Change of Trustee of a Unit Trust


Before proceeding read this carefully

Trustees should not be changed without first thinking about the process and the consequences.

It is vital that the correct mechanism is followed. That is, if the deed contains a procedure for changing the trustee it must be followed to the letter.

If the trust deed does not contain a procedure for changing trustees, the Trustee Act of the local State jurisdiction may need to be relied upon to give effect to what needs to be done, if possible.

It is not just the procedure that is important, the eligibility of the incoming trustee is also important. For example, some trust deeds don't allow individual trustees.

If a change of trustee is invalid all decisions made by the new trustee will, likewise, be invalid, including distributions of income.

For trusts located in New South Wales the impact of section 54 of the Duties Act 1997 (NSW) on changing a trustee must also be considered. Section 54 states that if, after a change of trustee, any of the new or continuing trustees is, or can become, a beneficiary, the transfer of trust property from the old trustee to the new trustee will attract full rates of duty. For example, if Mr and Mrs X are trustees and beneficiaries of a family trust that owns a unit in Sydney, and Mrs X is removed as a trustee and the family accountant is appointed in her place, state duty will be payable on the market value of the unit when it is transferred to Mr X and the accountant as the trustees.

If, on the other hand, the new trustee is a company controlled by Mr X and the family accountant, both of whom are ineligible to be a beneficiary of the trust, only nominal state duty will be payable when the unit is transferred, but only if the ineligibility is embedded in the trust deed. This is critical to avoiding unwanted duty problems.

There can also be taxation consequences associated with changing the trustee of a trust if the trust is one that conducts some form of business or owns income generating property.

Section 268-25 in Schedule 2F of the Income Tax Assessment Act 1936 requires the accounting year to be broken up into various parts if there is a change in control of a trust during the accounting year. The trap that can arise is that income earned by the trust in the first period of the year cannot be offset against expenses incurred in the second period of the accounting year.

Section 268-25 does not apply to trusts that have made a family trust election.

It is important that you consider these issues before changing the trustee of the trust.

Please note that we are not tax advisers and if you are in doubt as to the tax consequences for the trust of a change in trustee you should check with a taxation specialist.