The judgment in FCT v Clark and Anor and subsequent withdrawal of the Commissioner's Statement of Principles on 20 April 2012, created uncertainty on the ATO's view on resettlement of trusts. On 24 October 2012, the Commissioner released Taxation Determination TD 2012/21 confirming his position in relation to CGT events E1 and E2 and the creation of a trust over CGT assets. Some changes have been made from the previously released draft TD 2012/D4 in finalising this TD.Andrew O'Bryan and Emma Woolley, Partners, and William Moore, Lawyer, Hall & Wilcox
The take-home message from TD 2012/21 for practitioners is that:
While the TD provides some comfort on potential CGT events E1 and E2, uncertainties remain at a broader level. Clark's case concerned the continuity of a trust in the context of carry-forward losses. It is reasonable to assume that the ATO found it offensive that such fundamental changes occurred to the control and funding of that trust, yet the carry-forward losses were still available. It would not be surprising that, as part of the broader review of the taxation of trusts, Treasury introduces measures to prevent access to carry-forward losses in situations similar to Clark.
TD 2012/21 provides 4 examples. Only example 4 results in CGT event E1 occurring:
The TD provides assurance (in the context of CGT events E1 and E2) that the majority of amendments to trust deeds, where the amendment power is validly exercised, will not create a new trust over the trust assets. This includes changes to beneficiaries, insertion of income and streaming provisions, and extending the vesting date.
The common theme throughout the TD examples is that the amendments were valid exercises of a power of amendment. This highlights the importance of reviewing the terms of the trust deed, as some amendment powers are broad, whereas others are narrow and require specific steps be followed to be valid.
Trustees should be cautious where unusual amendments are being proposed to ensure that these do not cause trust assets to be held on a separate charter of rights and obligations . If trustees are unsure of the effect of a proposed amendment, or how an amendment power operates, they should seek advice before any proposed amendment is finalised.
It is also important to consider that the TD only provides guidance, and is limited to CGT events E1 and E2. Advice should always be sought to ensure there are no other taxation issues or stamp duty concerns that may arise from any proposed amendment.
The exercise of the amendment power will also become more important in light of proposed broad reforms to the taxation of trusts legislation that are expected to be introduced in the 2013-14 financial year.
Treasury's "Taxing trust income - options for reform" paper presents 2 alternative methods to reform the taxation of trusts. Both methods propose the following changes:
If these changes are legislated, it is likely that trust deeds without these powers will need to be amended to allow the trustee to take advantage of these powers. On the issue of amending trust deeds and trust resettlements, Treasury's paper noted:
"The Government is aware that decisions taken to change the taxation of trust income may lead users of trusts to alter their trust deeds. Such changes may lead to a resettlement of the trust estate, potentially triggering tax consequences at the federal level such as CGT, and stamp duty liabilities at the state level.
These issues will be considered further as part of the broader question of transitional relief when the final policy is settled by the Government. A number of factors will be relevant to determining whether relief might be appropriate, including, for example, the extent of any changes to the trust income tax provisions, and also whether those changes mandate or merely provide incentives to change trust deeds. In examining these issues, the Government will also consider the High Court's decision in Clark, in particular the appropriate parameters for 'continuity of the trust estate'."
It will be interesting to see what comes of the "transitional relief" and "continuity of the trust estate" comments.
Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:
You can read earlier ClearLaw articles on a wide range of trusts topics here.
 (2011) 79 ATR 550.
Paul is a Senior Associate in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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