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Resettlement is where, for income tax purposes, the Australian Taxation Office (ATO) deems that one Trust is ended and another has replaced it. At the present time, and without definitive rulings, there is very little guiding information as to when this occurs.
The
ATO has released a paper “Changes to Trusts leading to the creation of a new
Trust estate” which sets out the principles that will be applied by the ATO in
determining whether a resettlement has occurred. The ATO stipulates that while
individual circumstances will be decided on the paper’s contents, the contents
are for general guidance only. They further indicate that if there are any
doubts as to whether the guidelines apply to a particular situation then the ATO
should be contacted for advice.
The
case that resulted in the release of the ATO paper was recently argued before
the Full Federal Court in The Commissioner of Taxation v Commercial Nominees
of Australia Ltd.
This
paper will look at the implications of the June 9 ATO paper in relation to
Family trusts and the recent full Federal Court decision in Commercial
Nominees.
There
are two major tax implications of finding that your Family Trust has been
resettled for the purposes of income tax:
1.
There
will be Capital Gains Tax (CGT) and Stamp Duty implications if it is deemed that
a new Trust has been created. This is because the on resettlement the assets
held in the original Trust are deemed to be transferred into the name of the new
Trust. Depending on the assets held within the Trust this can result in a
significant amount of expense.
2.
The
other issue is that any carried forward tax benefits will be lost when a new
Trust is deemed to come into existence. This is because the original Trust is
deemed to have ended.
If
the original deed envisaged a widening of the class of beneficiaries then to
change the beneficiaries by widening the class is mostly acceptable where the
class does not exceed the scope authorised by the original deed. In this
instance the ATO has indicated that the power to appoint new beneficiaries must
be directed at a clearly defined group and the ‘actual objective purpose or
theme’ of the original Trust deed must be to benefit the widened class of
beneficiaries.
So
if an existing class beneficiaries is merely amended the existing Trust is seen
by the ATO to continue. A Family Trust can be widened to include all members of
the Family (and its associates such as Family companies) if the power to do so
is contained within the original Trust Deed.
Where
the Family Trust Deed contains a wide power to change beneficiaries and
originally the beneficiaries of this Trust was the Smith family, an appointment
of members of the Jones family as beneficiaries will be seen as a resettlement
and the creation of a new Family Trust. This is because the ATO looks upon this
type of alteration as a redefinition of the group of beneficiaries or a new
class of beneficiaries.
In
the Commercial Nominees case an entirely new class of beneficiaries was
created. The Court decided that this was okay as the original Trust deed allowed
for this and the entitlements of the existing beneficiaries remained essentially
unchanged.
However
this was a Superannuation Trust Deed and the beneficiaries had an entitlement to
an accrued benefit value. In Family Trust the beneficiaries only have the right
to require that the Trustee administer the Trust in accordance with their
discretion, the Trust deed and relevant trust law.
Consequently
any major changes to the beneficiaries of a trust may still be viewed as a
resettlement for the purposes of the ATO and so proposed changes must be
approached with caution until further clarification from the Courts or from the
ATO is provided.
The
termination date within a Family Trust can be extended provided that:
1.
the
Trust Deed gives an express power to do so;
2.
time
was not a fundamental feature of the Trust; and
3.
the
extension does not extend the life of the Trust to longer than 80 years minus
one day.
Where
the original Trust Deed envisaged that the Trust was to operate to provide
benefits to the beneficiaries from the Trust property for a particular amount of
time then extending the termination date will most likely be view by the ATO as
creating a new Trust. This will be even more likely where there are associated
changes in investments or other Trust activities.
Most
Trust Deeds allow for changes and additions the Trust property from time to time
by way of changing investments and generally in these cases there will be no
issue of resettlement if the Trust property is altered.
However
there are situations where the particular Trust property is an integral part of
the nature of the Trust. The Trust may have been expressly set up for the
original Trust property and in this instance it is likely the ATO will view a
replacement of this or the addition of new and different property as the
creation of a new Trust.
The
other situation where the ATO may view determine a new Trust is created is where
a dormant Trust is ‘revived’ by the injection of new Trust property. However
this will not usually be the case unless other changes to the Trust occur. For
example if a dormant Family Trust is ‘revived’ with an injection of property
and the Trust remains true to its original purpose then it seems the ATO will
not find the Trust resettled.
The
Commercial Nominees case indicates that for Trust losses incurred by the
Trust to be used by the Trust there must be continuity of the Trust property.
This means that if you inject profit making property into a Trust that has
existing Trust losses, these losses cannot be used against the profits of the
new property.
Changes
made to the Trustee do not by themselves result in the ATO deeming a new Trust
has been created. However if, in addition to a change in the Trustee, other
fundamental changes to the Trust have been made that alter the nature and
character of the Trust relationship between the Trustee and the beneficiaries
then the ATO will deem that a new Trust has been created.
Only
alterations that result in changes to the relationship between the Trustee and
the beneficiaries in respect of entitlements from Trust property will amount to
the deeming of a new Trust. Family Trusts are discretionary Trusts and so any
attempt to fix the beneficiaries’ entitlements from the Trust would be
changing the nature and character of the original Trust relationship, thus
creating a new Trust in the view of the ATO.
Changes
to the Trust deed which are merely procedural are unlikely to affect this
relationship and so it follows that they are unlikely to have the effect of
creating a new Trust. However it is sometimes very difficult to determine
whether a change is merely procedural or whether it is one which is fundamental
enough to affect the Trust relationship.
Can
I give my Trustees the power to accumulate?
If
the Trustees of a Family Trust are given the power to accumulate income whereas
previously they had an obligation to distribute then this may not be seen as
creating a new Trust providing the beneficiaries’ rights have not changed. If
the class of beneficiaries entitled to any distributions remains the same then
there will be no new Trust in the view of the ATO.
However
if the power to accumulate is conferred and the class of beneficiaries is
widened then the ATO may well deem that a new Trust has been created.
Can
I change the definition of Trust income?
This
type of change has the potential to alter the substantive rights of the
beneficiaries. However the ATO states that in the absence of other factors this
will not in itself give rise to a new Trust where:
1.
the
purpose of the redefinition is to clarify rather than redefine entitlements; or
2.
there
is a redefinition of entitlements but it is one that changes the respective
entitlements between a single beneficiary or class of beneficiaries not between
beneficiaries or classes of beneficiaries.
This
is because generally a change to the definition of income does not affect the
essential nature and character of the original Trust relationship.
The
ATO paper indicates that arrangements that had been implemented prior to the
release of the paper, 9 June 1999, will only be deemed to be resettlements where
“there are very strong indicia that the Trust relationship has been
fundamentally redefined.”
Arrangements
made after this date will be dealt with as per the guidelines.
1.
Look
at what changes you are contemplating to your Family Trust.
2.
Assess
the terms of the original Trust document, does the document authorise you to
make the changes you are contemplating.
3.
Ask
whether the changes are of a type that may be seen as a fundamental change to
the Trust relationship.
Remember
that the more changes you make the more likely their cumulative effect will
change the essential nature and character of the original Trust relationship.
This is because the ATO will not look at the effect of each change individually
but look at each change along with any other features that may be indicative of
the creation of a new Trust.