Recently we revisited a Tax Office private ruling in relation to a decision by the trustee of a discretionary trust to rectify a trust deed so it correctly reflected the intentions of the settlor at the time of establishing the trust some years earlier.
The exact ruling is Authorisation Number 37630. As usual if you would like a copy please contact me.
Critically, the ruling is based on the assumption that a court would in fact approve the rectification – a rectification requires a court to make an order to correct a trust instrument that, due to mistake, does not reflect the true intention of the parties.
The specific issue of concern was whether the rectification would create a new trust, or in other words, a resettlement, to be triggered.
The private ruling remains a very useful reminder of the usefulness of rectifications, even though it is from 2004 and therefore predates the substantial changes in approach about resettlements in 2012 of the Tax Office (see the following posts Statement of principles to be finally amended, ATO releases draft determination on trust resettlements, and More comments on ATO resettlements determination).
The ruling confirms that where a trust deed fails to accurately express the true agreement between the parties, equity will allow rectification of the document.
In particular, it was confirmed that:
‘The object of rectification is not to make a new contract for the parties or to alter the terms of an agreement, nor to rescind the existing contract it does not create new rights but to rectify the erroneous expression of agreements in documents' (see GE Dal Pont, DRC Chalmers - Equity and trusts in Australia and New Zealand).
Importantly, a rectification also has retrospective effect.
That is, a rectification is 'to be read as if it had been originally drawn in its rectified form' (see Craddock Bros v. Hunt [1923] 2 Ch 136.
As there is no change in the intended beneficial interest of the beneficiaries there are also no changes to the terms and conditions of the trust. Therefore, a rectification does not result in the creation of a new trust.
** For the trainspotters, ‘how does it feel’ is a line from the New Order song from 1983 ‘Blue Monday’ listen hear (sic):