1. For tax purposes the trust property to be realised at the trustee level (with potential trading stock, depreciation and capital gains tax implications);

2. The loss of carried forward tax benefits, ie tax losses.

3. The beneficiary or beneficiaries regarded as disposing of his, her or its interest in the original trust and acquiring an interest in the new trust with the consequent capital gains tax implications. CGT event E1 which covers creating a trust over a CGT asset would be triggered however it is possible given the inclusion of equitable rights within the definition of "CGT asset", CGT event A1 which covers disposal of CGT asset can potentially include the creation of trusts by the settlement or resettlement of property and dealings with trust interests.

4. In other situations, although the original trust estate may continue, changes may lead to the creation of one or more new and separate trust estate for tax purposes.

This situation arose in the context of a superannuation fund which was the subject of a decision of a High Court in Commissioner of Taxation v Commercial Nominees of Australia Ltd [2001] HCA 33.

This case involved a superannuation fund established by deed of trust in which a number of significant changes were made to the fund trust deed which among other things changed the nature of the benefits to which members were entitled, allowed for appointment of a professional management company and allowed for new classes of membership of the fund to be created.

The Commissioner argued that this was a resettlement by analogy to various resettlement cases involving the imposition of stamp duty.

Both the High Court and the Full Court of the Federal Court of Australia made it quite clear that those analogies did not apply for tax purposes but were in a different context.

The High Court held that a new trust was not created because there was a continuing trust estate with the general rights of members under the new regime not being essentially different from those under the old regime, and with the fund continuing to be a fund administered for the benefit of the employees or former employees of the relevant employer. The obligations and continuity of property which was the subject of this trust still remained and did not alter at the time the amendments took effect. The 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.

Accordingly the fund was entitled to deduct losses incurred in prior years.

This decision highlights that in dealing with the various issues arising out of the restructuring of family discretionary trust deeds great care must be taken to avoid a resettlement.

In this regard the ATO issued a Statement of Principles on June 9, 1999 which was then revised following the Commercial Nominees decision in August 2001.

In revising its statement of principles, the ATO stated that it believed that the High Court had said nothing that was contrary to its statement of principles issued on June 9, 1999. The ATO also noted that the High Court confined its reasons to a superannuation fund and that in every case, the question remains whether changes made to a trust effect the continuity of that trust.

However in both the original statement of principles and the revised Statement of Principles the ATO has stated that its view is that a new trust arises when there is a fundamental change to a trust relationship, that is a change in the central nature and character of the original trust relationship which has the effect of creating a new trust.

This may mean that the original trust ceases to exist and a new trust arises, or a new trust may arise that exists independently of the original trust, with all the consequences which flows from that.

Even if the trustee remains the same, it will be regarded for tax purposes as having disposed of the trust property as trustee of one trust and reacquired it as trustee of another. That disposal would trigger consequences under the capital gains and other provisions of the tax legislation such as tax losses etc. A capital gains tax (CGT) event would occur. Although the High Court for superannuation fund purposes said that the resettlement cases arising under stamp duty had limited implications in that context given that superannuation funds were not only regulated by the ITAA, but also by the Superannuation Industry Supervision Act.

Different questions as to applicability of the resettlement cases may apply in the context of a discretionary trust.

In contrast to superannuation funds, different issues arise with respect to inter vivos trusts and testamentary trusts where the trust is expressed to be for the benefit of a defined class of beneficiaries. In relation to such trusts, the concept of "resettlement" focuses upon the rights of the defined classes of beneficiaries. Superannuation funds are created with the knowledge that the class of beneficiaries will change dramatically over time.

Under Australian stamp duty legislation there has been extensive case law on when a trust is "settled" or "resettled".

The ATO takes the attitude that the stamp duty cases indicate that a new settlement arose when the changes amount to a "new charter of rights and obligations" or there are "created in the trust fund as a whole different equitable interests" to those which had existed under the pre-existing trust.

Furthermore in the ATO’s view, there is considerable overlap between the terms "settlement" and "trust estate" and accordingly regards the stamp duty cases as giving valuable insights into the nature of trusts and the circumstances under which a new trust arises.

The "variation to the Charter of Rights" doctrine which was applied by the High Court in the Davidson v Chirnside decision (1908) 7CLR 324 has not been followed in a large number of cases since then.

Although the decision in Commercial Nominees may be distinguished on the basis that it deals with superannuation funds and with trust losses, the decision is consistent with the approach of the concept of "resettlement" adopted by the Australian Courts in the decisions after Davidson v Chirnside.

Given these decisions it would appear that in the context of non-purpose trusts, the better view is that the trusts will only be "settled" or "re-settled" where there is such a substantial variation of the beneficial interests in the trust estate as to warrant the conclusion that the whole substratum of the trust has been altered. This approach would suggest that quite substantial changes could be made to a trust deed without triggering a trust resettlement for the purpose of section 104-55 of the ITAA 1997.

The ATO takes the view in the Commissioner’s statement of the applicable principles that changes leading to a new trust can arise by several means including variations under a power in the deed, and a variation by agreement among the beneficiaries. That statement together with a review of the entire Statement of Principles suggest that the Commissioner focuses upon variations in beneficial interest as the litmus test for the existence of a resettlement rather than upon the "Charter of Rights". The Commissioner goes onto offer some indication of his view upon a number of possible variations to a trust by considering a range of hypothetical factual scenarios.

Some of the changes which raise the question of whether the new trusts have been created include:

The ATO said depending on their nature or extent, and their combination with other indicia, the above changes may amount to a mere variation of that continuing trust, or alternatively to a fundamental change in the essential nature and character of the trust relationship. In the second case the original trust is brought to an end and/or a new trust created.

The ATO continued by saying that whether a new trust is created will depend among other things, on the terms of the original trust and on the powers of the trustee. The original intentions of a settler must be considered in determining whether a new trust has been created. However there may be different trigger points/tests for different types of trusts.

Further the ATO has issued Ruling TD2001/26. This ruling is aimed at people renouncing interests in discretionary trusts so that the income of those trusts is not attributed to them under social security means testing provisions. However the implications of the ruling are far wider.

It says that a beneficiary’s rights under a discretionary trust are still CGT assets even though the discretion may not have been exercised in their favour yet and the act of renouncing any further interest in the trust will still bring an end to those rights, ie. creates CGT event C2 being regarded as an abandonment, surrender or forfeiture of the interest.

Because the beneficiary does not receive any actual capital proceeds ie money or property, he/she is deemed to receive capital proceeds equal to the market value of the interest that he/she has renounced. Of course the beneficiary would be unlikely to have any cost base for such an interest. The ruling acknowledges that the market value of such an interest is generally nil prior to any discretion being exercised in the beneficiary’s favour, but it reached the inevitable conclusion that where a discretion has been exercised in a beneficiary’s favour, the market value would be equal to the value of the distribution the beneficiary was entitled to and then renounced.

This ruling does not take into account the principles expounded in Gartside’s case nor does it take into account the general principle that when a gift is disclaimed, under the law this is deemed to have effect from the outset, so that where a beneficiary disclaims an interest in a trust, the beneficiary is deemed never to have had any rights under the trust which could end, and thus create any CGT event C2 at all. It is a ludicrous step if the tax payer disclaiming the gift ie renouncing any expectation of receiving any item of value, is made liable to tax.

Accordingly any changes or amendments to a trust deed or to the class of beneficiaries whether by way of deed of exclusion or renunciation needs to be carefully considered.

Morris Milder

Consultant, Trumble Szanto Lawyers