The ATO's final determination on resettlements destroys Centrelink's last hope

Brett Davies Lawyers Tax Update dated 1 November 2001

The ATO's Tax Determination (TD) on Resettlements of Trusts has been released - TD 2001/26. It is now final. The previous TD was only a draft. 

Against the wishes of Centrelink the ATO has unfairly acted against those pensioners trying to remove themselves from their family trust. If you renounce your interest in your family trust you are likely to be subject to the Capital Gains Tax. 

Centrelink requires that you give up control and your beneficial interest in the trust to avoid the asset and income tests. On its very own web site Centrelink stated that you should amend the trust deed to achieve this. The ATO's new determination states that a renunciation by a beneficiary of an interest in a discretionary trust gives rise to a CGT event C2 for the beneficiary, being an abandonment, surrender or forfeiture of the interest (sec 104-25 of ITAA 1997). 

This is outrageous. So now not only do you have to be careful not to incur resettlement and stamp duty, you must also be careful to ensure that you do not trigger any Capital Gains Tax. 

You can remove yourself from your trust and not get a dollar of capital proceeds. It makes no difference to the ATO. Whether or not you get any capital you must determine the market value of your interest (under sec 116-30 of ITAA 1997) when acquired and at the time of the renunciation of the interest. A capital gain may arise if the market value exceeds the cost base of the beneficiary's interest. 

If a beneficiary of a discretionary trust has an interest in either the assets or the income of the trust before or after the exercise of any discretion by the trustee as to the allocation of those assets or income (eg a beneficiary with a default interest), then renouncing your interest in the trust is likely to trigger a Capital Gain Tax if you acquired that interest after 20 September 1985 because its cost base is likely to be nil and the interest at the time of the renunciation may have some significant value.  

However if you can show that the beneficiary has no interest in the assets or income before the discretion of the trustee, then a Capital Gain is unlikely as the interest has a nil cost base value and a nil market value. 

Extra care and preparation is now needed in rearranging your affairs to deal with the Centrelink changes that come into effect on the 1 January 2002.

I know that I am beginning to sound like a broken record - however, here is the message one more time. You can't amend the family trust deed to remove a specified or general beneficiary. (That is unless you are happy to pay stamp duty and CGT.)