Family Trust

Resettlement Issues

What is resettlement?

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.

What is the significance of the ATO deeming that my Family Trust has been resettled?

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.

Can I change the class of beneficiaries?

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.

Can I extend the termination date in my Family Trust?

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.

Can I change or add to the property held in my Family Trust?

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.

Can I appoint a new Trustee for my Family Trust?

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.

Can I change the terms of my Family Trust?

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.

When do these guidelines take effect?

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.

How do I use these 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.