Variations to discretionary trusts

Key information

A variation to a discretionary trust may trigger duty if the trust holds dutiable property, such as land. This can occur even if the trustee remains the registered owner. 

Duty most commonly applies where the variation results in either:

• a declaration of trust over dutiable property
• a change in beneficial ownership of dutiable property held under the trust. 

A change in beneficial ownership may occur in a range of circumstances, including where equitable interests change, or where property is no longer held on trust.

Whether duty applies generally depends on the substance and legal effect of the variation. A variation may be made by deed or, in some cases, approved by a court. 

Types of beneficiaries

The duty outcome often depends on the interests or rights a beneficiary has before and after the variation. Discretionary trusts often include the following types of beneficiaries:  

• Discretionary beneficiaries may receive income or property only if the trustee exercises its discretion in their favour. Until then, they do not hold an equitable interest in the trust property. They only have a right for the trustee to consider them.
• Takers in default are entitled to receive the trust fund if the trustee does not exercise its discretion. Depending on the trust deed, they may hold an equitable interest in the property held under the trust.
• Many trust deeds also identify primary or specified beneficiaries. These are often used to define the classes of discretionary beneficiaries. A primary beneficiary may also be a taker in default. 

Variations that trigger duty

Variations that are declarations of trust

A variation is a declaration of trust if its legal effect is that identifiable property is to be held in trust for certain people or purposes. This can occur even if the original trust continues. 

For example, a variation may result in a declaration of trust if it:

• causes dutiable property to be held on the terms of a new trust, or
• provides that a particular property is to be held for a named beneficiary absolutely. 

Variations that change beneficial ownership

Duty applies where a variation results in a change in beneficial ownership of dutiable property. This includes where the variation:

• causes dutiable property to stop being held under the trust
• causes dutiable property to become subject to a new or different trust
• changes equitable interests in dutiable property held under the trust.

Variations that terminate a trust

Some variations may be so significant that, as a matter of trust law, the original trust ends and a new trust arises. If this occurs and dutiable property is no longer held under the original trust, this results in a change in beneficial ownership. 

Relevant factors include whether the variation was authorised by the trust deed or approved by a court and whether the trust property, beneficiaries and operative trust terms continue.

If dutiable property is no longer held under the original trust, duty applies at the same rate as a transfer of the dutiable property.  

Variations that cause property to be held on different terms

Duty may apply even if a variation does not terminate the trust. 

This may occur if the person acting as trustee starts holding dutiable property in a different capacity. For example, they may stop holding the property as trustee of the original trust and start holding it in their own capacity or as trustee of another trust. 

It may also occur where a variation causes dutiable property to be held under a separate set of rights and obligations. In these cases, the property may effectively be held on the terms of a new trust. The original discretionary trust may continue to hold other property. 

Variations that change equitable interests

Duty applies where a variation changes equitable interests in dutiable property held under the trust. This does not depend on whether the variation terminates the trust. 

One example is where a variation removes the trustee’s discretion and gives beneficiaries fixed interests. Before the variation, the trustee had discretion about who benefits. After the variation, one or more beneficiaries have fixed interests. This results in a change in the beneficiaries’ interests in the dutiable property.  Duty may still apply even if the same beneficiaries were previously named as takers in default, and their default proportions before the variation are the same as their fixed interests after the variation. 

Duty may also apply where the substance of a variation is to give one or more beneficiaries a fixed interest in dutiable property held under the trust, even though the trustee retains some discretion under the trust deed. 

Variations that add or remove takers in default

A variation that adds, removes or changes a taker in default usually requires careful review. This is because takers in default may hold equitable interests in dutiable property held under the trust, depending on the trust deed.

A variation that changes all takers in default may result in a change in beneficial ownership. 

Resettlements

A resettlement of a discretionary trust is not itself a dutiable transaction. For duty purposes, the question is whether a variation results in a dutiable transaction, most commonly a declaration of trust or a change in beneficial ownership of dutiable property. 

Variations that do not usually trigger duty

The following variations do not usually trigger duty if they do not change how dutiable property is held under the trust or the equitable rights in that property. The outcome may be different if someone pays money or provides something non-monetary for the variation. 

Variations to administrative provisions

A variation to the administrative provisions of a discretionary trust deed does not usually result in a change in beneficial ownership. This includes variations to provisions relating to investment, borrowing, income streaming, bank accounts, record keeping and expenses. 

Variations to the appointor

A variation that changes the appointor of a trust, or appointor succession provisions, does not usually result in a change in beneficial ownership. 

Variations to add or remove some discretionary beneficiaries

A variation that adds or removes some discretionary beneficiaries does not usually result in a change in beneficial ownership. This includes variations that exclude a person or class of persons from being a discretionary beneficiary. 

For example, duty does not apply merely because a deed adds a family member as a primary beneficiary or excludes a class of discretionary beneficiaries. A closer review is usually needed if the primary beneficiary is also a taker in default. 

Variations that extend the vesting date

Most discretionary trusts include a vesting date, which is when the trust ends and the property is distributed. A variation that extends the vesting date does not usually result in a change in beneficial ownership if:

• the extension is made before the current vesting date
• the trust deed allows the extension
• the beneficiaries, trust property and operative trust terms otherwise stay the same. 

Further guidance

We will release a draft public ruling on variations to discretionary trusts.

If you need guidance on a specific variation involving a discretionary trust, you can request a private ruling.