‘Unacceptable uncertainty’: Law firm flags concerns with proposed fixed trust definition

Significant problems remain with the proposed trust tax reforms, with the fixed trust definition introducing "unacceptable uncertainty", the testamentary trust exclusion too narrow, and the treatment of corporate beneficiaries producing disproportionate results, according to Sladen Legal.

The law firm also warned that the electable regime contains restrictions that will limit its practical utility.

In a recent submission, Sladen Legal acknowledged that the government has tried to address some of the matters raised in the previous consultation on the proposed trust tax changes by offering an election for existing trusts and recasting the fixed trust test.

The law firm said that while those changes narrow aspects of the proposal, they do not resolve the more fundamental concerns.

The submission explained that the new fixed trust definition is overly complicated and uncertain.

It noted that subsection 272-65(1) of the exposure draft provides two alternative routes to fixed trust status.

One route concerns beneficiaries’ fixed entitlements to all income and capital. The other asks whether the trust contains no material discretionary elements affecting entitlements or rights," it said.

Proposed section 272-65 then identifies matters that may suggest that a trust satisfies the latter requirement.

The provision gives examples that may point towards the absence of material discretionary elements but does not state that any one of them is decisive. The examples include clearly defined entitlements; powers that cannot significantly vary those entitlements; and consent requirements for any variation of entitlements.

The law firm said while it supports the intention to broaden the fixed trust status beyond the narrow vested-and-indefeasible requirements of the existing law, the current drafting introduces unacceptable uncertainty for trustees and their advisers.

"The statutory expressions 'significantly vary', 'significantly affect' and 'material discretionary elements' do not identify a measurable boundary. Their application will depend on an evaluative assessment of the power, the surrounding deed, the likelihood of its use and the practical effect on the relevant entitlement," the firm said.

"The drafting technique creates uncertainty in both directions. The listed matters neither guarantee the result nor set a complete boundary for the inquiry. A trustee seeking to self-assess must still identify every other power that might be treated as material, even after satisfying the stated indicators."

Sladen Legal also noted that the power provided in the exposure draft by legislative instrument also creates a moving boundary.

"A trust regarded as fixed today may need to be reassessed after a later instrument, so trustees cannot treat their classification as settled for the future while that power remains available," it said.

"The definition is not sufficiently workable for a rule that determines whether a substantial liability arises. It asks trustees to reach a legal and factual conclusion by weighing uncertain concepts, rather than by applying criteria they can use consistently when preparing the trust return."