Trust resettlement scares many, but is actually quite rare to occur.
Trust Resettlement
While the ATO’s Statement of Principles was alive and kicking, trust resettlement used to be a real problem. But since the Clark case in 2011, resettlement is no longer the fiery beast it once was.
Here is what we learned but please listen in as Emily explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Change
For trust resettlements to occur, something must have changed. Something so drastic that a new trust is created. So change is the trigger for a resettlement, but how much and in what respect, that is the question.
Commercial Nominees
It all started in 2001 with Commercial Nominees. In response to this court case, the ATO released its Statement of Principles. And this statement declared that a resettlement would occur when,
‘there was a ‘fundamental change’ to the trust relationship and that a change in the ‘essential nature and character’ of the trust relationship can result in the creation of a new trust.’
And then it went on to say that even some relatively minor changes might trigger a resettlement. That got everybody spooked. And for 10 long years, resettlement was a real issue.
Clark
But then finally – in 2011 – came the Clark case. In Clark, members and property of the trust completely changed and yet, the court ruled that there was no resettlement.
That blew the ATO’s Statement of Principles out of the water and the ATO had to admit defeat. They withdrew their statement of principles, conceded that this approach was no longer sustainable and confirmed that Clark was now the correct test.
Continuity
Continuity is key. As long as you have continuity of the trust’s essential features, there is no resettlement. Essential features are the
1 – Terms of the Trust Deed,
2 – Trust property and
3 – Members of the trust.
As long as these three continue, there is no resettlement.
1 – Terms of the Trust Deed
If you want to change the terms of a trust, you can do so without triggering a resettlement as long as the trustee acts within its powers or is approved by the court. The ATO amended TD 2012/21 accordingly.
A trust deed can only be amended with an express power to do so. Where a trust deed contemplates a change and the correct procedures in making the change are followed, then there is no resettlement as Clark showed.
2 – Trust Property
If the trustee applies a separate charter of rights and obligations to a particular asset, then this might trigger a resettlement.
A separate charter of rights and obligations for an asset means that this asset has been settled on terms of a different trust.
3 – Members
Continuity of members doesn’t mean that the members need to be always the same. It just means that you can always determine the members as per the rules listed in the deed.
So if the trust deed lists Peter Smith and his descendants, then even as Peter Smith dies and now great-grandchildren are born, there is no change in membership.
Tax
Resettlement is all about tax. It is a CGT event that triggers capital gains tax. In addition, you lose any carry-forward losses. And you might incur stamp duty upon transfer of dutiable property. That is why a resettlement is so frightening.
MORE
Small Business CGT Concession Overview
Disclaimer: Tax Talks does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
Liability limited by a scheme approved under Professional Standards Legislation.