5.1 Addition or removal of beneficiaries
The identity of those for whose benefit the trust exists is an essential element of the trust obligation and hence the trust relationship. Therefore, changes amounting to a redefinition of the membership class or classes would terminate the original trust. By contrast, changes in the membership of a continuing class are consistent with a continuing trust. In some situations the correct characterisation is unclear but the following examples may assist.
A discretionary trust has as its beneficiaries 'the children and grandchildren of X'. One of the children dies and two new grandchildren are born.
These changes do not terminate the trust. They represent changes in the membership of a continuing beneficiary class.
Another discretionary trust has as beneficiaries 'the children of Y', and anyone else named in the deed as a beneficiary at a particular time. The trustee has a power to nominate beneficiaries, but only if they are parents or grandchildren of Y or their spouses. The trustee nominates Y's mother as a beneficiary.
In this case, the beneficiary group could be characterised as the children of Y and those members of the wider group nominated from time to time. Under this approach there is a mere change of membership and no new trust.
Ordinarily, the ATO will accept that there has been only a change in the membership of a continuing class when:
- an already existing power to nominate new beneficiaries is only exercisable under the terms of the trust in favour of a clearly defined group which it could be reasonably inferred that the trust was intended to benefit
- it can be shown from the deed and surrounding circumstances that the actual objective purpose or theme of the trust was to benefit that wider group.
In circumstances where the power to nominate or remove has the broad effect of a power of appointment among a group that the trust is clearly designed to benefit, it is more likely that group can be reasonably characterised as the beneficiary class. In these situations the trustee may benefit the 'inner group' members (those already named in the deed, for instance Y's daughter), by an appointment in their favour. When deciding to benefit the 'wider group' members (such as Y's mother) the trustee first exercises the power of nomination and then, if it so decides, the power of appointment.
In other situations it will be more difficult to characterise all those who may be nominated as beneficiaries as being merely members of a wider beneficiary group. If so, the effect of nominations and removals may be to vary the trust by redefining the group of beneficiaries so that a new trust is created.
A family discretionary trust (which may or not have made a family trust election) has as its beneficiaries members of the X family. The trustee has a power in the deed to nominate new beneficiaries. It may not be exercised in favour of certain persons such as the settlor, but is not restricted to members of the family group and their associates. The power is exercised to nominate members of the Y family as beneficiaries.
In this situation we would conclude that the power of nomination has been exercised to redefine the group of beneficiaries, and thus, to create a new trust.
A 'standard' investment unit trust regularly redeems from, and issues to, investors, units of the same class, or a number of existing classes, on arms' length terms.
The beneficiary class could generally be defined as those who from time to time hold the units under the terms of the trust. This class has an intrinsically changing membership and the issues and redemptions are consistent with a continuing trust estate.
A piece of real estate is owned by the trustee of a 'standard' investment unit trust. X owns all the units and all the shares in the corporate trustee. Both the shares and units are transferred to B. The transfer of units could be direct, or by way of redemption and reissue.
In the ATO's view the transfer of units, in itself, is consistent with a continuing trust estate for the reasons given in Example 5.1.4 above. In respect of the shares, a change in control of the trustee in these circumstances would be a normal incident in the continuing operation of a trust estate of this type.
This situation can be contrasted with the change in the family discretionary trust in Example 5.1.3. The purpose and essential nature of that trust was to benefit the members of the X family, and a new purpose or theme arose on the change of beneficiaries. By contrast, the unit trust in Example 5.1.5 is for the benefit of those who have subscribed for units and their assignees, and here, no change in that purpose has occurred.
The above comments only apply where the changes in question are not accompanied by other indicia of a new trust. While these features considered in isolation would generally not lead to a new trust, they may form part of an arrangement which does.
A 'standard' investment unit trust is varied to create and issue a new class of units.
Such variations may not only create a new beneficiary group (the holders of the new class) but also may lead to an express or effective change in the rights attaching to the pre-existing class or classes, for instance through introducing a competing claim on the proceeds of the trust fund. The overall result may be a redefinition of the trustee's obligations to the beneficiaries and hence the trust relationship, resulting in the creation of a new trust estate. As noted at the beginning of this statement, tax consequences then arise at both the trustee and beneficiary level.