A discretionary trust, which includes the family trust many Australian business owners operate, works because the trustee holds the trust assets and decides which beneficiaries receive income and capital each year. That arrangement is only useful while the right people are in it. When a beneficiary falls out with the family, a director resigns, or a co-trustee becomes unsuitable, the natural question is how to remove them. The answer is never simply to strike a name off a list. Removing a beneficiary or a trustee is a formal process governed by the trust deed, backed by default rules in state legislation, and surrounded by tax and duty consequences that can dwarf the original problem if handled badly.
This article explains how the removal process actually works: who has the power to act, the deed-based routes for removing beneficiaries and trustees, when the court gets involved, and where the capital gains tax and stamp duty risk concentrates.
Who is involved in changing a trust
Removing a beneficiary or trustee is not a one-person decision, you will need to consider the perspectives of the following parties before making any change:
- Trustee: Holds the trust assets and administers the trust. Depending on the deed, the trustee may hold a power to amend the deed, to add or remove beneficiaries, or to retire.
- Appointor: The person the deed names to appoint and remove trustees. In a family trust this is often the founder or a trusted adviser. The appointor's power to replace the trustee is usually the simplest removal mechanism.
- Beneficiaries: The people or entities entitled to receive income or capital. Their rights and the class they belong to are defined by the deed.
- The court: The Supreme Court of the relevant state or territory can remove and replace trustees, and can approve variations of the trust in appropriate cases.
- The ATO and state revenue offices: They do not approve the change, but they decide how it is taxed. A change that looks administrative can become a taxable event if it crosses into what the ATO treats as a new trust.
The tension in the system is that the people who usually want the change, the beneficiaries or one of several trustees, are rarely the people the deed gives the power to make it. That is why almost every removal ends up working through either the appointor, the deed's amendment power, or a court application.
The trust deed is the master control
Every trust is governed by its deed, and the deed is the first and most important document in any removal. It sets out how the trust can be changed: whether the trustee has a power of amendment, whether the appointor can remove and replace the trustee, whether beneficiaries can be added or excluded, and what formalities apply, such as execution as a deed or a written resolution.
The golden rule is to only change the trust in a way the deed authorises. A variation made without the supporting power is a breach of trust and can be set aside. Worse, a change that goes beyond what the deed permits can be treated for tax purposes as ending the old trust and creating a new one, an outcome discussed below under resettlement risk.
Where the deed gives the trustee a power of amendment, the standard mechanism is a deed of variation, sometimes called a deed of amendment. This is a document executed as a deed that amends the relevant clause of the original trust deed, for example the definition of the class of beneficiaries. It should be kept with the trust's permanent records, because it forms part of the trust's documentation and shows how the deed has changed over the life of the trust. If the deed requires a written trustee resolution instead, that resolution must be properly recorded and kept with the trust file.
Removing a beneficiary
Beneficiaries are usually removed in one of three ways, each of which depends on what the deed provides:
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Renunciation by the beneficiary: The simplest route is for the beneficiary to give up their interest. A beneficiary who wants out, for example in a divorce or a falling out, can sign a deed of renunciation or assignment disclaiming their interest in the trust. This is a personal choice, so it does not require any power in the deed, but it must be documented properly and delivered to the trustee to be effective.
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A power to revoke in the deed: Many modern discretionary trust deeds give the trustee an express power to declare that a person will cease to be a beneficiary from a specified date. Where the deed contains that power, the trustee can exercise it by resolution or deed as the deed directs. If the deed has no such power, the trustee cannot simply declare someone out of the trust.
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Variation of the class of beneficiaries: Where the deed has a general power of amendment, the trustee can vary the deed to remove a named beneficiary or narrow the class of beneficiaries. The ATO has confirmed that this kind of change does not trigger a capital gains tax event where it is a valid exercise of a power contained in the trust deed. In its Taxation Determination TD 2012/21, the ATO's example of removing a company from the class of general beneficiaries of a family trust is a change that does not give rise to a CGT event.
The main complication is when the removal affects people who cannot consent, such as minors, unborn children, or beneficiaries who are not named but described as a class, like "the children of X". A trustee cannot rely on the consent of a beneficiary who cannot give it, and a deed amendment that strips rights from an unborn class member may be ineffective. In these cases the change may need the approval of the court under its powers to approve variations of trusts, which adds cost and time.
Two points are worth noting about what removal does not do. Removing a beneficiary does not undo distributions already made, and any entitlement the beneficiary has for the period before their removal generally survives. Where income or capital has been streamed to the beneficiary, the streaming arrangements will need to be revisited for future years.
Removing a trustee
Trustee removal can happen one of two ways:
Via deed
Most trust deeds give the appointor power to remove a trustee and appoint a replacement. Where the appointor is alive and capable, this is usually the cleanest route, because the appointor's power operates without needing the consent of the trustee being removed or of the beneficiaries. If the appointor has died or lost capacity, the deed will usually say who can act next, or the trust may need a court application to fill the gap.
State legislation also provides a default mechanism. Under s 6 of the Trustee Act 1925 (NSW), a new trustee can be appointed by registered deed in place of a trustee who wants to be discharged, who refuses or is unfit to act, or who has been removed under a power contained in the trust instrument. Equivalent provisions exist in the other states and territories. This is the mechanism that makes a routine retirement or replacement work without going to court.
Via court order
Where the deed has no workable removal power, the trustee refuses to go, or the parties cannot agree, the application goes to the Supreme Court. Under s 70 of the Trustee Act 1925 (NSW), the court may appoint a new trustee in substitution for an existing trustee whenever it is expedient, and in particular where the trustee has been convicted of a serious indictable offence or is bankrupt.
The guiding principle for the court comes from Miller v Cameron (1936) 54 CLR 572, where the High Court held that in deciding whether to remove a trustee, the court regards the welfare of the beneficiaries as the dominant consideration. The case is instructive because the trustee there was not accused of dishonesty: he had assigned his estate to his creditors and was in financial difficulties, and the High Court upheld his removal because the risk to the trust assets made removal proper in the interests of the beneficiaries. Conduct that commonly supports a removal application includes:
- Breach of the trust deed: acting outside the terms of the trust.
- Mismanagement: handling trust assets negligently or recklessly.
- Fraud or misappropriation: taking or using trust assets improperly.
- Conflict of interest: dealing with the trust for personal gain, such as buying trust assets for less than market value.
- Excessive fees: charging the trust unreasonable remuneration.
- Breakdown of relationships: irreconcilable conflict between co-trustees or between the trustee and the beneficiaries.
- Incapacity or insolvency: mental incapacity, bankruptcy, or other inability to properly administer the trust.
A court removal application is a last resort. It runs in the equity division of the Supreme Court, requires an originating process supported by affidavits setting out the grounds, and the court will weigh the welfare of the beneficiaries against the disruption of changing the trustee. Where the court does remove a trustee, its orders can appoint a replacement, vest the trust property in the new trustee, and deal with costs, including ordering the removed trustee to pay costs in appropriate cases.
Where the tax and duty risk sits
The most expensive mistake in trust housekeeping is not a failed removal. It is an unintended resettlement, where a change to the trust is treated as bringing the old trust to an end and creating a new one. When that happens, the trust can be taken to have disposed of its assets at market value, which can trigger capital gains tax across the whole asset base, and state stamp duty can apply to the dutiable property.
The boundary is set out in TD 2012/21. CGT event E1 in s 104-55 of the Income Tax Assessment Act 1997 (Cth) happens when a trust is created over a CGT asset, and CGT event E2 in s 104-60 happens when a CGT asset is transferred to a trust. The ATO's position is that amending a trust deed under a valid power in the deed, or with court approval, does not trigger E1 or E2 unless the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or unless the change has the effect of putting a particular asset under its own separate set of rights and obligations.
In the ATO's own example in TD 2012/21, a trustee used a power in the deed to declare that two trust assets would be held exclusively for one beneficiary to the exclusion of the others. Because each asset then sat under its own charter of rights, the ATO concluded that separate trusts had arisen over each asset, and CGT events E1 and E2 happened on the declarations. A removal exercise that carves out an asset for one beneficiary, or that restructures the trust so that assets are held on materially different terms, can cross the same line.
The key safeguard is that the change must be a valid exercise of a power that already exists in the deed. Where the deed supports the change, the trust continues and the assets are not revalued for CGT purposes. Where it does not, the change may be void as a breach of trust, or worse, may be treated as a resettlement with CGT and duty consequences.
Stamp duty is a separate, state-based layer. A genuine change of trustee, where the same assets are held on the same trusts for the same beneficiaries, is treated lightly. In New South Wales, s 54 of the Duties Act 1997 (NSW) charges nominal duty of $100 on a transfer of dutiable trust property to a new trustee on the retirement or appointment of a trustee. Queensland provides a change of trustee exemption under s 117 of the Duties Act 2001 (Qld), and Victoria exempts trustee changes from duty where the requirements of its exemptions are met. But those concessions assume there is no change in the underlying beneficial ownership. If the removal is structured as a resettlement, or property is transferred out of the trust, full ad valorem duty can apply, and state-specific rates and exemptions mean the position must be checked in the state where the property sits.
There is also the compliance tail. After a trustee change, the new trustee needs to attend to Tax File Number and Australian Business Number records with the ATO, and the trust's tax returns must be prepared and lodged in the name of the new trustee. None of this is hard, but it is easy to miss in the middle of a restructure, and a gap shows up later in ATO correspondence.
When you need a lawyer
The point at which professional help earns its cost is before the change is made, not after the tax bill arrives. A lawyer's first job is to read the deed and confirm which powers actually exist: whether the trustee can amend the class of beneficiaries, whether the appointor can remove the trustee, and what formalities the deed requires. That single check determines whether a removal is a routine document or a court application.
The second job is tax and duty planning. The difference between a valid deed amendment and a resettlement can turn on the drafting of one clause, and the cost of getting it wrong is measured in the CGT on the whole asset base and stamp duty on the trust's property. Tax advice should be obtained alongside the legal advice before the deed of variation is executed, so that the change is documented in a way that the ATO's ruling in TD 2012/21 protects.
The third job is the court application, which should be treated as the route of last resort. Where the deed power is missing, the appointor is gone, or a trustee refuses to resign, the removal application to the Supreme Court needs to be run carefully, because the court's focus on the welfare of the beneficiaries means the evidence needs to show why the removal serves the trust, not just why the parties have fallen out.
The deed decides the process, the tax decides the price
If there is one thing to take from this area of law, it is that the removal process is only ever as good as the deed it is built on. A removal attempted without the supporting power is not just ineffective, it risks being treated as a new trust, with every asset deemed disposed of and duty charged on the whole property base. The cheapest insurance is a review of the deed's amendment and removal powers before anything is signed, followed by legal and tax advice on the specific change. A properly documented removal costs a fraction of what an unintended resettlement costs, and the consultation to confirm which route applies is where that protection starts.