This is part 2 of my three-part series commenting on Draft Taxation Ruling TD 2018/D3. In this article, I 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. The first part of the series explains No New Trust View and why, in my opinion, No New Trust View is an error and can be found here.
NEW TRUST VIEW
The second view is the ‘New Trust View’, which is founded on the relationship between the trustee and beneficiary as being the hallmark of a trust. It holds that (Rankine, 76 ):
the split trust is one that is newly-created by the appointment of a New Trustee over the Transferred Asset that was formerly held as a constituent part of the original trust.
This second view seems to more correctly accord with the foundational tenets of the trust estate, that being (Rankine, 207):
no more than an obligation imposed on a person by rules of equity that
requires that person as the holder of property to deal with it for the benefit of
others, or for specified purposes, in performance by her or him of the trusts
and powers that bind her or his conscience. Put simply, it is an obligation
that binds a person who holds property possessed by her or him
It follows from at least two principles arising from that passage that the appointment of a new trustee without more under a trust instrument will constitute ‘a new charter of future rights and obligations:
1. the obligations imposed on a new trustee are fresh obligations on a person who hitherto had no obligations in respect of that property. These are not the same rights and duties imposed on a previous trustee, as the duties, powers, and the remedies given to beneficiaries are in personam rights against the new trustee.
2. where a trustee has retired in respect of trust property, that property is no longer impressed with the trusts that formerly bound it. It does not follow that the certainties of trusts are not maintained, though, for the new and old trustees together manifest an intention to hold discrete trust assets for beneficiaries comprising the same class of interest holders, as contemplated under the original trust deed.
Certainly, that separating trusteeship represents the creation of a new trust was envisaged under the s 14(2)(b) of the Trustee Act 1936 (SA) when it states that:
a separate set of trustees may be appointed for any part of
the trust property held on trusts distinct from those relating to any other part
or parts of the trust property
Determining at some later time which of the identical trusts (or starfish) is the original, as though it were an egg that could be unscrambled into its separate parts, is a task in the impossible. It is simply not as the No New Trust view proponent would maintain that the identical trusts (or starfish) may at some later stage be stitched together without begetting some contorted and unruly behemoth. Once a trust is split, it is split.
The New Trust View was recently applied in the South Australian case of Dyda, where it was held that the trustee who received land as a new trustee under a trust split was not entitled to the exemption from stamp duty upon a change in trustee of a trust, as the transfer did not ensue from a transfer of property within the same trust. It was relevantly held that (Dyda at 45):
there is an absence of continuity which is necessary for the appointment of
a new trustee to the same trust. On this basis alone, the exemption cannot
apply.
In relation to the splitting of a Unit trust, Dyda considered the test enunciated in Commercial Nominees, 78:
I reject the contention of the appellants that the “Alternative Acquisition”
resulted in a “cloning” [i.e. a splitting] of the [Progenitor Unit] Trust into two
identical copies. On the contrary, the [Split Unit] Trust is a new trust carved
from the [Progenitor Unit] Trust. It has a different trustee. It has different
property. The nature of the trust obligation has changed. The beneficial
interest of the unit holders has changed.
I therefore submit that the New Trust view is to be favoured.
CONSEQUENCE OF NEW TRUST VIEW
Under the New Trust view, there is no discernible difference between a change in trustee of the whole of a trust and a change in trustee over only part. This has been set out expressly by the New Trust view’s proponents (Rankine, 231):
a mere change in trustees will always create a new trust, although surprising, is not,
on a closer examination, so very radical or fatal to the new trust view. To the
contrary, the new trust view demands that this be so, for it may be true to say that,
strictly speaking, every change of trustee creates a new trust, but generally nothing
will follow from this. Conversely, it is no more than an assumption, and not a
conclusion, that the no new trust view denies the creation of a trust upon a change of
trustees, for the question seldom arises in ordinary trust cases. The new trustee is as
bound by identical trust terms and powers to an extent that is not less than was
binding on the retiring trustee. In the splitting of a trust, the original trustee is still
bound as before, but now over a sub-set of the property formerly held by it, and her or
his fiduciary obligations that bind that other property is coextensive with the duties
and trusts that bind the new trustee over the discrete property now possessed by it.
[…]Therefore, as a matter of policy, the creation of a new trust on a change of trustees is
generally ignored, for it has no practical implication. The significance under revenue
law has generally been to ignore the transaction of a change of trustee, and not
impose taxes on it
There are specific exemptions from taxation across Stamp Duty, CGT, GST, and others for the case of a change in trustee. If the ATO adopts the New Trust View and holds that CGT is incurred upon a trust split, then there is no rationale for not applying CGT on every change in trustee.
The New Trust View proponents will also hold that what ought to determine a resettlement is whether a new dispositive obligation is imposed upon a trustee. This does not have to be a taker in default or some other more fixed beneficiary, as the High Court noted in Buckle (Chief Commissioner of Stamp Duties (NSW) v Buckle (NSW) [1998] HCA 4 at 41):
The irresistible conclusion is that what constitutes a resettlement of the trust property does not depend on whether the beneficiary that is added is a discretionary object or a taker-in-default.
Therefore (2nd Annual Family Planning Day Conference, SA Division 2012, Stamp Duty Issues, Dr Campbell Rankine at 90):
where an object of a mere power or a trust power is added to a range of
trust objects, the trustee will have new burdens imposed on it. In short, the
trustee must consider whether or not to exercise the power by appointing
trust corpus or income to the new and existing beneficiaries to the exclusion
of others.
Put another way (Rankine, 195):
any instrument that purports to add a discretionary object will be a
resettlement of the original trust, unless the power to do so already inhered
in the trust instrument. But if a variation to the trust terms is necessary to
give the trustee the necessary power then that variation may well amount to
a resettlement, for the settlor did not confer it in the original settlement.
The New Trust View would require a narrowing of Example 1 in TD 2012/21. Note that there is no resettlement on the removal of a beneficiary, for the trustee’s burdens are relieved.
Read the continuation of the series for my opinion on the 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.