Question: What are the Tax Consequences of Amending a Trust Deed?Answer:
A trust deed is a document that sets out the terms and conditions of a trust. It describes how the trustee will handle the trust assets for the benefit of the beneficiaries. As laws change over time (particularly tax and duties legislation), you may wish to alter your trust deed. In this article, we look what tax consequences may arise when amending a trust deed.
Amending a Trust Deed
You can modify a trust deed through:
- a deed of amendment (also known as a deed of variation); or
- any other method permitted under the trust deed. For example, some trust deeds allow amendments simply by resolution of the trustee.
Any amendments must be done in good faith and for the benefit of the beneficiaries as a whole.
However, you can only alter a trust deed if it contains a specific power allowing you to do so. If there is such a power, you must then determine whether your intended amendments fall within the scope of that power. Most modern trust deeds usually provide a broad power of amendment.
Tip: Keep all documentation regarding the amendment of the original trust deed. This will serve as a record of how the trust has changed over time.
Tax Consequences of Amendment
If you make any amendments in accordance with the proper powers and procedure under the original trust deed, there will usually be no major tax consequences.
However, if your proposed amendments are so significant that they affect the foundation of the trust, the amendment will give rise to a resettlement.
A resettlement means that the changes are so fundamental that the old trust is taken to have ended and a new trust has started. This has some significant tax repercussions in regards to:
- capital gains tax (CGT); and
- duty tax.
1. CGT Repercussions
When resettlement occurs, the previous trust is taken to have been disposed by the trustee. The trustee then reacquires the new trust.
This kind of disposal triggers a CGT event, resulting in either a capital gain or loss.
Any losses that have been previously carried forward by the trust, to be offset against future income, will also cease to exist upon the trust’s disposal. This is because a different taxpayer (i.e. the old trust rather than the new trust) incurs the carry-forward losses.
2. Transfer Duty Consequences
A resettlement of trusts generally should not trigger duty tax since there is no change to the parties or properties of the trust. A resettlement will generally only cause duty liabilities if the termination of the old trust causes the property to change hands.