One question we are commonly asked is whether family trust deeds need to be updated on a regular basis, in the same way that many SMSF deeds are routinely updated every 2-3 years.
While routine family trust deed updates are not as common as SMSF deed updates, trusts are subject to constantly evolving taxation laws and there have been a number of significant taxation changes over the last decade which have impacted on the provisions that would ordinarily need to be contained in a trust deed, to ensure the income of the trust can be treated in a tax effective manner.
For instance, some of the key legislative and case law developments over the last few decades which impact on the taxation treatment of trusts have included:
- the introduction of capital gains tax in 1985
- the High Court decision in Bamford v FCT [2010] HCA 10 (which was followed by the release of Taxation Determination TD2012/22 by the Tax Office) in relation to the interaction between sections 95 and 97 of the Tax Act 1936
- the passage of the Tax Laws Amendment (2011 Measures No. 5) Act 2011, which introduced new rules regarding the streaming of capital gains and dividends as separate classes of income
- the Tax Office’s decision in 2012 to remove administrative guidance which allowed trustees to make distribution resolutions after 30 June
- the introduction of foreign trust stamp duty and land tax surcharges by various jurisdictions, which impose additional costs on certain types of trust
As these changes have become law over time, advisers have been forced to decide whether to update trust deeds on a case-by-case basis, or to institute a deed update for all trust deeds they are involved with.
For instance, following the Bamford decision and legislative amendments in relation to the streaming of capital gains and dividends, many advisers chose to recommend that all of their clients update their trust deeds to reflect the changes to the law.
While the amendments may have only directly impacted a small proportion of their clients, these advisers took the view that it was better for all their client’s trusts to have broadly similar income distribution provisions, to minimise the risk of inappropriate trustee distribution resolutions being passed.
Conversely, other advisers have historically chosen to only recommend their clients amend their trust deed as a last resort, when a specific issue is identified.
Similar issues are now being faced in relation to the foreign trust stamp duty and land tax surcharges, which in some jurisdictions require additional provisions to be inserted into a trust deed expressly prohibiting foreign residents from being beneficiaries of the trust, to ensure the trust is not subject to the surcharge.
If you or your clients have questions in relation to discretionary deed updates, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au.
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