Creation of a new trust - Statement of Principles August 2001

Sources of relevant law

The central problem is to define the point where changes are such that a new trust estate comes into existence. The tax legislation 'takes the law as it finds it', operating on, or modifying the situation arising at general law. We must rely on court decisions, in the absence of criteria in the legislation itself, for guidance as to when a new trust comes into existence.

In the Commercial Nominees of Australia Limited case, the High Court stated that the three main indicia of continuity of a superannuation entity for the purposes of the income tax superannuation rules are:

• the constitution of the trust under which the fund operates
• the trust property
• membership.

However, the High Court commented that the question of continuity is to be considered 'in the context of a superannuation fund, which, of its nature, may be expected to change'. The High Court in the Commercial Nominees of Australia Limited case confined its reasons for judgement to superannuation entities. The Commissioner does not draw any implication (favourable or adverse) from that decision in relation to other kinds of trust estates. To the extent that observations made by the Full Court of the Federal Court of Australia in the decision under appeal were not confined to superannuation entities, the Commissioner takes the view that those observations are of limited, if any, precedential value. They do not warrant any modification to the approach taken in this Statement of Principles.

However, the ATO believes that the necessary requirement that there be a continuity of the trust (that is, that the fundamental trust relationship continues) applies equally to trusts generally. The ATO also relied on its understanding of decisions on trusts from other non-taxation areas of the law. Judicial pronouncements must be treated cautiously outside the legislation and jurisdiction in which they arise, but the ATO believes that the case law outlined below offers useful and relevant guidance.

Trust settlements are recognised under Australian State stamp duty legislation and have generated extensive case law on when a trust is 'settled' or 'resettled'. Relevant decisions include:

• Davidson v. Armytage (1906) 4 CLR 205
• Davidson v. Chirnside (1908) 7 CLR 325
• CSD (NSW) v. Perpetual Trustee Company Ltd (Quigley's case) (1926) 38 CLR 272
• Wedge v. CS (Vic) (1940) 64 CLR 75
• Buzza v. CS (Vic) (1951) 83 CLR 286
• CSD (NSW) v. Buckle 98 ATC 4097.

The stamp duty cases indicate that a new settlement arises when the changes amount to a 'new charter of rights and obligations', or there are 'created in the trust fund as a whole different equitable interests to those which had existed under the pre-existing trust'. In the ATO's view there is considerable overlap between the terms 'settlement' and 'trust estate'. Exceptions include bare trusts (which may not be settlements) and multiple trust estates arising under one instrument (which may comprise a single settlement). Nonetheless, these cases give valuable insights into the nature of trusts and the circumstances in which new trusts arise.

The ATO also refers to United Kingdom estate duty decisions. Gartside v. IRC [1968] 1 All ER 121, often referred to in Australia as an authority on discretionary trusts, arose in this jurisdiction. A line of cases, discussed and explained in Re Weir's Settlement [1970] 1 All ER 297, considered when changes to a trust which took place in consequence of a death would result in a 'passing' of the trust property. Weir's Settlement supports the proposition that property passes where changes amount to a 'new trust in favour of a new group with new qualifications', as opposed to a situation where the 'same trust purpose or theme continues unchanged'.

It has been argued that a new trust estate for Australian income tax purposes may only arise in situations that would amount to the creation of a new settlement under United Kingdom capital gains tax legislation. Relevant cases on the UK provisions include:

• Roome v. Edwards [1981] 1 All ER 736 per Lord Wilberforce at 739 to 741
• Bond v. Pickford [1983] STC 517
• Swires v. Renton [1991] BTC 362.

Although situations that would amount to a new settlement or resettlement under UK CGT principles could result in a new trust estate under Division 6, in some circumstances the one settlement (in this sense) may comprise a number of separate trust estates for Australian income tax purposes, either concurrently or in succession.

For this reason, at this stage the ATO considers that a particular set of circumstances may give rise to a new trust estate for the purposes of Australian income tax, even though it may not amount to the creation of a new settlement for the purposes of UK capital gains tax. As Lord Wilberforce pointed out in Roome v. Edwards at All ER 741, the UK capital gains tax (which he contrasts to estate duty) focuses on settlements, rather than funds held on distinct trusts. In the ATO's view it is generally the latter which amount to trust estates under Division 6.

ATO references:
NO 4913