Trust Resettlement: Check a Proposed Deed Change

Trust resettlement is the concern that a proposed change creates a new trust relationship over trust assets. Before the trustee signs, establish whether the trust continues and whether any asset moves onto separate trust terms. A deed amendment alone does not settle that question.

What Trust Resettlement Means

A resettlement of a trust can involve the existing trust ending and a new trust arising, or particular assets becoming subject to another trust. The word resettlement is shorthand for the concern. Apply the relevant tax provisions to the legal effect of the transaction.

For capital gains tax (CGT), section 104-55 covers creating a trust over a CGT asset by declaration or settlement. Section 104-60 covers transferring a CGT asset to an existing trust. These are CGT events E1 and E2. The Income Tax Assessment Act 1997 sets their conditions and consequences.

Record whether the original trust continues under trust law. Then assess whether each affected asset remains on that trust or moves to different trust terms. A continuing trust can still have an asset settled on another trust.

Read the Change With the Existing Instrument

Read the proposed wording against the executed deed and every effective variation before forming a tax view. A clean replacement document can conceal an earlier restriction that still governs the proposed change.

1. Assemble the executed trust deed and the complete variation history. Include trustee appointment documents and any court orders affecting the terms.
2. Identify the exact power being used. Record who can exercise it, any excluded clauses and the required consents or procedural steps.
3. Compare each old clause with its proposed replacement. Describe the effect on beneficiaries and on each affected asset, including any accompanying declaration or transfer.
4. Send the complete proposal to the legal adviser. Ask for confirmation that the power supports the change and that the proposed execution and consents satisfy its conditions.

Ask the adviser to address whether any rights are protected from amendment, whether the trust has already vested and whether a separate trust arises over an asset. Supply the facts behind those questions, including earlier distributions or appointments that affect the property.

An amendment outside the power is not automatically a resettlement. TD 2012/21 explains that an invalid amendment, being ineffective, does not itself trigger E1 or E2. Any actual dealings with property still need assessment. If validity is unresolved, pause signing and obtain advice on the defect before applying the continuity analysis to an assumed effective change.

Apply the ATO’s Continuity Approach

The ATO’s TD 2012/21 addresses changes under a valid deed power or relevant court approval. E1 or E2 does not arise unless the trust ends and a new one arises, or an asset is settled on different trust terms.

A separate charter of rights and obligations means examining what the trustee must do with that asset and who can benefit from it. Keeping the same trustee or the same trust name does not resolve that asset-level question.

The following fictional proposals illustrate the decisions your file must support. They assume the legal adviser assesses all operative documents, including any accompanying resolutions.

Adding Eligible Beneficiaries

A discretionary trust’s trustee proposes adding the spouses of existing beneficiaries to the eligible class. Assume the amendment power permits that addition and the trustee follows every required procedure. The trust continues, and its assets remain available under the amended discretionary terms. On those assumptions, the amendment does not itself trigger E1 or E2.

Change the proposal so that a particular investment is held exclusively on a separate trust for one beneficiary. The original trust can continue while E1 arises over that investment. A later transfer of another asset into that separate trust raises E2. The adviser must settle the legal effect of the exclusive entitlement before you calculate either consequence.

Replacing the Trustee

A corporate trustee retires and a replacement corporate trustee takes over all assets on the existing trust terms. Assume the appointment is valid and no beneficial rights change. The statutory notes to sections 104-55 and 104-60 confirm that changing the trustee alone does not trigger E1 or E2.

If the proposal also divides assets between separately administered beneficiary groups, assess those additional terms. A document labelled a trustee replacement may contain a second transaction that changes how particular assets are held.

Record the confirmed outcome before considering what the beneficiary rights mean for fixed trust classification. A continuity conclusion also leaves the separate trust loss rules to be assessed before claiming carried-forward losses.

Keep Federal Tax and State Duty Separate

A federal conclusion that E1 and E2 do not arise does not determine state or territory duty. Prepare the duty assessment for the jurisdiction of each affected asset and the actual transaction.

For example, Revenue NSW’s beneficial ownership guidance identifies changes in equitable interests and property becoming subject to a trust as potential duty events. Excluded transactions and concessions require their own assessment. A deed variation can therefore require a duty review even where the original trust continues for federal tax purposes.

For a NSW trustee replacement, Revenue NSW’s trustee-change ruling sets conditions for concessional treatment. These include restrictions on new or continuing trustees benefiting and a test concerning schemes that confer interests to the detriment of another person’s beneficial interest or potential beneficial interest. Retain the deed history and appointment evidence needed for the assessment.

For assets elsewhere, obtain the relevant jurisdiction’s duty advice. Keep its conclusion separate from the federal memorandum, with the documents to lodge and the person responsible for lodgement.

If E1 or E2 does arise, identify the affected assets and event time. Calculate the gain or loss using the applicable proceeds and cost-base rules, including any market-value substitution, exception or relief. A non-cash change can require a tax calculation without providing cash to fund the liability.

Retain the Advice and Closing Records

Keep a decision record that connects the assessed proposal to the signed documents and the resulting tax treatment. Another accountant must be able to identify the precise transaction the advice covers.

Record the following in the permanent file.

• The old and proposed clauses, document versions and intended signing sequence.
• The legal advice, its assumptions, required consents and conclusion on validity and continuity.
• An asset list showing ownership capacity before and after the change, jurisdiction, cost bases and any required valuations.
• The federal tax outcome for each affected asset, supporting calculations and any separate loss or entitlement review.
• The duty advice, lodgements and assessments, together with the agreed actions and their owners.
• The executed variation, appointment documents and resolutions, checked against the versions the advisers assessed.

Before updating the tax workpapers, compare the signed clauses and accompanying resolutions with the advised proposal. If a beneficiary exclusion or asset declaration has changed, send the changed documents back for assessment. Do not carry the earlier conclusion across to different terms.

Update the deed history and any required registration or asset-title records after the confirmed outcome. A retained Australian Business Number (ABN), unchanged Tax File Number (TFN) or accepted register update is not proof of trust continuity. Close the review when the executed documents match the assessed transaction and every resulting tax and duty action has an owner.