TRUST IN YOUR TAX

The Commission of Taxation has the unenviable task of getting people to pay tax
they don't want to hand over, so the government can provide services which
most people perceive we don't need. The recently muddled waters relating to the
taxation and disbursements of trusts are slowly becoming clearer. The
Commissioner has certainly helped his own cause with the announcement that
the Commonwealth Government plans to update the legislation pertaining to
taxation of trust income. A discussion paper containing these changes is being
circulated,
http://www.treasury.gov.au/documents/1981/PDF/Discussion_paper_Improving_
the_taxation_of_trust_income.pdf. The key focus of the discussion paper deals
with the current approach and the proposed changes for dealing with
'distributable income' and ‘taxable income' and the ability to stream distributions
to particular beneficiaries. Of particular interest is the Treasury’s commitment to
continue to allow tax streaming through trusts.

Trust Resettlements

Amending a trust is always problematic due to the risk of a resettlement of the

trust. The resulting tax and stamp duty consequences are well published. The
Courts recently shed light on some issues associated with what constitutes a
resettlement.

Federal Commissioner of Taxation v Clark [2011] FCAFC 5

In the decision of Federal Commissioner of Taxation v Clark, the Full Federal

Court gave practitioners assistance in determining what constitutes a
resettlement of a trust. Significantly their Honours stated that there was no
statutory requirement that a lack of continuity of a trust meant it was resettled.
This may mean continuity in trust property, continuity in membership or
continuity in the trust obligations. The position taken from this is that a
resettlement of the trust arises when the change to the trust amounts to a 'new
character of rights and obligations.'

In this case, the Commissioner argued that an arrangement entered into between
two families concerning a pre-existing unit trust constituted a resettlement of that
trust. The Commissioner argued that there was a change of the trustee, change
in the ownership of the units of the trust and that the activities of the trust were
also changed from being that of a dormant vehicle.

In essence, the Commissioner argued that there was a lack of continuity in the
trust.

The Full Federal Court decided in favour of Clarke. Though dissenting with the
majority, Dowsett J noted that "inevitable and ongoing change is a necessary
characteristic of the operation of a unit trust". Such changes are contemplated
by the trust deed. It is only where the trust has been totally deprived of all
assets and a new trust created that it can be said that the original trust has
ceased to continue.

This case is good news for tax payers and goes someway to clarifying what is a
resettlement of a trust and what is not.

Plan Protect and Prosper

Law affecting trusts are in a state of flux, so it is important that practitioners

remain vigilant in their continuing education regarding trusts.

redchip is dedicated to following the changes to the law surrounding the taxation
of trust income and is keenly awaiting the Commissioner's decision as to whether
he will appeal the Full Federal Court's decision.

The Business Structures and Planning Team at redchip lawyers can advise and
help your clients on amending their trust deeds to be compliant with the new
legislation and advising on resettlements of their trusts.

Please contact Ian Tindale at iant@redchip.com.au or Emily Ponting at

emilyp@redchip.com.au or on (07) 3852 5055 to arrange a confidential and
obligation free discussion.

Level 1 “The Portal”, Cnr Ann and Longland Streets, FORTITUDE VALLEY, QLD
4006

·Tel: (07) 3852 5055 ·Fax: (07) 3852 2559 ·www.redchip.com.au

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