Resettlement risk continues to be one of the most significant risks that trustees and beneficiaries need to manage in the administration of trusts of any kind. The duty and tax consequences of an inadvertent resettlement of some or all of the trust property are manifold, including:
- declaration of trust duty at rates of up to 6.5% on the dutiable value of the property resettled;
- transfer duty or trust acquisition/surrender duty on the dutiable value of the property resettled; and
- capital gains tax (CGT) on creating a trust over a CGT asset (E1) or transferring a CGT asset to a trust (E2).
This article is the second in our resettlement series which considers the resettlement risks associated with transactions that do not vary the trust deed. If you have not read our first article, which provides an overview of resettlement risk in the context of amending the trust deed, you can find it here.
Resettlement recap
In substance, a resettlement at general law occurs where property which was the subject of one trust becomes the subject of another trust such that there is a new charter of future rights and obligations in respect of that property.[1]
In Commercial Nominees HC[2] the High Court in dealing with whether a complying superannuation fund evidenced the necessary continuity in order to be able to claim a deduction for past tax losses indicated that an assessment of three indicia was required:[3]
- constitution of the trusts under the original instrument/settlement;
- trust property; and
- beneficiaries of the trust.
Since Commercial Nominees HC it has become accepted that those indicia are of broader application and provide the foundation for guiding the question whether a particular transaction / amendment effects a resettlement of the trust.[4]
Therefore, the key question when it comes to assessing resettlement risk is whether there has been such an interference with or change to one or more of the indicia identified above so as to lead to the conclusion that the “property [does not] remain subject to the same trusts as it did before”.[5]
When can a transaction that does not amend the trust deed cause a resettlement?
The scenarios that could potentially give rise to a resettlement at general law and for tax/duty purposes are vast. That being said, three of the more common scenarios that the trustee should be alive to are:
- collapsing the trust by severing the trust relationship between the trustee, the beneficiary and trust property;
- declaration of trust wording in relation to existing dutiable trust property; and
- beneficiaries, who are absolutely entitled to trust property, exercising their power to bring the trust to an end pursuant to the principle in Saunders v Vautier.[6]
Collapsing the trust
Although deployed in a variety of contexts, all trusts will be made up of a trustee, at least one beneficiary (who is not the trustee) and trust property. If at any time, and even if momentarily, the trust ceases to maintain these essential characteristics, the trust will collapse.[7]
The consequences of the trust collapsing are complex and will vary depending on the terms of the trust instrument. However, the consequences can include:
- the trust property becoming the subject of a new “resulting” trust in favour of the settlor of the original trust;
- a distribution of the trust property to the beneficiaries; or
- a transfer of the trust property to a separate existing, or wholly new, trust.
Aside from the obvious disruption this would cause to the proper management of the trust asset, the taxation/duty consequences are significant; particularly if the cost base of the asset has increased significantly since the settlement of the trust. For example, a distribution of trust property to the beneficiaries would, subject to limited exemptions,[8] trigger transfer duty on the property to the extent it is dutiable property (e.g. land). Two scenarios where a collapse of the trust can be easily overlooked arise in circumstances:
- where there will be a complete replacement of a trust’s beneficiaries through a redemption of the existing units and an issue of new units to the incoming beneficiaries. The issue here being if all of the units in the trust are redeemed prior to the issue of new units to the incoming beneficiaries there will exist a period of time where the trust has no beneficiaries.
- where a trustee, who is also a beneficiary of the trust, acquires units in the trust from other beneficiaries or where there are significant redemptions. Here, there is a risk that the trustee may find itself as the only beneficiary of the trust causing it to collapse as a person cannot be trustee for themselves (i.e. the doctrine of merger).[9] That being said, there is authority declining to apply the doctrine of merger strictly where it would be contrary to the intention of the parties.[10]
Careful attention must be given to implementing a transaction to ensure that there are no sequencing issues that may cause an unnecessary resettlement risk. The costs associated with remedying these issues, even where resettlement can be avoided, can often be significant and may require the assistance of the court.
Use of trust wording in relation to existing trust property
Except for certain exceptions, a court will not look to subjective intention in the face of an explicit written declaration of trust.[11] Therefore, the precise words used in the formal documents executed by the trustee must be considered and their ramifications properly understood.
The fact that property is already the subject of a trust does not preclude it, or rights associated with it, becoming the subject of another trust in certain circumstances. Two examples of this are:
- where the trust instrument contains a general power for the trustee to create new trusts for the benefit of all or a distinct class of beneficiaries; and
- where the trustee’s and beneficiaries’ joint actions give rise to a conclusion that certain trust property becomes the subject of a new trust (considered further at 1.2(c) below)
Where the trustee has power to create new trusts it is vital to ensure that ordinary transactions do not give rise to an uninformed express or implied exercise of that power.
An example of this is Commissioner of State Revenue v Lam & Kym Pty Ltd[12] where the court found the phrase “hereafter held separately in trust” in a deed poll executed by the trustee in relation to a parcel of land the subject of the original trust gave rise to a new trust (and was, therefore, dutiable).[13]
However, the precise construction of the relevant document will be key in determining whether there is any resettlement. For example, the proper construction of the document may be that it achieves nothing beyond an acknowledgement of the existing legal position.[14]
Chief Commissioner of State Revenue v Benidorm Pty Ltd[15] is a recent example of this where a document styled as “Declaration of Trust by Nominee” and that contained a clause “declar[ing]” that the trustee will hold certain property on trust was held to do nothing beyond provide a written confirmation of the existing state of affairs; no new trust was created.[16] In the context of the modern duties regimes where duty is imposed on transactions rather than instruments,[17] one could expect Benidorm to be applied consistently in other jurisdictions.
However, from 19 May 2022 by virtue of the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) the New South Wales Parliament has purported to reverse the decision in Benidorm through creating a new head of duty which is triggered on a mere acknowledgement of trust (see our note here on these provisions).
Saunders v Vautier: Bringing the trust to an end
Independent of the mechanisms within the trust instrument for bringing the trust to an end, it is well established that the beneficiaries of the trust, if united and of capacity, can terminate the trust.[18] Plainly beneficiaries acting in unison to bring the trust to an end may give rise to CGT and duty issues on the transfer of the trust property from the trustee to the beneficiaries; however, there is a range of circumstances where the actions of united beneficiaries may give rise to a risk of resettlement.
An example of this is united beneficiaries requesting the trustee to change the terms on which the trustee administers the trust. Assuming there is no power conferred by the trust instrument allowing for the changes to take place, then one characterisation of what follows is an exercise of the principle in Saunders v Vautier such that what occurs is not a variation of the existing trust, but a consensual termination of the existing trust and a resettlement of the trust property on new, even if largely identical, terms.[19] It is the agreement of the beneficiaries that is the source of power for the changes and becomes “the new starting point” in regulating the relationship between the trustee, the trust property and the beneficiaries.[20]
As was said in one of the High Court’s first considerations of resettlement issues, what is required is an assessment as to whether the particular instrument (or transaction) results in a new “charter of future rights and obligations with respect to [trust] property”.[21]
On the other hand, a scenario that may stand at the boundary of what is known to give rise to a resettlement is an arrangement between the beneficiaries and the trustee where the beneficiaries prospectively release the trustee from a breach of trust with the aim of allowing the trust to be managed on terms inconsistent with the trust deed as it is perceived to no longer be fit for purpose.[22] This scenario is fraught with risk given the High Court has held that “the most important duty of a trustee is to obey the terms of the trust”.[23]
However, it is also a well-established principle of trust law that beneficiaries may direct the trustee to depart from the strict terms of the trust and that the trustee will incur no liability if their directions are followed.[24] It is equally well recognised that where a trustee commits a breach of trust the right of a beneficiary to sue for breach of trust is a purely equitable right and may be released wherever there is a fixed, deliberate and unbiased determination to that effect.[25]
Authority in this area is scant and will likely remain that way as there will ordinarily be no person seeking to challenge the effect of such a transaction, as beneficiary, trustee and manager (if any) will be united in purpose. That being said, the requirement that an instrument evidencing a dutiable transaction be stamped before it can be admitted into evidence can lead to awkward revelations.[26]
When advising on such a transaction, and the other sophisticated ways in which the modern trust can be deployed where authority is scant, an advisor on resettlement must go back to first principles and consider:
- what effect will the transaction have on the indicia identified in Commercial Nominees HC (see 1.1 above);
- what can be documented to minimise the risk that the transaction will be found to give rise to a consensual termination of the trust and resettlement under Saunders v Vautier;
- whether the arrangement gives right to a new charter of rights with respect to the trust property in the relevant sense;
- whether a private ruling ought to be obtained to confirm the tax and duty treatment of the arrangement; and
- whether the desired outcome be achieved through more orthodox means (such as an amendment to the trust deed under a power of amendment).
Conclusion
What this article has sought to demonstrate is that the risk of resettlement is pervasive when it comes to trust dealings. Nearly every arrangement or transaction involving a trust if mishandled can result in a resettlement of the trust property whether that be due to sequencing issue, infelicitous use of language or managing the trust in such a way that it is no longer “traceable to the settlor’s intention as communicated [in the trust deed]”.[27]
For further information, please contact:
Jinny Chaimungkalanont, Partner, Herbert Smith Freehills
jinny.chaimungkalanont@hsf.com
[1] Davidson (Collector of Imposts) v Chernside (1908) 7 CLR 324 at 340-341 (Griffiths CJ) (Chernside).
[2] Federal Commissioner of Taxation v Commercial Nominees of Australia [2001] HCA 33; 179 ALR 655 (Commercial Nominees HC).
[3] Commercial Nominees HC at [36] (the Court).
[4] Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 at [36] (Dowsett J); [79]ff (Edmonds and Gordon JJ); Re McGowan & Valentini Trusts [2021] VSC 154 at [129] (Macaulay J).
[5] Wedge v Acting Comptroller of Stamps (Vic) (1941) 64 CLR 75 at 79 (Rich ACJ), 80 (Starke J), 82 (Williams J).
[6] (1841) 4 Beav 115; 49 ER 282.
[7] There are exceptions to this rule. For example, it is a well-established equitable principle that the court will not allow a trust to fail for want of a trustee. However, if there is no mechanism to replace the trustee the costs of rectifying that oversight can be significant and it may require the beneficiaries to approach the court for assistance. Cf – Raftland Pty Ltd (ACN 069 996 943) (as trustee of the Raftland Trust) v Commissioner of Taxation (2006) 227 ALR 598 at [72].
[8] For example, section 57 of the Duties Act 1997 (NSW) provides that fixed duty of $50 is payable on a transfer of trust property to the beneficiaries provided the preconditions are satisfied.
[9] DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 442 (Gibbs CJ), 463 (Aickin J), 474 (Brennan J); DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1980) 1 NSWLR 510 at [16] (Hope JA; Glass JA agreeing).
[10] ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue (2003) 59 NSWLR 196 at [295]-[286] (Barrett J); Commissioner for ACT Revenue v Perpetual Trustee Co (Canberra) Ltd (1993) 118 ACTR 1 (Higgins J). See also the High Court’s comments passing over this issue in CPT Custodian Pty Ltd v Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd (2005) 224 CLR 98 at [6] (Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ).
[11] Byrnes v Kendle (2011) 243 CLR 253 at [18] (French CJ), [65] (Gummow and Hayne JJ); [115] (Heydon and Crennan JJ).
[12] (2004) 10 VR 420.
[13] Commissioner of State Revenue v Lam & Kym Pty Ltd (2004) 10 VR 420 at [47] (Nettle JA; Vincent JA and Hansen AJA agreeing).
[14] See example – Chief Commissioner of State Revenue v Benidorm Pty Ltd (2020) 101 NSWLR 729;.
[15] (2020) 101 NSWLR 729.
[16] Chief Commissioner of State Revenue v Benidorm Pty Ltd (2020) 101 NSWLR 729 at [110]-[114] (Leeming JA; Meagher JA agreeing), [120] (Payne JA).
[17] See e.g. DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 449 (Mason J).
[18] See discussion in CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98 at [44] (the Court); Beck v Henly [2014] NSWCA 201 at [33] (Leeming JA; Beazley P and Sackville AJA agreeing).
[19] Re Dion Investments Pty Ltd (2014) 87 NSWLR 753 at [46] (Barrett JA; Beazley P and Gleeson JA agreeing); CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98 at [44] (the Court).
[20] Davidson (Collector of Imposts) v Chernside (1908) 7 CLR 324 at 345 (Isaacs J).
[21] Davidson (Collector of Imposts) v Chernside (1908) 7 CLR 324 at 341 (Griffiths CJ)
[22] The fact that such a transaction appears on its face to be contractual only is no barrier to it giving rise to a resettlement. See Gosper v Sawyer (1985) 160 CLR 548 at 568-569 where Mason and Deane JJ said “The origins and nature of contract and trust are, of course, quite different. There is however no dichotomy between the two. The contractual relationship provides one of the most common bases for the establishment or implication and for the definition of a trust.”
[23] Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at [32] (the Court).
[24] Spellson v George (1992) 26 NSWLR 666 at 670-671 (Handley JA), 674-675 (Hope AJA), 679-681 (Young AJA); Griffiths v Porter (1858) 25 Beav 236 at 241; 53 ER 627 at 629.
[25] J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis, 8th ed, 2016) at 558.
[26] See the admissibility provisions in each jurisdiction – Duties Act 1997 (NSW) s 304; Duties Act 2001 (QLD) s 487; Duties Act 2000 (VIC) s272; Duties Act 1999 (ACT) s 250; Duties Act 2001 (TAS) s 246; Stamp Duties Act 1923 (SA) s 22; Stamp Duty Act 1978 s 96; Duties Act 2008 (WA) s 279; Judiciary Act 1903 s 79.
[27] Re Dion Investments Pty Ltd (2014) 87 NSWLR 753 at [45] (Barrett JA, Beazley P and Gleeson JA agreeing).
