This is part 1 of my three-part series commenting on Draft Taxation Ruling TD 2018/D3. In this article, I will focus on No New Trust View and will explain why, in my opinion, No New Trust View is an error. The second part will focus on the New Trust View and its consequence, and the last part of the series will be dedicated to discussing CGT and TD 2018/D3.
TWO VIEWS
I submit that there are actually two competing views on what happens during a trust split: the ‘No-New Trust View’ and the ‘New Trust View’:
The No-New Trust view holds that there is only one trust after a trust split but that the different trustees control different parts of it. So similar to two puppet masters with one puppet, one controlling the head and arms, the other the body and legs. Or like an egg with two yolks;
The New Trust view holds that there are two separate trusts after a trust split. It is similar to if you take a starfish and cut it through the middle; each side will regrow the remaining half. So you end up with two starfish, both of which are the original. Each of these has different taxation implications.
NO NEW TRUST VIEW
The first view, and I would concede often the more common among many commentators, is known as the ‘No New Trust View.’ This position is based on testing whether there has been a change in the interest of the beneficiaries of a trust. Because beneficial entitlement is conceived as the hallmark of the trust estate, there is an assumption in the first view that there must be a settlement (or resettlement) to be a new trust. These proponents ‘look first to see whether or not any resettlement has occurred; and if (in their opinion) it has, then state as a conclusion that a new trust has arisen’.
In my view, trusts commonly arise in situations other than in settlement. Consider ‘testamentary’ trusts established pursuant to a Will. At first, the assets of the deceased are subject to a trust, whilst the executor administers the estate. Then, as the estate is administered, there appears over time a number of ‘testamentary’ trusts. Depending upon the outcome of the administration of the estate, including both the age and existence of those so named and the assets and liabilities of the estate, some trusts established under the Will may arise, and others may not. There is one settlement under the Will, but new trusts may later arise. This example was considered in Roome v. Edwards, 389:
But when is a settlement a separate settlement? There are a number of
obvious indicia which may help to show whether a settlement, or a
settlement separate from another settlement, exists. One might expect to
find separate and defined property, separate trusts, and separate trustees.
One might also expect to find a separate disposition bringing the separate
settlement into existence. These indicia may be helpful, but they are not
decisive. For example, a single disposition, e.g. a will with a single set of
trustees, may create what are clearly separate settlements, relating to
different properties, in favour of different beneficiaries, and conversely
separate trusts may arise in what is clearly a single settlement, e.g. when
the settled property is divided into shares.
I note that, as has been previously been correctly pointed out, Roome v Edwards is concerned with the question of whether there is a separate settlement and not whether there is a separate trust estate.
Just as there are trusts which cannot be accounted for in the No New Trust rule position on resettlements, there are, likewise, circumstances where a trust will be deemed to be resettled without the beneficiary or trustee receiving a monetary or proprietary gain.
To determine the emergence of a new trust entity or estate is to observe some degree of severance in the continuity of the trust property or corpus. The case of Clark cited with approval the test applied in Commercial Nominees, where it was considered whether a taxpaying trustee claiming an entitlement to certain deductions was the same trustee which earlier incurred loses so claimed. The High Court observed that (as cited in Clark, at para 77.):
[t]he three main indicia of continuity for the purpose of [the Assessment Act] are the constitution of the trusts under which the funds (if a trust fund) operated, the trust property, and membership. Changes in one or more of those matters must be such as to terminate the existence of the eligible entity, or to produce the result that it does not derive the income in question’ (emphasis added).
These comments certainly do not seek to set out an exhaustive manner in which there may be a resettlement. For example, a trustee could resettle a trust by exercising a power of appointment granted to it to settle a new trust. But, as a general proposition, a resettlement will occur if there is a break in the continuum of one of these indicia, as judged against the constituent documents of the trust. Therefore, a unit trust contemplates that the membership will be determined by the ownership of the units, and therefore a change in the membership through that mechanism will not result in a resettlement.
In short, then, a break in the continuum of the trust will constitute a resettlement. However, no break in the continuum of the trust does not mean that there is no resettlement if the property and membership can be identified at a particular point in time.
The No New Trust view has been criticised for failing to represent the jurisprudence of today and the beneficial interest in property as against the trustee’s right of indemnity. Dr. Rankine explains that the cases relied on to support that view (Rankine, 229):
“are those that are concerned with instances where a new charter of rights
and obligations are created, in the Davidson v Chirnside and Re Ball’s
Settlement Trust sense. … [T]hose cases do not fully explain what is meant
by a ‘trust relationship’. In each of them, the facts are chiefly concerned
with the wholesale changes to a trust instrument where there has been no
change of trustees or separation of trust subject matter. In short, they are
not at all concerned with the creation by trust splitting of a new trust estate.
Rather, they are concerned more with the exercise of a power of a trust
instrument than they are with the question of whether or not the exercise of
the power will create a new trust estate that is separate and distinct from the
settlement that begot it”
In my opinion, the No New Trust View is in error. By placing inordinate emphasis upon the nature of the beneficiary’s interests and comparing them before and after the change in trustee, proponents heed little to the relationship between the beneficiary, trustee and their obligations as originally set out and contemplated by the settlor. That fails to accord with equity in its most general respects.
Read the continuation of the series for my opinion on the New Trust View and its consequence, and discussion of CGT and TD 2018/D3.
Adrian is the Creator of Ailira, the Artificial Intelligence that automates legal information and research, and the Principal of Cartland Law, a firm that specialises in devising novel solutions to complex tax, commercial and technological legal issues and transactions.