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There is some debate within the legal and accounting professions about whether or not a change of trustee needs to be done by a registered deed.
In Retravision (NSW) Limited v Copeland, Justice Young of the New South Wales Supreme Court indicated that, unless the trust deed expressly excludes or contains provisions inconsistent with Section 6 of the Trustee Act, the appointment of a new trustee is not effective until the deed of appointment is registered.
Many practitioners have taken this case to mean that all deeds changing trustee must be registered.
Our view is that if the trust deed specifically excludes the operation of Section 6 of the Trustee Act then registration of the change of trustee document is not required.
However, if there is no exception in the trust deed, it is prudent to change trustees by registered deed.
Some financiers require deeds changing trustees to be registered. If your bank’s lawyers take that view there is little you can do, other than change financiers, to avoid having to register the deed changing the trustee.
The taxation consequences of an invalid change of trustee can be significant. In the most extreme case all decisions made by an invalidly appointed trustee are, likewise, invalid.
Trustees should not be changed without first thinking about what happens if the trustee is changed.
The single most important thing to ensure when changing a trustee of a trust is that the correct mechanism is followed. That is, if the deed contains a procedure for changing the trustee it must be followed to the letter.
If the trust deed does not contain a procedure for changing trustees, the Trustee Act 1925 (NSW) will need to be relied to give effect to what needs to be done.
It is not just the procedure that is important, the eligibility of the incoming trustee is also important. For example, some trust deeds don’t allow human trustees and others don’t allow company trustees.
If a change of trustee is invalid all decisions made by the new trustee will, likewise, be invalid. including distributions of income.
The impact of section 54 of the Duties Act 1997 (NSW) on changing a trustee must also be considered. Section 54 states that if, after a change of trustee, any of the new or continuing trustees is, or can become, a beneficiary the transfer of trust property from the old trustee to the new trustee will attract full rates of duty. For example, if Mr and Mrs Bloggs are trustees and beneficiaries of a family trust that owns a unit in Sydney, if Mrs Bloggs is removed as a trustee and the family accountant is appointed in her place stamp duty will be payable on the market value of the unit when it is transferred to Mr Bloggs and the accountant as the trustees.
If, on the other hand, a company controlled by Mr Bloggs and the family accountant, both of whom are ineligible to be a beneficiary of the trust, are appointed as new trustees, stamp duty of $10 will be payable when the unit is transferred to the company as trustee but only if the ineligibility is embedded in the trust deed. This is critical to avoiding unwanted stamp duty problems.
There can also be taxation consequences associated with changing the trustee of a trust if the trust is one that conducts some form of business or owns income generating property.
Section 268-25 of the Income Tax Assessment Act 1936 requires the accounting year to be broken up into 2 parts if there is a change in control of a trust during the accounting year. The first period is from 1 July until the change of control occurs and the second is from when the change of trustee occurs to 30 June.
The trap that can arise is that income earned by the trust in the first period of the year cannot be offset against expenses incurred in the second period of the accounting year.
Section 268-25 does not apply to trusts that have made a family trust election.
While most trust deeds can be amended and updated, caution needs to be exercised to ensure the amendment or update does not result in unforeseen consequences.
A trust deed should not be amended without first looking at the deed and any prior amending deeds.
When updating a trust deed it is crucial that the amendment clause is followed to the letter. If the trust deed does not have an amendment clause it should not, generally, be amended in any way.
If the amendment clause is not followed the purported amendments may not be effective.
A trust deed cannot be updated after the vesting date. You should check whether or not a trust has vested before updating or amending the trust deed.
Updating a trust deed could result in the creation of a new trust. The ATO in its August 2001 publication “Creation of a New Trust – Statement of Principles” states “It is a change in the essential nature and character of the original trust relationship which creates a new trust”.
Any change you make to a trust deed could result in unwanted taxation consequences if the ATO considers that the updating of the deed resulted in the creation of a new trust.
A trust is usually established by a person (the settlor) declaring that another person (the trustee) is to hold certain property in accordance with a set of rules (the trust deed).
The settlor sets up the trust.
When a resettlement happens the original trust is said to have come to an end and been replaced by the new trust. The original trust is deemed to have sold all of the assets to the new trust for their market value on the day of the resettlement.
Whether or not a resettlement is a problem depends on the assets owned by the trust. If, for example, a trust’s only asset is a bank account containing cash, then a resettlement has little effect.
If, however, the trust owns assets with an unrealised capital gain or trading stock whose market value is greater than its book value, the taxation consequences associated with a resettlement can be significant.
The Australian Taxation Office has produced a publication “Creation of a New Trust – Statement of Principles” dated August 2001 which sets out the ATO’s view on what results in the creation of a new trust.
The Statement of Principles states that things likely to result in the creation of a new trust are:
changes to the beneficial interest in trust property,
the addition of a new class of beneficiaries or type of beneficiary. That is, for example, the addition of a company as a beneficiary;
redefining a class of beneficiaries;
changing terms of the trust or the rights or obligations of the trustee;
changing the termination date of the trust (vesting date); and
changes to the trust that are not contemplated by the original trust deed.
None of these will necessarily cause a problem, however, all of them should be carefully considered before being done.
In many cases it is prudent to obtain a private binding ruling from the Australian Taxation Office before making changes to a trust deed.
In Commissioner of Taxation v Commercial Nominees  HCA 33 the High Court of Australia considered what it believed amounted to a resettlement in the context of a superannuation fund. The case suggests that the High Court may take a more liberal view than the ATO.
A trust is a relationship by which a party (the trustee) holds property for the benefit of other people (the beneficiaries) on certain terms and conditions. The trustee has the legal interest in trust property and the beneficiaries have the equitable interest.
Trusts come in various forms with the most common being bare trusts, unit trusts, discretionary trusts, testamentary trusts and superannuation funds.
Under a bare trust the trustee generally has no active duties to perform and the beneficiaries can call for a transfer of the trust property to them at any time.
Under a unit trust the trustee holds property on behalf of the unit holders who own units in the trust. Unit trusts can either be fixed or a hybrid. In a fixed unit trust, the unit holders have fixed rights to the income and capital of the trust. In a hybrid trust, the unit holders generally have fixed capital entitlements and variable income entitlements, but it can be any combination of both of those things.
Discretionary trusts, commonly known as family trusts, give the trustee a discretion to decide which of a number of beneficiaries is to receive the income of the trust each year as well as a discretion to decide which of the beneficiaries can receive capital from the trust either during the trust’s existence or when it ends. Discretionary trusts are good business operating entities and asset protection vehicles.
Testamentary trusts are trusts created by someone’s’ will. They are commonly similar to discretionary trusts. Testamentary trusts are excellent estate planning vehicles.
Superannuation funds are a trust by which the trustee holds the assets of the fund on behalf of the members of the fund.