On 11 July 2018, the Australian Taxation Office (ATO) released Draft Taxation Determination TD 2018/D3 (TD 2018/D3) that contains the ATO’s “preliminary view” on the long-debated issue of trust splitting.
TD 2018/D3 says “‘trust split’ refers to an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled by and held for the benefit of one class of beneficiaries, and other trust assets are controlled and held for the benefit of others”.
TD 2018/D3 says that trust split arrangements “will exhibit all or most of” the following laundry list of features:
- The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets.
- Control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries.
- Different appointors are appointed for each trustee.
- The rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee.
- The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit the subset to the exclusion of others. The original trustee will also exercise its powers in respect of the assets held by it independently of the new trustee to benefit a different subset again to the exclusion of others. This is so whether the range of beneficiaries that can benefit from particular assets is expressly limited.
- The rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed.
- The original trustee and new trustee keep separate books of account.
TD 2018/D3 states that trust split arrangements “as described in this draft Determination” “will result in the creation of a trust, by declaration or settlement, as the new trustee has new personal obligations and new rights have been annexed to property. This will cause CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA97) to happen.”
CGT event E1 happens if a taxpayer creates a trust over a CGT asset by declaration or settlement.
TD 2018/D3 is quite unhelpful on what arrangements the view, that CGT event E1 happens, applies to. TD 2018/D3 refers to “all or most of” the features above. Does “most” refer to 4 of the 7, if so which 4, or do some features have greater weight?
TD 2018/D3 includes a single example and given the list of features (above) the ATO refers to, TD 2018/D3 is of little utility in helping taxpayers and their advisers on when CGT event E1 happens in this context apart from knowing in certain circumstances the ATO will consider the CGT event occurred. In this sense, TD 2018/D3 is akin to a ‘Taxpayer Alert’ rather than a Determination.
In previous commentary and publications, the ATO focused on the holding of the assets of the trust for a subset of the beneficiaries of the trust as having triggered the creation of a new trust for CGT purposes. In TD 2018/D3, the ATO specifically note that in the scenario addressed there is no express limitation to the potential beneficiaries of the assets held by each trustee. However, the ATO rely on there being an “expectation” that each trustee will benefit one subset of beneficiaries to the exclusion of others. In paragraph 34, based upon the example in TD 2018/D3, the ATO claims that this consideration of “expected” outcomes allows them to conclude that the relevant assets are held for the “exclusive” benefit of the subset of beneficiaries (despite the deed stating otherwise).
The ATO relying on an “expectation”, which based upon the drafting of TD 2018/D3 appears to be a subjective “expectation”, is unsatisfactory and creates unnecessary uncertainty for taxpayers.
Further, TD 2018/D3 does not comment on other CGT events that could apply to trust split arrangements, such as:
- CGT event A1 (disposal of a CGT asset by a change of ownership to the new trustee);
- CGT event E2 (transfer of a CGT asset into an existing trust); and
- CGT event E5 (where a beneficiary becomes absolutely entitled to a CGT asset of a trust).
TD 2018/D3 distinguishes the decisions in FCT v Commercial Nominees of Australia (2001) 47 ATR 220(HC) and FCT v Clark (2011) 190 FCR 206 which are of “minimal assistance in considering the tax implications of a trust split.” In both cases the Federal Court held that there had been continuity of the original trust, despite changes to the trustee, trust property, and beneficiaries.
TD 2018/D3 says that such cases do not help as the question before the Court was whether an existing trust had come to an end while the question posed by a trust split is whether the assets transferred to the new trustee are settled on a new trust that has been separated from the original trust fund. After distinguishing Commercial Nominees and Clark, the ATO does not rely on any authority for its view in TD 2018/D3 that certain arrangements can result in CGT event E1 happening (although the ATO says that there is no case law dealing directly with this question).
TD 2018/D3 assumes that the steps needed to implement a trust splitting can be achieved at law, including by amendment of the trust deed, without causing the resettlement of the trust. The ‘two bites of the cherry’ approach – if it does not cause a resettlement (resulting in a CGT event) it may be a split that results in a CGT event happening.
In this regard, taxpayers are left with no guidance as to whether a trust split implemented by amending a trust deed could avoid the trigger of a CGT event apart from knowing that the ATO thinks in certain circumstances there may be. After the long wait for some form of public guidance from the ATO, this outcome is less than satisfactory.
The ATO welcomes submissions on TD 2018/D3 until 10 August 2018. Until then, taxpayers should be very careful when considering implementation of trust split arrangements and whether an alternative option is available to achieve the same outcome.
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