Considerations in amending a trust deed.

Amending a trust deed is process that should be treated as requiring careful planning, consideration and intentionality. Indeed, unintended (and undesirable) consequences can flow from a purported trust amendment that has been undertaken with such consideration, such as a resettlement of the trust. In this article we examine key considerations when amending a trust deed, and delve into the possible consequences that can arise from an ineffective of ill-conceived amendment.

Why does a trust deed amendment require careful consideration?

A range of consequences can flow from an improper trust deed amendment. Some these are somewhat benign. Take for example an amendment to a trust deed to comply with certain bank requirements. A purported amendment may not satisfy the bank’s requirements, causing delays and additional costs in reworking the amendment deed, or executing an additional amendment deed entirely.

The impact that an amendment has on a beneficiary or class of beneficiaries also needs to be taken into account when amendment a trust document. An amendment that affects the rights of said beneficiary or beneficiaries may give rise to a claim for a breach of trust by the trustee.

More seriously, an ill-considered amendment can cause serious unwanted tax consequences. Take for example the situation in which a trustee purports to amend an aging trust deed to modernise the terms of the trust to accommodate contemporary changes in Australia’s tax laws, such as to allow for the streaming of capital gains and franked dividends.

 If the trustee does not have the requisite power to amend the trust deed, such that the amendment is ineffective, a scenario may arise where the trustee relies on powers contained in the amendment deed in making determinations as to the income and capital of the trust which the trustee does not have. The Commissioner of Taxation may take the view that those decisions are ineffective, and assess the relevant trust income as taxable in the hands of the trustee (at the top marginal rate).

Alternatively, the ATO or a state revenue authority, may take the view that an amendment gives rise to resettlement of the trust estate entirely. This is a scenario that has been previously litigated by the Commissioner of Taxation in Commissioner of Taxation v Clark [2011] FCAFC 5 (‘Clark’s case’).

In this case the Commissioner of Taxation argued that these changes amounted to a lack of continuity of trust, which either terminated the trust estate, or brought into existence a new trust estate. The Full Court of the Federal Court held that there is a continuity of trust where the four essential elements of a trust remain present.

Since Clark’s case the Australian Taxation Office has adopted the position, as stated in Taxation Determination 2012/21 (‘TD 2012/21’) at para 21, that provided “there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of an amendment contained under the deed will not have the result of terminating the trust, irrespective of the extent of the amendments so made so long as the amendments are properly supported by the power”.

One view, an amendment made to a trust that is not properly supported by a power of amendment, is simply void and ineffective. On the other hand, the views set out in TD 2012/21 suggest that the Commissioner may take the view that an amendment to a trust that is not properly supported by the requisite power may result in terminating a trust.

The above demonstrate why important care and consideration is necessary when amending a trust deed.

What Issues need to be considered before amending a trust deed?

When amending a trust deed, several issues need to be considered, including:

  • Is there a power of amendment? What is the scope of the power? Does the power confer on the trustee the power to amend the trusts, or the trusts and the provisions of the trust deed?
  • Is the consent of any of the beneficiaries or an officeholder, such as an ‘appointor’ or ‘principal’ required?
  • Are there any specific restrictions in the trust deed that prevent the proposed amendments from taking effect?
  • Have there been any prior amendments to the trust deed which restrict the ability of the trustee to make the proposed amendments?
  • Do the amendments amount to a lack of continuity of trust?
  • Will the amendments give rise to a taxation or duties liability?
  • What are the rights and interest of the beneficiaries under the trust? Do the amendments infringe on any rights or interests of the beneficiaries?
  • Are there any matters in the historical record of the trust that require confirmation and ratification?

In this article we have examined why trust amendment is a process that requires careful planning and consideration. At PGG we specialise in trust law and trust amendments. If you would like to discuss the topic of this article with us or require assistance in amending your trust deed, please contact us.

Amending a trust deed is process that should be treated as requiring careful planning, consideration

Joshua Briggs

Joshua has a Juris Doctor from Macquarie University and graduated from the College of Law in 2020. He works closely with Peter in trust law and taxation advisory. Joshua has completed a Bachelor of International Studies from the University of New South Wales.