Tax implications for resettlement of trust
Tax consequences when resettling a trust arise on the transfer of property or following a loss of continuity.
The ATO defines that a trust will be resettled “where it might be concluded that there is not sufficient continuity between the trust as originally constituted and the trust in its current form.”
There can be significant tax consequences associated with a resettlement of a trust including income tax, stamp duty and triggering capital gains tax (CGT).
If a CGT event is triggered, CGT assets held in the original trust will effectively transfer to the new trust at market value. This poses problems as either pre-CGT assets will become post-CGT assets or a capital gain will occur equal to the difference between market value and the cost base of post-CGT assets held in the trust.
Furthermore, any accumulated losses or gains from the original trust cannot be carried forward into the new trust.
One thing that trustees may want to determine is the potential CGT consequences for the trust if resettlement is deemed to have occurred. Once this is established, it may be appropriate to apply for a binding ruling from the ATO to gain certainty on whether resettlement has occurred prior to making any changes.
A trust deed cannot be amended without an express power to do so and trustees must consider whether the amendments maintain the continuity in the trust estate. The ATO is clear that any amendments must be made in accordance with the terms of the original trust. The problem for trustees is that resettlement needs to be assessed on a case-by-case basis.
Before making an amendment to a trust deed, trustees are cautioned to read the trust deed and check that the power specifically authorises the proposed amendment and that amendments made pursuant to a power are done so in accordance with any process outlined in the deed.
Resettlement of a trust can be quite complicated; seeking professional legal advice is recommended, particularly where changes are unrelated to tax issues such as estate planning.