Trust Resettlement Series: Amending the trust deed

By Mark Peters

Resettlement risk continues to be one of the most significant risks that trustees and beneficiaries need to manage in the administration of trusts of any kind. The duty and tax consequences of an inadvertent resettlement of some or all of the trust property on new trusts are manifold, including:

• declaration of trust duty on the dutiable value of the property resettled;
• transfer duty or trust acquisition/surrender duty on the dutiable value of the property resettled; and
• capital gains tax (CGT) on creating a trust over a CGT asset (E1) or transferring a CGT asset to a trust (E2).

Dixon J’s comment in Buzza v Comptroller of Stamps (VIC)^[1] that “[i]t is notoriously difficult to define a settlement, but that does not mean that it is difficult to recognise one” continues to resonate today; however the ever increasing complexity of commercial transaction involving trusts means that it is no longer so simple to recognise. In the modern trust context where one often sees a “churn in the composition of [the trust’s] beneficiaries, and in the property administered”^[2] some of the typical indicators of resettlement no longer hold.

That being said, if identified early, resettlement risk can be managed through appropriate documentation. To that end, this is the first of a series of articles on resettlement addressing three of the common questions that arise:

• when is a variation to the trust deed pursuant to a power of amendment likely to give rise to a resettlement;
• what are the resettlement risks associated with transactions that do not vary the trust deed; and
• what to do if a resettlement has occurred or may have occurred.

This article addresses the first of those questions.

Summary

We regularly advise listed and unlisted funds, superannuation trusts, private trusts and trustees generally in relation to amending trust deeds and resettlement risk.

When seeking to amend a trust deed, a prudent trustee will seek advice on whether the proposed amendment:

1. is within the scope of the amending power;
2. goes against the three indicia set down by the High Court for confirming that a resettlement has not occurred; and
3. is appropriately worded so as to not inadvertently exercise some other power under the trust deed or re-declare the trust.

Through seeking advice on these three issues, trustees and beneficiaries can be confident that no unintended tax or duty issues arise.

What is a trust resettlement?

In substance, a resettlement at general law occurs where property which was the subject of one trust becomes the subject of another trust such that there is a new charter of future rights and obligations in respect of that property.^[3]

In Commercial Nominees HC^[4] the High Court in dealing with whether a complying superannuation fund evidenced the necessary continuity in order to claim a deduction for past tax losses indicated that an assessment of three indicia was required:^[5]

• constitution of the trusts under the original instrument/settlement;
• trust property; and
• beneficiaries of the trust.

Since Commercial Nominees HC it has become accepted that those indicia are of broader application and provide the foundation for guiding the enquiry into whether a particular transaction / amendment effects a resettlement of the trust.^[6]

Therefore, the key question when it comes to assessing resettlement risk is whether there has been such an interference with or change to one or more of the indicia identified above so as to lead to the conclusion that the “property [does not] remain subject to the same trusts as it did before”.^[7]

Varying trust pursuant to a power of amendment

Resettlement issues often arise where the trustee, whether by itself or in concert with the beneficiaries and / or manager, seeks to amend the terms of the trust. Absent an express power of amendment, subject to certain statutory nuances,^[8] the terms of a trust cannot be changed (without, for example, creating a new trust or being in breach of trust).

Assuming a trust instrument includes a power of amendment, there are two steps in determining whether a proposed amendment poses a resettlement risk:

1. it must be determined whether the proposed amendment is within the scope of the amending power; and
2. the effect of the amendment must be analysed by reference to the indicia enunciated by the High Court in Commercial Nominees HC (see trust resettlement above).

(a) Construing the power of amendment

An amendment will only be effective if it is made within the scope of the power of amendment.^[9] Where a purported amendment is beyond power, a trustee who acts in reliance on the purportedly amended instrument will potentially commit a breach of trust or otherwise support a conclusion that some other source of power is being relied on. That is, are the trustee’s actions best explained through the implied exercise of a power under the trust deed, for example, that a new trust has been created.^[10]

To determine the scope of a power of amendment one must have regard to:

• • its terms and whether it expressly discloses the purpose of, or restraints on, its use; and
  • the trust instrument as a whole and the underlying purpose of the trust.

Putting express restraints to the side, the classic exposition on whether an amendment is inconsistent the trust, and as a result cannot be regarded as variation to the trust, is that of Megarry J in Re Ball’s Settlement Trusts (at 442):^[11]

“If an arrangement changes the whole substratum of the trust, then it may well be that it cannot be regarded merely as varying that trust.”

Most modern trust instruments are drafted with deliberately broad amendment power so that it can be said the “evident purpose of the power is to ensure maximum flexibility”; where that is the evident purpose, it can be “impossible to locate any substratum at all”.^[12] Where that is the case, it is likely that almost any amendment will be regarded as being within the scope of the power of amendment (subject to the usual caveats regarding fraud on power and breach of duty).

However, that rule is not fixed and it would be prudent for a trustee to seek legal advice based on the trust instrument as whole, before amending the trust deed. Jenkins v Ellett^[13] is an example where an expansive amendment power could not overcome the implied intention of the settlor to limit the amendment power as found by an analysis of the balance of the terms of the trust deed.^[14]

(b) Analysing the proposed amendment

Assuming that a proposed amendment is validly made pursuant to a power of amendment, there will ordinarily be no resettlement as the change in the trust is referable to, and derived from, the terms of the original trust instrument and as a result is “traceable to the settlor’s intention as communicated [in the trust instrument]”.^[15]

However, this step only addresses the first of the three indicia identified by the High Court in Commercial Nominees HC. The Australia Taxation Office and state revenue authorities will look beyond this; for example in Tax Determination 2012/21 the Federal Commissioner of Taxation states (at [27]):

“Even in instances where a pre-existing trust does not terminate, it may be the case that assets held originally as part of the trust property commence to be held under a separate charter of obligations as a result of a change to the terms of the trust - whether by exercise of a power under the deed (including a power to amend) or court approved variation - such as to lead to the conclusion that those assets are now held on terms of a distinct (that is, different) trust.” (emphasis added)

In order to overcome any resettlement risk the precise terms and effect of the proposed amendment must be analysed to ensure that it does not bring about a material change in the relationship between the trustee, the beneficiaries and the trust property. In Federal Commissioner of Taxation v Clark^[16] the Court considered the kind of changes which would be sufficient to constitute a resettlement. The Court held that provided a “continuum of [trust] property and [beneficiaries]” could be established such that at no time there was severance of the trustee, the beneficiary and trust property relationship, no resettlement could arise.^[17]

However, the situation may not always be so simple for duty purposes as, even if no resettlement has occurred at general law, the interference with trust property or the rights of beneficiaries could give rise to a dutiable transaction. See, for example, the discussion in New South Wales Revenue Ruling DUT017.

Common pitfalls

The discussion above demonstrates that, as with all matters where taxation/duty issues intersect with the management of trusts, there is substantial complexity and the cost of mistakes when amending a trust instrument can be significant.

The common pitfalls that we see include;

• ineffective amendments as the scope of the amending power has not been properly understood;
• inadvertently re-declaring the trust by paying insufficient attention to the precise wording used. For example, many powers of amendment require the amendment to be carried out by deed of amendment; that deed should not include any language that could be construed as creating a new trust. This issue could be of greater significance for New South Wales where new law impose duty on a mere acknowledgment of an existing trust (see our note here and the text of the new s 8AA in the Amending Act);
• momentarily causing the trust to collapse (thereby causing a severance of the trustee, the beneficiary and trust property relationship) by not properly analysing the consequences of an amendment; and
• unintentionally exercising a general power of appointment under the trust instrument to create new trusts. Many amendment powers appears in the same clause as a general power for the trustee to create new trusts. Careful wording must be used to ensure that only the amendment power is exercised in those cases.

It is important to seek advice before amending the trust deed to ensure that no inadvertent resettlement occurs, and that any risk can be appropriately managed whether through refined drafting or adopting a different means to achieve the commercial objective.

For more information, please contact Jinny Chaimungkalanont, Partner, Mark Peters, Solicitor, or your usual Herbert Smith Freehills contact.

[1] (1951) 83 CLR 286 at 300.

[2] Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation (2018) 264 FCR 587 at [205] (Steward J).

[3] Davidson (Collector of Imposts) v Chernside (1908) 7 CLR 324 at 340-341 (Griffiths CJ).

[4] Federal Commissioner of Taxation v Commercial Nominees of Australia [2001] HCA 33; 179 ALR 655 (Commercial Nominees HC).

[5] Commercial Nominees HC at [36] (the Court).

[6]  Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 at [36] (Dowsett J); [79]ff (Edmonds and Gordon JJ); Re McGowan & Valentini Trusts [2021] VSC 154 at [129] (Macaulay J).

[7] Wedge v Acting Comptroller of Stamps (Vic) (1941) 64 CLR 75 at 79 (Rich ACJ), 80 (Starke J), 82 (Williams J).

[8] For example, s 601GC of the Corporations Act 2001 (Cth) provides that the constitution of a registered managed investment scheme may be amended either by special resolution of the members or unilaterally by the responsible entity if satisfied that the amendment will not adversely affect members’ rights. See also the power conferred on the courts under the various trustee acts. See discussion in Re Dion Investments Pty Ltd (2014) 87 NSWLR 753.

[9] See discussion in Pitt v Holt; Futter v Futter [2012] Ch 132 at [96] (Lloyd LJ).

[10] See example - Dagenmont Pty Ltd v Lugton [2007] QSC 272 at [25]-[27] where it was held that an agreement between a trustee and a beneficiary constituted an implied exercise of the general power of appointment under the trust despite the agreement not purporting to be founded on that power. See also discussion in Darrell Barnett, “Resettlement: finding the new charter of rights” (2006) 80(4) ALJ 254.

[11] [1968] 2 All ER 438.

[12] Kearns and Another v Hill and Others (1990) 21 NSWLR 107 at 110-111 (Meagher JA; Clarke and Mahoney JJA agreeing). See also Re McGowan & Valentini Trusts [2021] VSC 154 at [128] (Macaulay J).

[13] [2007] QSC 154.

[14] Jenkins v Ellett [2007] QSC 154 at [17] (Douglas J). Cf - Andtrust v Andreatta [2015] NSWSC 38 (McDougall J).

[15] Re Dion Investments Pty Ltd (2014) 87 NSWLR 753 at [45] (Barrett JA; Beazley P and Gleeson JA agreeing); Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 at [78] (Edmonds and Gordon JJ); Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (1999) 167 ALR 147 at [56] (Lee, Emmett and Gyles JJ).

[16] (2011) 190 FCR 206.

[17] Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 at [87] (Edmonds and Gordon JJ).