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Ruling

Subject: Trust resettlement

Question 1

Will the removal of beneficiaries at their own request from the trust constitute a resettlement or the creation of a new trust, under section 104-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Relevant facts

The trust is a discretionary trust established by a trust deed on a particular date.

The settler of the trust is A and B is the trustee. The appointer/principal is C.

A clause in the trust deed defines the trust's beneficiaries, and another clause allows the trustee to amend clauses in the trust deed.

A clause defines beneficiaries to mean and include:

the person or persons named in the Schedule;

the grandparents, parents, brothers, sisters, spouses, widows, widowers, children and remoter issue and next of kin of the person or persons names in the Schedule and spouses, widows, widowers, children and grandchildren of such parents, brothers, sisters, spouses, children and remoter issue and next of kin;…..

…notwithstanding the above, no person, trustee, partnership, or any other legal entity will be, become, remain or be appointed as a Beneficiary for the purposes of this deed if and while that person is, becomes, or remains as an excluded person.

A clause defines principal to mean;

The person named in the Schedule and the person or persons nominated by the person named in the Schedule in writing inter vivos or by will to succeed the person named in the Schedule during their lifetime or upon their death as the Principal…..

A clause contains a general power regarding the exclusion of beneficiaries;

Any person being a Beneficiary may by oral declaration recorded in the minutes or records of the Trustee or by written notice to the Trustee at any time exclude himself or herself from the class of beneficiaries and no further sums whether of Income or of capital shall be allocated or set aside or paid to or otherwise applied to or for the benefit of such person provided however that any such notice shall not affect the beneficial entitlement to any amount set aside for such Beneficiary or amount held in trust for such Beneficiary prior to the date of such notice.

The trust has four beneficiaries which consist of two siblings and their partners; B & D, C & E. The schedule also lists a company as a beneficiary.

The trust holds a commercial property asset of which it has sold a share of privately. Due to the sale of the commercial asset, two of the four beneficiaries have requested to be removed as beneficiaries.

The trustee and remaining beneficiaries will remained unchanged. The current Appointer is C and he will be replaced by D.

The trustee wishes to confirm the request by two of the beneficiaries to be excluded will not result in a trust resettlement.

Reasons for decision

Changes to an existing trust may have important taxation implications. In particular, section 104-55 of the ITAA 1997 states a capital gains tax (CGT) event occurs where a trust is created over a CGT asset.

The Creation of a new trust - Statement of Principles August 2011 (Statement of Principles) outlines the Commissioner's view on changes to trusts, and the resettlement of trusts.

The Statement of Principles makes it clear that a change to the essential nature and character of the original trust relationship creates a new trust. The Statement of Principles lists a number of changes that may result in the creation of a new trust.

They include:

Any change in beneficial interests in trust property.

· A new class of beneficial interest (whether introduced or altered).

· A possible redefinition of the beneficiary class.

· Changes in the terms of the trust or the rights or obligations of the trustee.

· Changes in the nature or features of trust property.

· Additions of property which could amount to a new and separate settlement.

· Depletion of the trust property.

· A change in the termination date of the trust.

· A change to the trust that is not contemplated by the terms of the original trust.

· A change in the essential nature and purpose of the trust.

· A merger of two or more trusts or a splitting of a trust into two or more trusts.

Depending on their nature, extent, and combination with other indicators, these changes may amount to a mere variation of a continuing trust. Alternatively, they may amount to a fundamental change in the essential nature and character of the trust relationship. A fundamental change means the original trust is brought to an end, and/or a new trust created.

The Statement of Principles highlights the creation of a new trust will depend on the terms of the original trust, and on the powers of the trustee. In addition, the original intentions of the settlor must be considered.

If the changes result in a newly created trust estate, CGT event E1 will occur over the trust's property.

Redefinition of beneficiary classes

Part 5.1 of the Statement of Principles discusses the addition or removal of beneficiaries.

The identity of the trust's beneficiaries is an essential element of the trust obligation and relationship. The Statement of Principles considers a change which amounts to a redefinition of the membership class or classes would terminate the original trust. In contrast, a mere change to the membership of a continuing beneficiary class is consistent with a continuing trust.

The Statement of Principles provides an example of how the changing membership of a continuing class affects a trust. Example 5.1.1 states '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.

The ATO will normally accept there has only been 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 could be reasonably inferred that the trust was intended to benefit, and

· 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 this case, two of the primary beneficiaries have exercised a general power under a clause of the trust deed to exclude themselves as beneficiaries of the trust. Any beneficiary is able to exclude him or herself from the class of beneficiaries at any time. This change does not terminate the trust as it is only a change in the membership of a continuing class of beneficiary.

Change of principal

According to a clause of the trust deed the principal is defined as the person named in the Schedule and also the person who is nominated by the principal during their lifetime as their replacement. The current principal is C will be replaced by D who is within the family group.

It is considered that the replacement of the principal will not result in the creation of a new trust as there is no change to the control of the trust and the appointer is within the same family group. 

A change in the essential nature and purpose of the trust.

These changes do not change the essential elements of the trust. The fundamental intention and character of the original trust are not changed. In addition, the class of beneficiaries are not changed, merely an election by two beneficiaries to be removed.

The changes are a mere variation of a continuing trust, and do not result in a trust resettlement. This means there are no CGT implications under section 104-55 of the ITAA 1997.