The Australian Taxation Office has released a draft determination (TD 2018/D3), ruling that splitting a trust may trigger a capital gains tax event. The ATO says a trust split causes new rights and obligations to be created over the transferred assets and these new rights and obligations amount to the creation of a new trust, which causes a CGT event.
A split occurs when the assets of a trust are divided into a number of sub-trusts to enable one group of beneficiaries to control certain assets and another group of beneficiaries to control other assets.
Trust splitting usually involves family discretionary trusts and is widely used as an estate and succession planning tool.
Cooper Grace Ward tax partner Scott Hay-Bartlem says the likely impact of the tax determination is that trust splitting will no longer be seen as a commercially viable option.
The ATO says that for the purposes of its determination, a split trust will have all or most of the following features:
The ATO says a trust split in this way will result in the creation of a trust by declaration or settlement, as the trustee has new personal obligations and new rights have been annexed to property.
“This will cause capital gains CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act,” it says.
The tax determination provides a case study, detailing the Star Trust, which was set up in 1980 to benefit John Smith and his family members. The trustee is Star Trustee Pty Ltd.
John Smith died in 2010 and since his death the trustee has been controlled Ben, a child from his first marriage, and Jane, his second wife.
The two branches of the family do not get on well, so to allow the two branches of John’s family some autonomy and limit interaction between them, the trustee varies the trust deed to implement a split. A new company owned and controlled by Jane is created, Moon Trustee Pty Ltd, while ownership and control of Star Trustee is changed such that control is now held by Ben and his sister Holly.
Star Trustee is removed as trustee of 100 of the 300 Sun Pty Ltd shares that constitute the assets of the trust and Moon Trustee is appointed as trustee to those shares in its place.
Legal ownership of the 100 shares is transferred from Star Trustee to Moon Trustee.
The expectation is that Moon Trustee will hold 100 Sun Pty Ltd shares for the benefit of Jane and her children to the exclusion of Ben and Holly. Conversely Star Trustee will hold 200 Sun Pty Ltd shares for the benefit of Ben and Holly to the exclusion of Jane and her children.
From this point each trustee has a separately identifiable parcel of trust property to which their separate trust obligations attach.
The ATO says: “The trust split causes new rights and obligations to be created over the shares transferred to Moon Trustee. These new rights and obligations amount to the creation of a new trust over those shares. The new trust is created by settlement in respect of the shares causing CGT event E1 to happen.”
Hay-Bartlem says people using discretionary trusts to hold assets need to consider alternatives to splitting. “Cooper Grace Ward has always had tax treatment concerns about trust splitting and has developed an alternative generation transfer trust provision that allows a trust to be divided among a number of beneficiaries in a practical way.”