 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.
• Relevant focus is on whether the continuity of the trust estate has been maintained
• “The three main indicia of continuity [for the purposes the former taxing regime for superannuation funds] are the constitution of the trusts under which the fund (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity”

Case in point: Commissioner of Taxation v. David Clark; Commissioner of Taxation v. Helen Clark [2011] FCAFC 5; 2011 ATC 20-236; (2011) 79 ATR 550 (Clark)3

• This case raised consideration of the circumstances in which the nature of a trust has so changed that it might be concluded that the trust that originally incurred capital losses is not the same trust for income tax purposes as that which has derived gains against which the losses are sought to be recouped.
• the approach adopted by the Full Federal Court in Commercial Nominees is authority for the proposition that assuming there is some continuity of property and membership of the trust, an amendment to the trust will not have the result of terminating the trust
• It was seen that the continuity of a trust estate will be maintained so long as the trust is not terminated for trust law purposes. As such, in the absence of termination, tax losses being carried forward by a trustee will generally remain available to be recouped against relevant trust income derived in future years of income.

From the Federal Court [re: Commercial Nominees]:

1. ...in order to determine whether losses of particular trust property are allowable as a deduction from income accruing to that trust property in a subsequent income year, it will be necessary to establish some degree of continuity of the trust property or corpus that earns the income from the income year of loss to the year of income. It will also be necessary to establish continuity of the regime of trust obligations affecting the property in the sense that, while amendment of those obligations might occur, any amendment must be in accordance with the terms of the original trust. 4
2. 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. 

1-5. Australian Taxation Office, Taxation Determination 2012/21(ATO, 2016).

Accessible via: https://www.ato.gov.au/law/view/document?docid=LIT/ICD/QUD1of2010/00001

Summary:

• Does a CGT E1 or E2 occur 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? No
• Courts will apply the rulings of Clark in an assessment of change in a trust, with a relevant focus on the continuity of the trust estate
• Clark was decided adversely to the Commissioner
• An amendment to a trust will not have an effect on the continuity of it if there is continuity in property and membership