Changing the trustee of a unit trust, and what has to move with it.

Identify the holder of the power before anything is drafted, because an instrument executed by a party who does not hold it does not effect the change. Some deeds name an appointor who may remove and appoint at will. Some allow the trustee to retire on notice, conditional on a replacement being appointed. Some require a resolution of unitholders, commonly a special resolution of 75 per cent of the votes cast at a meeting or a written resolution of holders of 75 per cent of the units on issue, and the difference between those two formulations decides the outcome wherever the register is concentrated. The instrument has to be executed by whoever the deed names, in the form it requires, after any notice period has run.

The incoming trustee usually has to consent in writing before the appointment takes effect, and many deeds require it to hold an Australian financial services licence covering the fund's activities or to be a licensed trustee company. Where the amendment power sits with the trustee and the amendment touches its own remuneration or indemnity, the exercise is conflicted and has to be documented as such. A power exercised for a purpose outside the one for which it was conferred can be set aside even where the literal words of the clause appear to cover it, and Australian courts have voided amendments that reached beyond the power, including amendments to the clause governing who may appoint and remove the trustee.

Consents held outside the deed run on their own timetable. Facility agreements commonly make a change of trustee an event of default or a matter needing the financier's prior written consent, and the financier will want the incoming trustee to confirm its security first. A consent obtained after the instrument is executed does not repair a change made in breach of the condition.

A change of trustee that leaves the terms of the trust and the beneficial interests untouched does not alter beneficial ownership of the trust's assets, and the trust continues as the same taxpayer with the same tax file number. The exposure sits in the deed amendments that travel with the change. Taxation Determination TD 2012/21 sets out the Commissioner's position that CGT event E1 or E2 does not happen where the terms of a trust are changed in a valid exercise of a power contained in the trust's constituent document, or varied with the approval of a relevant court, unless the change causes the existing trust to terminate and a new trust to arise, or the effect of the change is that a particular asset becomes subject to a separate charter of rights and obligations. What decides the outcome is whether the power existed and whether it was properly exercised, rather than how substantial the change looks.

The tax analysis therefore sits inside a trust law question. The conditions the deed specifies, procedural ones included, bear on whether an exercise is supported by the power, and an amendment made without a consent the deed required, or signed by a person who no longer held the appointment power, is void rather than merely irregular. The repair, where one exists, is a fresh and valid exercise of the power or an application to the court, and neither operates retrospectively. Characterisation of any particular change belongs to the fund's tax adviser and should be settled before the instrument is executed.

State duty is a separate analysis in every jurisdiction where the trust holds dutiable property. The revenue offices generally allow concessional or nominal duty on a transfer of dutiable property to a new trustee on a retirement or appointment, conditioned on the incoming trustee not being and not being capable of becoming a beneficiary, and on the change not forming part of a scheme to confer a beneficial interest. The conditions differ in each Act and the concession is claimed rather than automatic, so the application goes in with the deed and the evidence of the appointment. An incoming trustee that is foreign under the relevant state test, or a trust treated as foreign through its unitholders, can also bring surcharge duty and surcharge land tax with it, assessed against the value of the land.

Most fund deeds contain a vesting clause providing that the trust property vests in the new trustee on appointment, and the trustee legislation in each jurisdiction provides for a deed of appointment to have the same effect, subject in both cases to the same limitation. Vesting does real work for property with no register behind it, including contractual rights, receivables and cash held on trust, and the statutory provisions carve out land under the Torrens system, shares, and property whose transfer depends on registration or a third party's consent. Legal title to land moves when the land titles office registers the dealing, and shares move when the company's register is written up.

Land is the slowest item to move. The transfer or transmission to the incoming trustee is lodged with the relevant land titles office, supported by the executed deed of retirement and appointment, and in most jurisdictions the instrument has to be assessed for duty before the dealing can be registered. Where the land is mortgaged, the mortgagee's consent and often a transfer of mortgage are required, and the mortgagee's internal approvals set the timetable. Bank accounts are the other overrun, because an account is held in the name of the trustee company and the account holder cannot simply be changed. A new account is opened in the name of the incoming trustee as trustee for the fund, with full customer identification on that entity, its directors and its beneficial owners.

A trust should not be left without a trustee, so the appointment should take effect immediately before, or simultaneously with, the retirement, in one instrument executed by every party whose consent is required. Two documents signed on different days open the gap the statutory retirement provisions were written to prevent, and where the deed vacates the office on retirement the outgoing trustee may have no capacity left to sign what is still outstanding.

An ABN, a TFN and a GST registration belong to the trust rather than to the trustee, so they survive the change and what gets updated is the record of who the trustee is. Personal property security registrations need attention in both directions. Where the fund is the secured party, which is the ordinary position for a private credit trust, its registrations name the outgoing trustee, so the secured party details have to be amended or the registrations transferred, or nobody with authority can discharge them when the position is repaid. Where the trust is the grantor, the register's rules require a trustee grantor to be identified by the trust's ABN, so a registration made correctly is undisturbed by the change, while one made against the trustee company's ACN was defective when it was made and is exposed to being ineffective for a seriously misleading defect.

The incoming trustee does not become a party to the fund's contracts by force of the deed. A trustee contracts personally and takes a right of indemnity against the trust assets, so the fund's facility, subscription, management and service contracts each have to be novated or assigned, and financiers will want the incoming trustee to accede to the security documents. Limitation of liability clauses are inherited as drafted, and the standard form limits a counterparty's recourse to the trust assets only so far as the trustee's own right of indemnity is available, which makes the outgoing trustee's conduct a live question for the incoming trustee's exposure.

Licensing and financial crime obligations attach to the entity providing the service. If the outgoing trustee held the Australian financial services licence under which interests in the fund were issued, the incoming trustee needs its own authorisation, an appointment as an authorised representative, or another arrangement with a licensee, in place on the day the office changes. Where the trustee is the reporting entity for the fund's designated services under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), that status does not pass with the office either, so the incoming trustee stands up its own enrolment and AML/CTF program and obtains the investor identification material in a form it is entitled to rely on.

A trustee's right to be indemnified out of the trust assets for liabilities properly incurred in the office is secured by an equitable lien over those assets. The lien is proprietary, it ranks ahead of the beneficial interests of unitholders, and it survives the trustee's retirement, so the incoming trustee takes the fund's assets subject to it. Until the outgoing trustee's exposure has been dealt with it holds a legal basis for declining to hand everything across, and that is what turns an administrative exercise into a negotiation.

The deed of retirement and appointment is where that gets settled. It usually records an acknowledgement of the outgoing trustee's continuing right of indemnity and lien, an indemnity from the incoming trustee limited in recourse to the trust assets, and the treatment of known and contingent liabilities, which may take the form of a retention, an escrow arrangement, or run-off cover for the outgoing trustee and its directors. Where a liability was incurred in breach of trust the indemnity for it is impaired, which is the question the outgoing trustee will least want examined.

Liabilities the outgoing trustee incurred remain its own, because creditors contracted with that company, and what moves to the fund is the burden of the indemnity rather than the debt. Tax sits differently, because the trust continues as the same taxpayer, so its lodgment history and any open position with the Commissioner become the incoming trustee's administrative problem from the day it takes office.

A registered managed investment scheme changes hands under the Act rather than under its constitution alone. Chapter 5C sets out how a responsible entity retires or is removed, gives members a defined role in choosing the incoming responsible entity at a meeting called for that purpose, and requires the incoming responsible entity to be a public company holding an Australian financial services licence that authorises it to operate the scheme.

The feature that matters for comparison is the statutory transfer. On a change of responsible entity the rights, obligations and liabilities of the former responsible entity in relation to the scheme pass to the incoming one by force of the Act, and the former responsible entity must hand the scheme's books over. A wholesale unit trust has nothing equivalent. Everything the Act does automatically for a registered scheme has to be achieved in an unregistered trust by deed, by registered dealing, by novation and by notice, so the work is proportional to the number of registers and counterparties the fund has.

Amending the governing document differs in the same way. A registered scheme's constitution can be modified by special resolution of members, or by the responsible entity alone where it reasonably considers the change will not adversely affect members' rights, with the modification lodged with ASIC. In an unregistered wholesale trust the amendment power in the deed is the whole of the protection unitholders have, so an amendment touching unit rights, redemption terms or fees has to be tested against that clause word by word.

The order is set by dependency: consents precede execution, duty assessment precedes registration, and account opening and customer identification start before either because they run the longest.

Long after the deed is signed, a land title, a security registration or a bank mandate can still name a company that stopped being trustee in an earlier financial year, and that company may by then have been deregistered, so a week's correction during the transition becomes an application to reinstate it. Keeping the outgoing trustee registered and its directors authorised to sign until the asset register has been swept clean is worth negotiating into the deed.

Two questions are worth putting to an adviser before drafting begins: which register, which contract and which consent will still carry the former trustee's name when the fund next has to prove who holds its assets, and what the deed requires for the amendments the incoming trustee has made a condition of taking office, since those carry the resettlement risk rather than the change of office itself.