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Trust Deeds

Wills & Probate

The recent Bamford decision has prompted many to review their existing trust deeds and to seek to amend them to ensure that the trust deed complies with the High Court’s decision in Bamford v The Commissioner of Taxation.

In a recent example, a trust deed required a definition of income to be inserted and further specific provisions to ensure that the trustee would be able to stream franked dividends and capital gains. The trustee was advised by an external party that streaming would allow the trustee to distribute all the capital gains to one beneficiary, all the franked dividends to another and all other income (interest, rent and so on) to a third.

In addition, the trust, which was established in 1989, owns a block of residential units in Sydney and a large share portfolio.

To distribute all capital gain to a beneficiary, in most cases a trust deed needs to contain a clause giving the trustee the power to make capital distributions to beneficiaries.

This trust deed contained no definition of income, no income streaming clause and no capital distribution clause, but the trust deed did include a clause which gave the trustee the power to amend the deed in any way it chooses. Further, the trust was to vest when the settlor’s youngest grandchild turned 30 and at that time the capital was to be distributed to the settlor’s grandchildren equally.

The trust deed was amended so that the following was now included in the trust deed:-

1. A definition of income;

2. An income streaming clause; and

3. A clause giving the trustee the power to distribute capital to any beneficiary.

Despite the intention of the trustee, the ATO’s view in its Statement of Principles, was that the trust had been resettled due to the addition of the capital distribution power.

Generally, the addition of a definition of income would not result in a trust being resettled.  In its Statement of Principles, the ATO states, “Although inserting or varying an income definition may materially change the rights of beneficiaries, it may not in itself alter the essential nature and character of the trust relationship so as to result in a new trust estate.”

The ATO will accept that no new trust estate arises where, in the absence of other factors:

1. It can be reasonably concluded that the purpose and effect of the new definition is to clarify rather than significantly redefine entitlements to income and capital;

2. Where there is a significant change in respect of entitlements, it is between the rights of a single beneficiary or class or beneficiary, rather than between different beneficiaries or classes of beneficiaries.

Similarly, the addition of a power to stream income is unlikely to result in a trust being resettled as it is a procedural change which will not substantially alter the rights of beneficiaries in respect of trust property.

However, the addition of a power to distribute capital before the vesting date is likely to amount to a resettlement.

The terms of this trust suggested that the settlor, by not including a power to distribute capital, intended that the trust capital would be preserved until the vesting date and then passed to his grandchildren.

Inserting a power to distribute capital, in the ATO’s view, changed the essential nature and character of the original trust relationship and therefore created a new trust.

As the trust is deemed to have disposed all of its assets at market value the unrealised capital gains will become taxable.

This example highlights the need to carefully consider all options before proceeding to amend your trust deed. Amendments to trust deeds must be drafted with extreme care and with reference to both the ATO’s and the OSR’s views on resettlement of trusts.

Please contact Sheena Vinden, Director if you require further assistance.