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Capital gains tax consequences of trust split arrangements have been partly clarified, but more questions remain.
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ATO finalises its position on trust split arrangements
07 February 2020
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The Australian Taxation Office has recently finalised its position on trust split arrangements in TD 2019/14.
TD 2018/D3 has been finalised and is in substance unchanged, except for:
- the inclusion of a new example which the ATO considers does not give rise to capital gains tax.
- the confirmation that the ATO will not devote compliance resources to arrangements entered into before 11 July 2018 (the date of TD 2018/D3).
- the recognition that a feature of a trust split arrangement that gives rise to capital gains tax may include obtaining a new tax file number and Australian business number, and lodgement of separate tax returns.
The new example is a welcome clarification for taxpayers. It involves:
- amending the trust deed to:
- allow for the appointment of additional trustees in respect of some of the assets of the trust fund.
- allow for separate appointors in respect of different parts of the trust fund.
- require each trustee to take into account the losses incurred by other parts of the trust fund and expenses of the trust as a whole when making a determination to distribute the net income.
- require the trustees to act together in respect of decisions such as selecting an accountant, incurring joint expenses, amending the trust deed and determining an earlier vesting date.
- give each trustee recourse to all of the trust assets to satisfy its right of indemnity.
- appointing a new trustee as an additional trustee over some of the assets of the trust fund.
- removing the existing trustee as trustee of those assets.
- appointing a new appointor in respect of those assets and the existing appointor resigning in respect of those assets.
- no change in control of the existing trustee.
- no change to the beneficiaries.
- separate accounts being kept but the results consolidated for the entire trust fund and a single tax return is prepared.
If a trust split arrangement exhibits the above features, taxpayers can assume that there are no capital gains tax consequences.
Apart from this clarification, the ATO’s final position largely maintains the lack of clarity of TD 2018/D3 and its reasoning is questionable.
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The ATO refers to some cases that were not referred to in TD 2018/D3 to support its final position, including Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122 and Dyda Pty Ltd v Commissioner of State Taxation [2013] SASC 156. The ATO considers that they are more useful decisions than Commissioner of Taxation v Commercial Nominees of Australia Limited [2001] HCA 33 and Commissioner of Taxation v Clark [2011] FCAFC 5, without any real explanation, nor is there any real explanation of how those decisions support the ATO’s final position.
Unfortunately, TD 2019/14 is yet another unsatisfactory development for the tax treatment of trusts, and trust split arrangements probably need a test case to provide clarity.
In the meantime, it is very clear that the ATO does not like trust split arrangements. Taxpayers who are considering such arrangements should either:
- ensure that they exhibit the features in the new example, or
- approach the ATO for a private ruling.
Carlos Gouveia, special counsel, Colin Biggers & Paisley
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