UPDATE NOTE:  TD 2012/D4, referred to in this post, has been finalised in TD 2012/21.  This post should be read in conjunction with my post of 27 October 2012 which discusses TD 2012/21.

Changing the terms of a trust has historically been “risky” from an income tax perspective.  There was always a concern that the Commissioner of Taxation may have considered that the change triggered a capital gains tax liability (on the basis that the change caused a “resettlement” of the trust).

Recently, changing the terms of a trust became less risky.

Recently, the Commissioner of Taxation issued a draft tax ruling (TD 2012/D4) which addresses the kinds of changes to a trust that the Commissioner considers should not trigger a CGT liability.  Based on the draft ruling, changes to a trust that are made “pursuant to a valid exercise of a power contained within the trust’s constituent document” should generally not give rise to CGT.

(However, a change that causes the trust to terminate, or leads to a particular asset being held on different terms to other trust assets, might give rise to a CGT liability even if the change is made pursuant to a valid exercise of a power contained within the trust’s constituent documents.)

The ruling is still only in draft form, so, technically, cannot be relied on at this stage.  However, it gives a good indication of the Commissioner’s current thinking about what constitutes a trust “resettlement” (which is considerably more favourable to taxpayers than the Commissioner’s previous thinking on the issue).

Examples

The draft ruling gives some examples of amendments to a trust deed that should not trigger a CGT liability, provided that, in each case, the amendment is a valid exercise of a power of amendment contained within the deed:

• amending a trust deed to add additional discretionary beneficiaries
• amending a trust deed to expand the types of investments the trustee can make
• amending a trust deed to add a definition of income and add a power to stream