Whenever a trust is being amended, it is important to consider whether the amendment might result in a resettlement of the trust for tax purposes.

If a trust is resettled, then:

• all assets are treated as having been disposed of by the original trust and settled on the new trust (i.e. CGT event E1 occurs)
• any losses in the existing trust are forgone and cannot be carried forward to offset income in the ’new’ trust.

Trust resettlement has been an area of significant case law and Tax Office scrutiny over the last 15 years and it is useful to understand developments over that era, in order to analyse resettlement risks that exist today.

In brief, the key decisions and rulings regarding resettlement are:

• FCT v Commercial Nominees (2001) 75 ALJR 1172. This case involved substantial amendments to the trust deed for a defined benefit superannuation fund to change it to an accumulation fund.  The Tax Office argued that the changes constituted a resettlement of the trust, however the High Court found in favour of the taxpayer and held that as there had been ‘continuity’ of the trust, a resettlement had not occurred;
• The Tax office responded to the Commercial Nominees decision by issuing its ‘Statement of Principles’ (SOP) regarding trust resettlement. The Tax Office contended in the SOP that the principles from Commercial Nominees only applied to superannuation funds and did not apply to trusts more widely, although it did concede that some common variations (such as the extension of a vesting date) would not constitute a resettlement;
• FCT v Clark (2011) 190 FCR 298. This case involved amendments to a unit trust over several years which included changes to the trustee, beneficiaries and trust property.  The Tax Office argued that the amendments constituted a resettlement (and sought to disallow access to trust losses).  Again, the full Federal Court found in favour of the taxpayer and held that where there was a continuum in relation to the terms of the trust deed, the trust property and the membership of the trust, a resettlement would not arise even where changes to the deed, property or membership occurred over time;
• The Tax Office responded to Clark by withdrawing the SOP and issuing Taxation Determination 2012/21 (TD 2012/21). TD 2012/21 acknowledges that the addition or removal of discretionary beneficiaries, insertion of new powers and other administrative variations generally will not constitute a resettlement;
• While TD 2012/21 appears to adopt a more reasonable view of resettlements, the Tax Office has caused further controversy by releasing draft Taxation Determination 2019/14 (TD 2019/14) in relation to trust splitting arrangements. The Tax office contends in TD 2019/14 that certain trust splitting arrangements constitute a resettlement of the trust and adopts a line of argument which implies that transactions as simple as a mere change of trustee may also create a resettlement risk.

As the cases and rulings above highlight, the resettlement implications of amending the terms of a trust need to be carefully considered.

For further information in relation to trust amendments or tax resettlements, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au.

• clover law
• tax
• Tax resettlements