TRUST - HAS THEIR BEEN A RE-SETTLEMENT?
During the past few years, we have been regularly asked to draft a document that adds or deletes beneficiaries. The Australian Taxation Office (ATO) originally released the 'Creation of a New Trust — Statement of Principles' (Statement of Principles) on 9 June 1999 setting out the Commissioner's views on resettlements as a guide.
Then the High Court's decision in Federal Commissioner of Taxation v Commercial Nominees (2001) 75 ALJR 1172, in August 2001, came the High Court's decision in Federal Commissioner of Taxation v Commercial Nominees (2001) 75 ALJR 1172.
Most recently in 2011 question was considered by the Full Court of the Federal Court in Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark.
If there is a re-settlement there are two important consequences:
- a capital gains tax event; and
- stamp duty implications - there will have been an assignment of property from the old trust to the new trust.
If the trust has little or no assets then although there may be a resettlement, the downside is minimal. If the trust has substantial assets, then the downside may be substantial - SO BE CAREFUL.
In Federal Commissioner of Taxation v Commercial Nominees (2001)the High Court stated that whether a resettlement occurs, hinges on 3 indicia:
...The three main indicia of continuity .... 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. The trusts under which the fund operated in 1994-1995 were constituted by the original trust deed in 1988 as varied by the exercise, in 1993, of a power of amendment. The property the subject of the trusts did not alter at the time the amendments took effect. Persons who were members of the fund before the amendments remained members of the fund after the amendments. The fund, both before and after the amendments, was administered as a single fund, and treated in that way by the regulatory authority.
In Commissioner of Taxation v David Clark; Commissioner of Taxation v Helen Clark the Full Court of the Federal Court made some interesting comments:
...[at 76] It is, in our view, not without significance to the issue of trust estate continuity, that all of these arrangements were effected without making any alteration to the terms of the constituent document pursuant to which the CU Trust was established, namely, the Deed of Trust. In other words, there was no alteration to the terms of the trusts embodied in that document even if a beneficial interest in the trust fund was affected, even extinguished, by virtue of the arrangements, for example, by the erstwhile trustee, Carringbush, waiving its right to be indemnified out of the assets of the trust fund in respect of liabilities incurred by it in properly discharging its power and duties as trustee
...[at 82] Carringbush's waiver of its right to be indemnified out of the CU Trust in respect of liabilities incurred by it in properly discharging its powers and duties as trustee, no more created a new trust estate than it terminated an existing one.
..[at 85/86] The same applies to a unit trust of the kind here under consideration. The trust property will constantly change as subscriptions for units are made and redemption of units occur and Parts III and IV of the Deed of Trust pursuant to which the CU Trust was established expressly provide for the creation and application for units and the redemption of units respectively.
The identity of the persons entitled to benefit under the CU Trust would be likely to change over time as new units are issued and existing units are transferred or redeemed. Clauses 3 and 14(a) of the Deed of Trust contemplate changes in the beneficial ownership of the fund, .
..[at 87] When the High Court in Commercial Nominees spoke of trust property and membership as providing two of the indicia for the continued existence of the eligible entity or trust estate, the Court was not suggesting that there had to be a strict or even partial identity of property for the first and objects for the second. It was speaking more generally: that there had to be a continuum of property and membership, which could be identified at any time, even if different from time to time; and without severance of one or both leading to the termination of the trust in question. In the present case, the Commissioner never contended, nor on the evidence could he, that there was a severance in the continuum of trust property and objects of the CU Trust. Their identity changed from time to time, but not their continuum.
Such an approach is consistent with the position at general law in relation to the four essential indicia of the existence of a trust: the trustee, trust property, the beneficiary and an equitable obligation annexed to the trust property: JD Heydon & MJ Leeming: Jacobs' Law of Trusts in Australia (2006) 7th ed, at [104] – [110]. In Commercial Nominees both the Full Court, at [49] of its reasons, and the High Court, at [35] of its reasons, pointed out that there was nothing in Pt IX, nor in the 1936 Act generally, which imposed some statutory requirement of continuity for determining when there is a sufficient identity of the trusts involved. With respect, the same applies in the case of Div 6 of Pt III of the 1936 Act.
CONCLUSION
In Clark, the court rejected the notion that there had to strict or partial identification of property or membership in determining whether a resettlement of the trust has occurred. Instead it was held that provided the continuum of property and membership could be identified at any time (even if different) and that if neither was severed, then the trust had not been resettled.
In Clarke the changes (that the ATO alleged had given rise to a resettlement) included:
a change of trustee;
a complete change in the membership composition of the trust;
a change in trust property;
a raft of changes associated with rights of indemnification between the old trustee and beneficiaries and the new trustee;
a discharge of liabilities;
a transition from a dormant trust to an active trust.
The majority of the judges (2 to 1) found that these changes did not cause the fundamental obligations and objects of the trust to end since the trust deed was not altered, and it contemplated both changes to trust property and unit holdings.
It remains important to ensure that changes made to a trust do not result in resettlement. If the changes are made in accordance with the powers set out in the deed and the trust itself is not terminated, it is unlikely that resettlement will occur.
But, having said this, the ground is by no means settled since ATO may appeal the decision to the High Court.
As always, before you seek to amend a trust deed, please seek the appropriate advice.