Following the Full Federal Court decision in Commissioner of Taxation v Clark and the refusal by the High Court to grant special leave to appeal, a draft public taxation determination has been issued on the question of trust resettlements.
It appears that the Commissioner of Taxation has, albeit begrudgingly given the tone of the explanation of the determination and the qualifications it seeks to impose, finally accepted defeat on the trust resettlement issue. Prior to this there was no public taxation ruling on the issue of trust resettlements. Rather the Commissioner relied upon a published Statement of Principles paper which, with respect, was most unhelpful and took an interpretation of the High Court decision in Federal Commissioner of Taxation v. Commercial Nominees of Australia Ltd that arguably was an incorrect one.
In Clark, the majority of the Full Federal Court rejected the Commissioner’s arguments based on his interpretation of the High Court in Commercial Nominees.
It is clear from the decision in Clark, relying upon the High Court decision in Commercial Nominees, held that the trust will be the same trust provided that there is a continuum of property and membership, which can be identified at any time, even if it is different from time to time and that there is no severance of one or both leading to the termination of the trust. In addition any amendment of the trust obligations relating to such trust property which is made in accordance with any power conferred by the trust instrument creating the obligations will not cause there to be a change in the identity of the trust.
Amongst other events, a capital gain or capital loss may be made in the following circumstances:
- if you create a trust over a CGT asset by declaration or settlement
- if you transfer a CGT asset to an existing trust.
Either or both of these CGT events may occur where there is a trust resettlement.
In the draft determination the Commissioner states that neither of these CGT events will occur if, pursuant to a valid exercise of a power contained within the trust’s constituent document, the terms of the trust are changed unless:
- the amendment causes the trust to terminate for trust law purposes, or Trust resettlements
- the effect of the amendment is to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.
It is not clear what the Commissioner means by the second exception. This might indicate that he is still clinging to hope that he can resurrect his trust resettlement argument.
From the examples he provides it is clear that the following types of amendments that are made in accordance with the amendment power will not cause a trust resettlement:
- addition of new entities to class of objects of a discretionary trust
- expansion of power to invest
- addition of a definition of income and insertion of a power to stream.
On the other hand where the terms of a discretionary trust enable the trustee to declare that it holds a particular asset of the trust for a particular beneficiary or class of beneficiaries and the trustee exercises that power then there will be the creation of a new trust over that particular property. If this is all the Commissioner means by the second exception then his reservation would be correct because in this example there clearly is a new trust created.