05/07/2018

John and Isabelle are the two primary beneficiaries and appointors of a discretionary trust (“the Trust”). For various reasons, John has now decided to remove himself from these positions.

This scenario raises the important question of whether the proposed changes would constitute a resettlement of the Trust. A resettlement occurs when changes are made to the original trust to such an extent that the trust is considered to have been terminated and subsequently re-created.

A resettlement has capital gains tax (“CGT”) and state duty consequences as the CGT assets in the Trust will effectively be regarded as having been transferred to the newly created trust at market value. 


Interestingly, the Australian Taxation Office (“ATO”) has determined that even where the variation does not amount to a resettlement at law, it may amount to one for tax law purposes where the trust is amended in such a fundamental way that the ATO will deem that a new trust has been created.

The ATO’s current position in relation to CGT events E1 and E2 is stated in its Taxation Determination TD 2012/21 (“the Determination”), which was released following the decision of the Full Federal Court in the case of FCT v Clark [2011] FCAFC 5 in January 2011. 


In the Determination, the ATO states that provided the change(s) is effected pursuant to a valid amendment of the trust under an existing power in the trust deed, the amendment will not result in a termination of the trust (regardless of the extent of the amendment) and consequently will not generally have CGT implications, unless the change results in the trust being resettled for trust law purposes. 


In other words, provided there is no resettlement for trust law purposes, there will not be any detrimental CGT consequences in respect of CGT events E1 and E2 if the scope of the amendment power was broad enough to allow the proposed variation(s) and the amendment power was validly exercised by the relevant entity. 


The effect of the Determination and Clark’s case is that in most cases, provided the amendment power is validly exercised, the amendments (such as changes to beneficiaries, insertion of income and streaming provisions and extension of the vesting date for instance) will not result in the trust being resettled for tax purposes.

However, care should still be taken to not only make sure that the variation is effected in such a way that it falls within the scope of the amendment power but also that the proposed variation does not amount to a resettlement from a legal point of view.

If in doubt, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or info@townsendslaw.com.au for legal advice or assistance with an application for a private binding ruling from the ATO.