trust deed updating - required or not?

Trust Deed Updating - Required or Not?

Why do trust deeds need to be updated?

With the Australian Taxation Office having established a $379 million task force this year to specifically target trusts, your discretionary

(family) trust deeds and unit trust deeds need to be updated to prevent any

adverse tax consequences for the trust and its beneficiaries.

There are many reasons why trust deeds need to be updated. Trust deeds which contain out-of-date provisions, inconsistent terms, drafting errors or were simply not established in accordance with the client’s instructions, can lead to serious adverse consequences.

The most common reasons why trust deeds need updating are as follows:

1. Income of the Trust

2. Income Streaming Measures

3. UPEs and Division 7A

4. Financial Transactions

5. Dispute Resolution

6. Trust Law Issues

1.Income of the Trust

Broadly, as a result of the decision of the High Court in Commissioner of Taxation v Bamford [2010] HCA 10 (Bamford )and subsequent ATO publications, to determine the income of a trust which is to be taxed in the hands of the beneficiaries, reference has to be made to what is contained in the trust deed.

2.Income Streaming Measures

Following Bamford, the ATO created uncertainty by questioning the ability of trusts to stream different sources of income and capital. Treasury responded by introducing new trust streaming measures that specifically allow trusts to stream capital gains and franked distributions to particular beneficiaries, provided these powers are contained in the trust deed.

3.UPEs and Division 7A

In the past few years, the ATO has expanded its views with regard to

when an unpaid present entitlement would be treated as a

loan. In recent publications the ATO has confirmed its view that it is

necessary to provide the trustee of the trust with additional powers to

comply with the relevant requirements.

4.Financial Transactions

Trust deeds should contain other modern trust principles and administrative provisions. For example, many trust deeds do not allow the trustee to enter into certain transactions with banks, give guarantees or to make family trust elections

5.Dispute Resolution

It is essential for trust deeds to provide in detail what happens to the control of the trust on the divorce, bankruptcy, death or other legal incapacity of the trustee or other key office holders such as the guardian and the appointor.

6.Trust Law Issues

Trust deeds need to be checked to determine they were validly established, are in compliance with the rule of perpetuity and that they were correctly set up in the first place (and were not incorrectly amended after establishment) due to apparent incompetence or carelessness.

How to tell if a trust deed needs to be updated

As a general rule:• if the trust deed was drafted in or before 1998, the deed

most likely needs to be amended to conform to the significant developments in tax law and trust law that have occurred since the deed was drafted; and

• If the trust deed was drafted in or after 2010, then provided the trust is not involved in financial transactions and does not have any unpaid present entitlements, the provisions of the deed may not need to be updated for tax law and trust law purposes.

Our Free Preliminary Trust Deed Review Service

• our firm performing a preliminary review of your trust deed (including all subsequent amending deeds) to determine if and to what extent the trust deed is deficient for tax law, trust law and commercial purposes; and

• Based on our preliminary review, we will write to you and outline the critical deficiencies (if any), our recommendations as to whether or not the trust deed needs to be updated and an estimate of our fees.

Our Trust Deed Health Check Service

If the trust deed needs amending and you wish for us to proceed, then we will perform a trust deed “health check” service which includes:

• one of our trust law experts thoroughly reviewing the trust deed to determine which provisions need replacing, which additional provisions need to be inserted, whether the trust deed contains any errors which need rectifying and whether the trustee, guardian and/or appointor positions need to be amended; and

• Based on our thorough review, our trust law expert will then prepare a deed of amendment for the trust deed, to amend the deed on a piecemeal basis to avoid any adverse resettlement of the trust, which we will provide to you as an electronic copy (or hard copy, if requested).

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