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Variation of Trust

Variations of trust range from changes to deeds of trust for administrative reasons or to reflect legislative amendment, to changes that affect beneficial interests.

The consequences of a variation for tax purposes depend on the extent of variation. A variation of a minor nature such as a change of the trust’s name will not have tax consequences because this change will not alter any of the beneficiary’s rights or the trustee’s obligations.

Some variations can be so significant  that a new trust results.  Where this is the case it is necessary to consider the tax consequences of the variation.   This is a complex matter and if you have any concerns about variation it is important to seek competent legal advice.

These comments should be viewed as of a general nature only.

A distinction can usually be made between variations that relate to the trust’s property (or who can benefit from it)  and variations relating to the trust’s administration.

Administrative changes do not usually have any tax consequnces.

However, variations to beneficial interests, or say a resettlement where all or some of the trust’s property is resettled onto a new trust can have tax consequences.

The difficulty with variation is determining the nature of a variation at trust law so that any tax law consequences can be correctly identified. Tax consequences arising, not because there has been a variation, but where there is a change in the legal or beneficial ownership or rights relating to the trust’s property.

From a tax perspecitve the consequences of a variation are those that that arise from a loss of continuity of a trust or from changing property ownership, for example where there is a resettlement.

Where a variation is made to avoid an undesirable tax consequence, for example where trustees would incur a tax liability

Other variations may have no effect on the trust structure but can have a tax effect because of a resultant impact on tax revenue following the variation. For example where a variation so that a tax impost could be avoided was subsequently found to be tax avoidance.

Guidance

There are no legislative tests as to what variations can have tax consequences.  However, the following statement from the report of the Australian Review of Business Taxation: A Tax System Redesigned: More Certainty, Equitable and Durable, July 1999, p 479 usefully summarises the uncertainty that prevails regarding the consequences of variation:

“An existing trust may cease and a new trust may be created as the result of changes to a trust deed, changes to the substance or nature of a beneficiary’s interest in the trust or changes to the operation of a trust. Such changes can give rise to the resettlement of a trust for some legal purposes. However, neither trust law nor taxation law is clear about exactly what changes to a trust deed constitute the creation of a new trust.”

Tipping point

The difficulty in matters of variation is to identify the point where changes are such that a new trust comes into existence as a consequence of changes to the former trust.

Where the identity or rights of the beneficiaries are altered it is more likely that a fundamental change has occurred.

Although there is no recognised  test that determines whether a variation has brought about a new trust results, there are a number of factors that can provide quidance.

Such factors include, whether there has been:

• changes to the class or classes of beneficiary

• a change in the trust’s final date (either forwards or backwards)

• substantial changes in the nature of trust property

• changes in the terms of the trust

• a settlement onto trust on amended terms.

A change of beneficiaries can result in a new trust

Identifiable beneficiaries are a pre-requisite of a valid trust.  Although it is common for the beneficiaries of any trust to change over time, a variation of trust that results in a complete change of beneficial owner can represent the termination of a trust and the establishment of a new trust for different objects.  Establishing the significance of a change in beneficiaries can require consideration to how the trust had been managed in the past.  Where beneficiary changes are common, a change may be of far less significance than where there has been no change for some years, or even say the life of the trust.

Further guidance on changes that will amount to a redefinition of beneficiaries such that a termination of trust results are provided by the Australian Tax Office in its statement of principles released in response to the decision in Commercial Nominees — “Creation of a new trust — Statement of Principles August 2001”. Although these principles must be considered in the context of Australian tax and trust law, and are not determinative forNew Zealandpurposes, they nevertheless provide a considered view of matters to take into account.

A settlement on new terms can bring about a new trust

Where a new settlement onto a trust requires that the terms of the trust are altered in respect of that settlement, the settlement may in fact represent a new trust. However, as the existing trust terms are not necessarily varied, the existing trust may not come to an end, as is the case where there is a fundamental variation. In such cases, determining whether a new trust results will require consideration in the context of the particular circumstances.

A change of trustee is not a variation of trust

In the normal course of events following the retirement and appointment of a trustee, the trust property vests in the new trustee who assumes the rights and obligations of the retiring trustee and the trust continues.  Unless a change of  trustee is part of an arrangement where the trust property is to be held by a new trustee on new terms, the retirement and appointment of trustee(s) will not amount to a variation of trust.

References

  • Income Tax Act 2007, s HC 3
  • Vicki Ammundsen, Taxation of Trusts, ed 2, CCH New Zealand Limited (2011) chapter 31
  • Australian Tax Office paper “Creation of a new trust — Statement of Principles, August 2001” for guidance on what variations can have the effect of bringing a new trust into existence.
  • Dalziell v Dalziell (2008) 27 FRNZ 276
  • Tatham v Tatham (2010) [2010] NZHC 2315
  • Swires (HMIT) v Renton [1991] BTC 362, IR Commrs v Holmden [1968] AC 685; [1968] 1 All ER 148
  • McKnight & Ors v Craig & Ors (2010) 3 NZTR 20-019
  • Shanks & Ors v Shanks & Ors (2010) 3 NZTR 20-021
  • De Bernardo & Ors v De Bernardo & Ors (2010) 3 NZTR 20-011
  • FC of T v Commercial Nominees of Australia Ltd 2001 ATC 4336
  • Hart (Inspector of Taxes) v Briscoe [1978] STC 89
  • Massereene & Ferrard v IR Commr [1900] 2 IR (Irish) 138, 147

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