A Practical Perspective on Resettlements

Earlier posts have looked at various aspects of the Clark decision and trust resettlements – see -

Statement of principles to be (finally) amended (?)

ATO releases draft determination on trust resettlements

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to resettlements in a ‘vidcast’ at the following link - https://vimeo.com/145339753

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

If you go back to Clark as a benchmark, that decision followed a whole thread of decisions starting right back to Commercial Nominees, which was a superannuation resettlement case.

There was significant white noise around that decision from the Tax Office’s perspective, because they were arguing that the principles about amending trust instruments out of Commercial Nominees were really only available for superannuation funds. Therefore while, a super fund could amend its deed significantly, that didn't apply to any other form of trust.

Clark, somewhat interestingly, was a case that involved a unit trust. But ultimately the Tax Office following that case was comfortable that the principles, as initially confirmed by the High Court in Commercial Nominees, did in fact apply to any form of trust.

Even though Clark involved a unit trust, there were really quite radical changes to the way in which the trust instrument was crafted. There were changes to the unitholders, the trusteeship, and the way in which the trust instrument actually worked.

Despite all of those changes, the court held that the trust was an ongoing trust and there had been no tax event, that is there had been no resettlement, which would have notionally meant that all of the assets of the trust were disposed of from the original trust and reacquired by the new trust, effectively creating a tax event.

What Clark in theory should allow in any trust splitting arrangement, is permit amendments to whatever trust instrument is involved, to allow whatever is desired to be achieved from a trust splitting perspective.

Statement of principles to be (finally) amended (?)

Many readers will be aware of the full Federal Court decision earlier this year of Clark.

In that case, the Court largely reiterated the decision from 10 years ago in Commercial Nominees that, generally speaking, a resettlement of a trust for tax purposes can only happen in a very limited range of circumstances.

At the end of last week, the Tax Office released a decision impact statement in relation to the Clark decision and has, finally, accepted that the position set out in the case may mean that the 'Creation of a New Trust – Statement of Principles' last updated in August 2001, may need to be changed.

A previous post links the Statement of Principles for those that have not seen it, and in that document, the Tax Office suggests that there are in fact quite a large range of situations where a trust may be resettled for tax purposes.

It is hoped that the Tax Office can prioritise providing some clarity around their position on trust resettlements, particularly given that most specialist advisers in this area believe that, in accordance with Commercial Nominees and Clark, significant changes should be able to be made to trust deeds without triggering a resettlement.

For those interested in reviewing the complete decision impact statement, the relevant link is as follows – http://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2FQUD1of2010%2F00001%22

Until next week.