18/08/2008

A couple of current issues have turned the spotlight again on the vagaries and dangers of amending trusts so it is probably time to remind ourselves of the principles that apply and of the need for caution when considering amending a trust.

Any proposed variation to a trust needs to be cross-checked against the possibility that such a variation will constitute a resettlement of the trust which could lead to substantial capital gains tax and income tax detriments not to mention additional stamp duty.

The ATO says that an amendment to a trust will result in a resettlement or creation of a new trust (with the accompanying revenue liabilities) “when there is a fundamental change to the trust relationship … a change in the essential nature and character of the original trust relationship …”.

You can test the usefulness of that statement of general principle by answering yes or no as to whether a new trust has been created as a result of the following amendments to the trust deed (see below for answers):

1    the addition of new beneficiaries (not included in the original trust’s objects) pursuant to the trustee’s power to do so in the trust deed
2    the issue of new units to new unitholders in a unit trust pursuant to the trustee’s power
3    the extension of the term of a trust originally set up for 10 years
4    the conversion of a fixed trust to a unit trust
5    the addition of a trustee’s power to accumulate income.

The ATO’s Statement of Principles discusses a number of different possible changes to the trust deed and their ramifications.  The list is not exhaustive and is by way of example only and each situation has to be dealt with individually on its merits.

I guess that the problem is that although the general principles are stated fairly clearly, they are so general in nature that it is still very difficult to decide in any given case which side of the line they fall.

Although a change to a trust may not create a new trust when taken in isolation, the ATO will look at all changes in their total context and may decide that that context is sufficient to constitute a resettlement even if at least some of its elements do not of themselves do so. 

For example, although the ATO accepts that the mere extension of the term of a trust is consistent with a continuing trust estate, if the original specified term were an essential feature of the trust its variation could amount to a new trust especially if there were other changes such as the introduction of new investments or activities.

The ATO has also issued specific guidelines in respect of changes to trusts that are necessary for the purposes of making the trust comply with the new Australian International Financial Reporting Standards.    The principles do not differ from the general statements, but are applied to the particular area.

Buckle’s Case in 1998 led the NSW revenue authority to issue a ruling (DUT 17) on how it would deal with variations to trust deeds. In summary it concedes that variations to discretionary trusts will not be liable to duty in NSW

•    where a beneficiary is added to or deleted from either the class of default beneficiaries (usually mum and dad in a discretionary trust) or the more general class of discretionary beneficiaries (usually the kids, grandkids and other rellies)
•    where the interests between the beneficiaries are varied without altering the identity of those beneficiaries, or
•    where the variation is only in respect of administrative powers (although the ATO distinguishes between simply procedural variations and those that might look procedural but have a material affect on the rights of beneficiaries).

Finally there is the issue of changing trustees which is the subject of some controversy in NSW.  The ATO concedes that the change of a trustee does not of itself result in the termination of a trust.  The NSW revenue authority continues to rely on an old ruling SD 118 which, although it does not purport to attach stamp duty liability to the change of trustee as a resettlement, nevertheless achieves the same result by requiring ad valorem duty be paid on any transfer of trust property from the old trustee to the new trustee unless both the old and the new trustee are prohibited from ever benefiting from the trust.  This latter requirement in regard to the old trustee appears unsupported by the case law or legislation.

Commentary like this can only touch a few of the more significant issues and there is much more detail that needs to be understood when varying a trust deed.  So don’t be doing those variations until you have thought carefully through the ramifications and likely revenue results.  And the quiz?  The answers were: 1. yes 2. no  3. yes  4. yes  5. no.  If you got them all right I’d be delighted to receive your job application.