This article was published in this month’s edition of the Law Society Journal of NSW.
Many years ago Paul and Polly used a small inheritance to purchase their first pub. It was a lot of hard work but it succeeded and the business grew. At the same time they raised two boys – Peter and Patrick – and found the time to make a good job of it. 
Acting on advice from their accountant, Prudence, Paul and Polly purchased their pub in a family discretionary trust they called the Polpall Family Trust. The potential beneficiaries were defined as Paul and Polly and descendants. The trustee was P & P Properties Pty Limited with Paul and Polly as shareholders and directors.

Now, the business has grown and, with help from Peter and Patrick, they have developed two thriving pub businesses – one in Parramatta and one in Penrith. Paul and Polly have a healthy balance in their super fund so have decided to hand over to the boys and travel.

Peter has been running the Penrith business for some years and Patrick Parramatta. Both are now married with children and would like to have separate ownership of each business.

The problem is, as their accountant, Prudence tells you, that the pubs have a large accrued capital gain and the Trust is not eligible for the small business CGT concessions.

Prudence asks if it is possible to split the trust. She says there is a ruling by the Australian Taxation Office allowing deeds to be amended without problems provided the amendment clause is followed precisely and you don’t go too far.

You check and see that under section 7(5) of the Trustee Act (NSW) it is possible to appoint a trustee “for the whole or any part of the trust property” so decide there can be one trustee company controlled by Peter for Penrith and another controlled by Patrick for Parramatta.

You and Prudence have a joint meeting with the family who like the idea and ask you to go ahead.

Firstly, you check the deed, see it has a very wide amendment clause, then have P & P Properties Pty Limited execute an amending deed with appropriate provisions to enable separate trustees for a separate sub fund for each pub.

To avoid potential problems between Patrick and Peter, you make it so that only Patrick’s family can benefit from Parramatta and only Pater’s from Penrith.

Then, to make sure the old and new provisions tie together, you include a clause by which P & P Properties Pty Limited declares that it holds each pub on the trusts of the varied deed.

Finally, things are rearranged with a second company being appointed as trustee and ownership of the two pubs separated with Peter and Patrick in control of their respective entities.

Just before the meeting to sign the documents you hear that Prudence has gone overseas – but the family is keen to proceed so you go ahead without her.

The stings

After lodging the amending deed with the OSR to be marked exempt, you receive a letter stating that the amending deed is liable for ad valorem duty on the market value of dutiable property in the Trust and asking for valuation.

Under section 9 of the Duties Act a declaration of trust over dutiable property is taken to be, for duty calculation purposes, a transfer of that property. In ruling the DUT 017 paragraph 11 the OSR states: “an instrument that varies the terms of the trust may also contain a declaration that the trustee holds the trust property subject to the trusts as varied. Such a declaration would be a dutiable transaction to the extent that it relates to dutiable property.”

Which is exactly what happened.

Then … Prudence returns, reviews the documents and rings you up with more unhappy news: that the Polpall Family Trust is most likely liable to pay capital gains tax as if it had disposed of both pubs at market value – the very thing that Prudence feared. She explains why.

The ruling Prudence referred to, TD 2012/21, states that amending a trust deed, provided the amendment clause is precisely followed, does not trigger CGT E1 (creating a trust over an asset) or E2 (transferring an asset to a trust) unless the amendment “is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust”.

And in private binding ruling number 101 292 129 0075, which looked at a similar set of facts, the ATO states that narrowing a class of beneficiaries in relation to a particular asset can give rise to the conclusion that the asset “has been settled on terms of a different trust”.

Which is exactly what happened.

Takeaway points:
• Always be careful dealing with trusts
• Carefully check revenue rulings before acting
• Trust resettlements can still happen 

By Jim Main

This article is general information only and should not be relied on without obtaining further specific information.