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Choosing the right trust structure is an important step to effectively manage and administer wealth.
How To Choose The Right Trust Structure
In this episode Paul Mackenroth of Cleary Hoare in Brisbane will walk you through some of the options you have. Here is what we learned.
To listen while you drive, walk or work, just access the episode through a podcast app on your mobile phone.
Unit Trusts
In a unit trust the beneficiaries are the unit holders. The trust property starts with a subscription price or settlement sum.
The beneficial interest in the trust is divided into units. And the unit holders have a proprietary interest in income and capital.
But you need to watch out for three things. A return of capital will often trigger CGT event E4. The unit trust is not necessarily a fixed trust for trust loss measures. And to achieve asset protection the unit holders must be discretionary trusts.
Hybrid Unit Trust
A hybrid trust is a unit trust with discretionary beneficiaries. Discretionary distributions can’t be made without unit holder consent. And CGT Event E4 is not relevant to discretionary distributions.
This is really important. When we see a capital contributions, we immediately see a non-assessable part and think E4, but if the capital contribution is made using the trustee’s discretion, then there is no CGT even E4.
Trust Resettlement
Resettlement is the end of one trust and the start of another. It can occur through the distribution of an asset to a new trust or through the variation of an existing trust.
A distribution of an asset would be done through a capital distribution from one trust to another. But you need to be aware of the rules against perpetuities and Div 7A.
A variation to an existing trust might be adding new beneficiaries (watch out for an FTE though) or interim capital distributions. It might be a so-called ‘Bamford amendment’ where the trust deed receives a new clause regarding streaming or the definition of net income. Or it might be turning a unit trust into a hybrid trust, to ‘hybridize’ a unit trust.
You might make all these variations and yet not have a resettlement. Because a resettlement doesn’t occur as quickly as you may think. Variations of a trust deed don’t necessarily cause a fundamental change to the trust so as to terminate the trust, if ….and this is a big IF….there is sufficient power in the deed to make those variation.
Powers of Trustee
The power the trustee has through the deed will determine – among other factors – whether a resettlement occurs. If the trustee acts within its powers, then a resettlement is lot less likely to occur. If the trustee acts outside of its powers, you are at high risk of a resettlement. So most modern trust deeds give the trustee wide variation powers
Variation Power
A trustee can have a narrow or broad variation power.
A narrow variation power might sound like this, “The Trustee may at any time and from time to time by Deed, vary the Trusts hereby declared by appointing in favour of any child or children and/or other issue of the Appointor in addition to or in substitution for the said Beneficiaries.”
And here is an example of a broad variation power, “Subject to any specific restrictions in any clause, the Trustee may revoke, add to, release, delete or vary all or any of the trusts, powers or provisions contained in this Deed or any trusts, powers or provisions contained in any revocation, addition, release, deletion or variation made from time to time and may declare or nominate any new or other trusts, powers or provisions concerning the Trust Fund or parts of it.”
However wide the power is, it is important to stay within the variation powers when varying a trust deed. If the trustee goes beyond those powers, a resettlement might occur.
Case Law
There are two important court cases regarding the resettlement of trusts.
Commercial Nominees
In Commercial Nominees the deed of a super fund was varied to broaden the categories of employees who could participate. The ATO challenged the deduction of carry forward losses saying the taxpayer claiming the deduction was not the same who incurred the loss.
But the High Court unanimously held that
“The three main indicia of continuity … are the constitution of the trusts …, the trust property, and membership.
Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question, to destroy the necessary continuity.”
Clark’s Case
Clark’s Case is another trust loss dispute. The court found that there was no resettlement despite a change of trustee, change of control, change in trust assets and change in unit holders. This court case led to TD 2012/21.
Revenue Implications of Resettlement
Resettlement of a trust is a CGT Event E1. The resettlement might result in a trading stock deemed sale or a balance adjustment event. But most costly is it when you have a new declaration of trust over dutiable property, meaning the resettlement can trigger stamp duty.
Trust Cloning
When you clone a trust, you will have a CGT event E1, but you might be able to claim the small business CGT concessions or the asset rollover in Subdiv 328-G.
Trust Splitting
With trust splitting you create a separate trustee for separate assets. This limit the right of indemnity to specific assets, but doesn’t trigger CGT or stamp duty. But you need to be aware of TD 2018/D3.
Converting a Unit Trust to a Hybrid Trust
Converting a unit trust to a hybrid trust doesn’t trigger CGT or stamp duty.
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Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s personal circumstances.
Last Updated on 04 May 2020
Tax Talks spoke to Paul Mackenroth - Senior Associate at Cleary Hoare - for more details.
