The Commissioner issued Draft Determination TD 2012/D4 on 13 June 2012. This is the latest statement on the vexed question of what variations to the terms of trusts give rise to a resettlement. This welcome move by the Commissioner provides much greater certainty for advisers and taxpayers. Further, the Commissioner has finally recognised the correct position in law as set out in Clark’s case (discussed in the Tax law report in the April/May 2012 issue of Public Accountant). The document Creation of a New Trust – Statement of Principles (SOP), issued by the Commissioner in 1999 and revised in 2001, was withdrawn in April 2012.
Invariably, the Commissioner’s position as set out in the SOP meant that for many advisers there was a fear that varying trusts would give rise to Capital Gains Tax (CGT) consequences. As recognised by the Commissioner, the decision in Clark’s case and the High Court’s refusal to hear the appeal meant that the position as set out in the SOP was untenable.
The Commissioner accepts that, following Clark’s case, for recoupment of trust losses and more generally (including whether CGT Event E1 arises), where there is no loss of continuity of trust property and trust membership and where variations to trusts are made in accordance with the proper exercise of a power of variation or amendment in the deed, such variation will not have the result of resettling the trust. The key issue is that the variation must be supported by a power to make the variation in the trust deed.
The examples in the draft determination clearly highlight that, provided there is a power to vary the terms of the trust deed and a variation is made in accordance with that power, variations to expand or narrow the class of beneficiaries, alter investment powers, redefine trust income and provide streaming powers will not give rise to a resettlement. Many other variations may be made that also do not give rise to a resettlement.
Taxation of trust reforms
On 30 July 2012, the Government announced that the new rules for the taxation of trust income will commence on 1 July 2014 instead of 1 July 2013. The start date for the new tax system for managed investment trusts has also been set at 1 July 2014.
The Government also issued a discussion paper titled A more workable approach for fixed trusts. Tax laws, such as the trust loss rules, make a distinction between fixed trusts and non-fixed trusts. Many advisers have incorrectly assumed that unit trusts are fixed trusts, but, as the Colonial First State case showed, the fixed trust as defined in tax law is a very narrow species of trust, and trusts that many consider to be fixed trusts are not so.
The fixed trust distinction is very important for trust loss rules and non-arm’s length income of superannuation funds, among other things. A statutory definition is long overdue as it will give taxpayers and advisers greater certainty. At present, taxpayers can only rely on the Commissioner’s discretion to treat a trust as a fixed trust. Advisers should keep abreast of the reforms, as taxation of trusts is a very complicated area of law.
