The issue of resettlement of trusts is very topical as practitioners wrestle with income and capital definitions and streaming provisions in trust deeds following the Bamford decision and the new streaming rules.
In many cases, particularly with old trust deeds, amendments to the deed will be necessary to allow for flexible and effective tax management of the trust. The first question asked by practitioners is, Will the amendments give rise to a resettlement? The short answer is, in most cases, no.
In the context of varying a trust deed, resettlement means the creation of a new trust by reason of the variation. If the variation gives rise to a resettlement, the tax consequences can be far reaching, including triggering one or more CGT events and possible stamp duty liabilities, and loss of carry forward losses.
On 2 September 2011 the High Court of Australia refused the Commissioner’s application for special leave to appeal the Full Federal Court decision in Clark’s case because the Full Federal Court decision was not sufficiently doubtful to warrant leave being granted (see June/July 2011 Tax Report for a discussion of Clark’s case). No doubt the Commissioner’s Statement of Principles dealing with resettlements will have to be reviewed in light of the High Court’s refusal to grant special leave. Clark’s case gives clearer guidance on what constitutes a resettlement than the Commissioner’s Statement of Principles.
What we understand from Clark’s case is:
- The principles set out by the High Court in Commercial Nominees are not limited to superannuation funds but apply to trusts generally.
- The High Court in Commercial Nominees endorsed the criteria set out by the Full Federal Court in that case in determining the continuity of a trust.
- The general principles in determining the resettlement question are the continuity of trust property; of beneficiaries in the trust (even if they are not the same); and in trust obligations.
Provided a trust deed has sufficient variation powers to make amendments, variations to definitions of income and streaming provisions or the insertion of such provisions into the deed should not give rise to a resettlement.
Share trading – carrying on a business
Whether a business is carried on or not is often not given much attention as in many cases the answer is quite clear. In a share trading context the distinction is drawn between a trader of shares and an investor in shares. In the former case the shares are held as trading stock and purchases and sales are treated on revenue account. In the latter case shares are held to derive dividend income and for capital growth purposes. In a falling share market resulting from the GFC or some other financial crisis, the ATO is concerned that losses are not characterised as revenue losses when in fact they are capital losses.
The recent AAT decision in AAT Case [2011] AATA 545 highlights the factors taken into account in determining whether a share trading business is being carried on. It makes interesting reading as the use of technology such as smart phones, notebooks and computer tablets was considered in the decision.
The taxpayer in this case had time outside his other business commitments to trade in shares using a strategy of buying shares with a falling share price and selling them when the price rebounded. Significant losses were incurred as a result of the GFC and the strategy was revised by holding on to shares rather than crystallising significant losses.
The Tribunal found that:
- the taxpayer intended to make short-term profits
- the taxpayer was not engaged in a hobby or academic pursuit
- the share trading activities were on a relatively large scale
- the taxpayer had a business strategy even though it was not detailed or documented in a formal business plan
- the business was not overly complex, and
- it was operated in a businesslike manner.
Although the ATO may place much reliance on formal business plans and the maintenance of a business premise in determining whether a business is being carried on, this case challenges the importance of these factors by pointing out that the taxpayer made decisions on ‘gut instinct’ based on research and information gathered, and worked largely from a laptop and smart phone.
This case highlights that in the 21st century trading stock is not necessarily ‘widgets’; it can be shares and the business can be conducted from a telephone, portable computer, or computer tablet while sitting in the sun on the beach.
