ATO reminder – read the deed

Following on from the recent posts about the ATO draft determination on resettlements (TD2012/D4), today's post is in effect a further reminder of an earlier post that focused on the catch phrase 'Read the Deed', again with thanks to co View Legal director Tara Lucke.

One of the key themes in the recent ATO determination is that a trust variation must be made within the scope of the variation power in the trust deed.

If a purported variation is made outside the scope of the particular variation power, the ATO has provided guidance that this may result in the termination of a trust (i.e. a resettlement for CGT purposes).

We are constantly encountering deeds that have significant limitations on the variation power, particularly with the regular amendments we are doing for clients of accounting firms to ensure that trust deeds are up-to-date for all recent changes in law.

Next week’s post will focus on some of the common variation prohibitions we come across.

Until next week.

More comments on ATO resettlements determination

As mentioned in the last post, the ATO has released a draft determination, TD2012/D4, in relation to resettlements.

With particular thanks to View Legal director Tara Lucke, today’s post focuses on the interplay of the draft determination with the ATO’s previous published position on resettlements – the Statement of Principles.

In summary, according to the determination:

1.        The ATO has withdrawn its Statement of Principles as of April 2012.

2.        The ATO accepts that although the Clark and Commercial Nominee cases were decided in perhaps slightly different contexts to many of the issues dealt with in the Statement of Principles, the conclusions reached in each of those two cases do have a broader application.

3.        Provided an amendment to a trust is valid at trust law and is in accordance with the terms of the trust instrument, CGT event E1 should not be triggered.

4.       The ATO will expect any deed of variation to be made in accordance with trust law principles and the particular requirements of the trust instrument in order for the amendment to be effective.

Until next week.

ATO releases draft determination on trust resettlements

Posts from last year looked at the Clark decision.  In that case, the court held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes.

As mentioned in last week’s post, the Tax Office has now released draft determination TD2012/D4 which provides some further clarity around when the Tax Office will deem changes to a trust to amount to a capital gains tax event under CGT events E1 and E2 (i.e. a resettlement).

In broad terms, the Tax Office states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

A number of examples are provided, which give some guidance around issues such as changes of beneficiaries and update to address distribution of trust income.

Unfortunately, the examples provided are not particularly comprehensive and issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise) are not specifically addressed.

This said, the draft determination should provide a level of confidence that relatively significant changes to trust instruments can be made without adverse tax consequences, although it remains necessary to also consider the separate stamp duty and trust law implications of any such change.

A full copy of the draft determination is at the following link – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2012D4%2FNAT%2FATO%2F00001%22

Until next week.

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.

Lineal descendant trusts post Bamford

As touched on in a recent post, often 'lineal descendant trusts' will adopt a 'hybrid' approach whereby:

1) The capital is protected for lineal descendants.

2) The income may be distributed to a wide range of potential beneficiaries (including non lineal descendants).

We have seen a number of instances lately where trusts that were originally prepared along the lines outlined above where, following Bamford on the recent Government legislation concerning streaming, the client was wanting to redefine income and in particular allow capital gains to form part of the net income of the trust. While (as is the case in many of these areas) there are a number of competing arguments, there is a real risk that this kind of amendment to a 'hybrid' lineal descendant trust would amount to a resettlement for tax purposes.

For regular readers, you will recall that an earlier posting specifically mentions the Tax Office’s Statement of Principles and provides a link to that document.

Until next week.

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.