Monday, February 7, 2011

Trust resettlements

Following on from last week's post concerning the long awaited 'Colonial' decision, another decision released by the Federal Court in the last couple of weeks is of significant interest.

In a similar vein to the high profile tax cases last year of Bamford and Thomas, the taxpayer here was largely successful.

For those interested the full title of the case is - FCT v Clark [2011] FCAFC 5 (Full Federal Court; Dowsett, Edmonds and Gordon; 21 January 2011).

In brief terms, the key aspects of the decision (which was given by way of a 2 to 1 majority) were as follows:

1. What is required to constitute a resettlement (i.e. the disposal and reacquisition, for tax purposes, of all assets of a trust at market value) is significantly more than what the Tax Office has traditionally suggested, and indeed argued in this case;

2. The High Court decision of Commercial Nominees confirms that to avoid a resettlement occurring, there only needs to be a continuum of property and membership, that can be identified at any time, even if different from time to time;

3. The Commercial Nominees case, while it related to a superannuation fund, is relevant in relation to trusts more generally;

4. In the circumstances of this case the fact that there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years did not trigger a resettlement; and

5. Where a trust has been effectively deprived of all assets and then 're-endowed', a resettlement will probably occur.

Until next week.