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Trust Deeds

Wills & Probate

There can be pitfalls in amending trust deeds – both in terms of trustee liability to beneficiaries where a relevant power to act is missing from a deed and in terms of amendments triggering exposure to capital gains tax. This is a technical area of the law.

While some simple amendments may be made to a trust deed using a commonly included variation power, there are often issues or actions sought about which the trust deed is silent, and which, although seemingly advantageous to the beneficiaries, cannot be carried out by the trustee. S.81 Trustee Act 1925 (NSW) permits an application to the Supreme Court for the court to approve exercise of a power if that would be advantageous for the beneficiaries, and a recent case has highlighted the benefits of such an application.

In Barry v Borlas Pty Limited & Ors the relevant trust was created by a deed in June 1977 by Mr Barry for the benefit of his wife, children and grandchildren as primary beneficiaries. The vesting day was specified as 31 December 2026 (30 years earlier than the maximum period permitted), and at that date the trust fund was to vest in such of the primary beneficiaries and in such shares as the trustee might determine. There were many valuable assets in the trust fund including farming properties.  Vesting would require sale of those assets triggering significant tax consequences, as well as not being considered in the best interests of the family. There was no power of variation in the trust deed. Dealing with an application pursuant to s.81 Justice White was satisfied that an amendment of the trust to extend the vesting date would be advantageous to the beneficiaries as it was consistent with and would advance the objectives of the trust including providing for Mr Barry’s children and grandchildren well into the future. It was also relevant that the beneficiaries supported the proposal and thus the court exercised the discretion allowed by s.81 to extend the vesting date.

However, before applying to the Court for an order to extend the vesting date, it is also important to consider whether or not that extension may give rise to a resettlement (in effect, to a new trust) which could then have capital gains tax and stamp duty implications. Those implications should be clarified before taking any action to vary the trust, as the tax or duty, if payable, would be payable from the date of the variation (even if liability was not ascertained or assessed until disposal of the asset many years after the variation).  Unfortunately, although in 2001 the Australian Taxation Office (ATO) issued a Statement of Principles which dealt with its views on what constitutes a resettlement, that has now been withdrawn and until recently there has been no public document as to the ATO’s viewpoint on resettlement.

The Statement of Principles is still useful as a general guide and consideration should also be given to the content of private rulings.  Private rulings, by their nature, deal specifically with particular trust deeds and therefore cannot be utilised as precedents, but they are a useful indication of the ATO view.  Those views have seemed to go either way; sometimes where an extension of a vesting date expands the identity of eligible beneficiaries the ATO has viewed that as changing the beneficial rights of the existing beneficiaries and thus being a resettlement, but it has also in other matters looked at the intention of the original settlor at the time the Trust was established. If the intention was apparently to benefit defined beneficiaries in a particular family, then the ATO has ruled that the trust was for the general benefit of a family group and provided it was not being used as a vehicle for a particular project or to hold a particular asset then the extension of the date (and the possible enlarging and variation of the class of beneficiaries, but within the same family) was ruled to be maintaining the beneficial interest of the beneficiaries as a class. Those extensions were not seen to be a resettlement.

The effect of these varied rulings has been to create significant differences between “trust law” and the ATO. However, the consequences of some common amendments are now somewhat clearer with the publication of draft Tax Determination TD 2012/D4. In essence this states that the ATO will consider that certain amendments to a trust deed pursuant to a valid exercise of a power contained within the trust constituent document will not trigger CGT event E1 or E2.  Examples given by the ATO as being outside the scope of E1 or E2 include:

  • Addition of new entities to a class of objects;
  • Expansion of a power to invest; and
  • Addition of a definition of income and power to stream.

However, even where a trustee has powers to declare that particular assets of a trust are to be held exclusively for one of the trust objects to the exclusion of other objects, an amendment made in pursuance of such power, such as that a trustee will commence to hold one of several assets exclusively for one of the objects of the trust whilst not terminating the trust, will be regarded as a variation of the trust obligation so as to trigger event E1.

It would seem arguable (but this has not been stated by the ATO) that an amendment to a trust deed pursuant to an order under s.81 Trustee Act will also be similarly regarded, even though not being under a power of the constituent deed, since the effect of the Court’s discretion is to enlarge or enable exercise of a power by the trustee (which takes its powers from the constituent deed) and that will then be an exercise of power under the constituent deed.

Whilst resettlement issues must be considered whenever any proposal is under consideration in regard to an amendment of a trust, certain amendments are now able to be made with a better degree of certainty as to the tax consequences.

If you have any queries regarding the amendment of trusts, please contact Anne Goodrick on (02) 9411 4466 or at:  agoodrick@avlawyers.com.au.