By Tom Walrut

On 24 October 2012, the ATO released Taxation Determination 2012/21 in response to the High Court refusing special leave to appeal the decision of Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark's Case).

Prior to the release of this new Taxation Determination, there was considerable uncertainty in respect of when an amendment to a Trust Deed caused a resettlement.

For stamp duty and capital gains tax purposes, a resettlement is treated as if the entire trust assets are transferred to a new trust thereby (usually) creating a significant tax liability.

The ATO has now confirmed its views that a resettlement will generally not occur:

  1. in most cases, where a Trust Deed is varied pursuant to a valid exercise of a power contained in the Trust Deed or by a Court Order (including by the addition of new beneficiaries and the removal of existing beneficiaries);
  2. where the terms of the trust are varied in a situation to expand the powers of investment for the trust (for example a trust established for the purposes of investing in the stock market by resolution, expands its purposes to invest in real property as well);
  3. where a Trust Deed is varied to insert a definition of net income, income characterisation clauses and Bamford prompted amendments.

Taxation Determination 2012/21 further provides examples of situations where the ATO will consider that a resettlement has occurred. These examples are generally limited to situations where the trust obligations that attach to trust assets change in such a manner that the assets have commenced to be held on the terms of a separate trust.

RevenueSA's position, as noted in its Revenue Ruling SDA003, is that "an instrument by which a trustee of a discretionary trust varies a Trust Deed to add a new beneficiary in respect of capital, that is a potential beneficial interest in relation to property subject to the trust, is chargeable with ad valorem duty on the net value of the trust property." This is in contrast to the ATO's position and it is yet to be seen whether RevenueSA will revise this position in light of Clark's Case and the Taxation Determination.

Notwithstanding that this new Taxation Determination is encouraging to taxpayers, we continue to recommend that caution should be exercised when considering amending a trust deed, and to do so only when necessary. This is particularly relevant given the legislation governing the taxation of trusts is set to be substantially rewritten and is intended to take effect from 1 July 2014.

The rewriting of the trust taxation provisions may make hastily made current year Trust Deed amendments superfluous as you may need to re-amend when the new provisions are enacted. We recommend adopting a wait and see approach before taking steps to amend a Trust Deed other than when necessary.

However where a trustee needs to stream income (capital gains or share dividends) in the current financial year and a streaming power is not currently contained in the Trust Deed, it is necessary to amend the Trust Deed to include this power. This is the most common amendment to Trust Deeds that we encounter and should be performed if the trustee requires the ability to stream income.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.