The question of whether, and how far, a trust can be split is a vexed one.
The Australian Taxation Office (ATO) sought to address this question through a public determination (first issued in draft as TD 2018/D3) that considered a range of features of an arrangement, that when considered together, were deemed to have resulted in the creation of a new trust over assets formerly held by an original trust. That is, the split trust causes the creation of a new trust that triggers CGT event E1 and those assets that are now held by the split trust are “disposed of” for CGT purposes (potentially resulting in a tax liability on that disposal).
Although not addressed in TD 2018/D3, the creation of the new trust potentially creates a range of additional taxation problems including, amongst other things, loss of pre-CGT status for assets, the treatment of trust losses, ability to pass through franking credits, the treatment of family trust elections, and the disposal of depreciable items and trading stock for income tax purposes.
The ATO has finalised draft TD 2018/D3 and released the final form Taxation Determination TD 2019/14 on 13 December 2019.
We wrote about the draft determination here. In that article we criticised the draft determination as failing to provide much needed certainty and clarity in relation to the implications of trust splits. We noted that the draft determination:
only contains a single example;
noted that arrangements that would trigger the CGT event as a creation of a new trust would exhibit “all or most of” the features in the example (which features and how many is left uncertain);
didn’t address how arrangements implemented with variants of the example provided would be treated for tax purposes;
indicates that the ATO would consider a CGT event would be triggered based on an “expectation” as to what the two trustees will later do post the split; and
failed to address other CGT events that could be triggered on a trust split including CGT events A1, E2 and E5.
TD 2019/14 still contains many of those flaws.
However it does now provide a second example of a scenario where the changes made to the trust do not result in the creation of a new trust.
The ATO distinguish the two examples saying that the first example that triggers the creation of a new trust involves an arrangement that:
“puts in place a complete segregation of the obligations, powers and rights of the trustees attached to the different assets they respectively hold.”
In respect of the second example the ATO state that it:
“cannot be concluded that the assets transferred to [the new second trustee] have been subjected to new personal obligations and new rights annexed to that property.”
It is difficult to draw out those distinctions as the two examples address different fact scenarios. That is, example 2 refers to the trust being administered as one trust and the two trustees being required to work together in relation to the:
selection of an accountant for preparation of the trust tax return;
incurring joint expenses;
amending the trust deed; and
determining an earlier vesting date for the trust.
However, the examples do not state that this is not how the trust in example 1 would be administered save for an “expectation” that the trustees would operate independently due to the relationship breakdown between the siblings.
The only distinction beyond the expectation as to administration is that the right of indemnity remains in respect of all assets of the trust in example 2, whereas in example 1 there is an attempt to limit each trustee’s right of indemnity to the assets it holds on the terms of the trust. The right of indemnity is the right for the trustee to be reimbursed for expenses it incurs when acting on behalf of the trust (often limited to where there is no fraud or gross negligence).
The ATO also added further technical analysis based on the Full Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122 and the Supreme Court of South Australia decision in Dyda P/L & Anor v Commissioner of State Taxation [2013] SASC 156 to support their position in the final determination.
The determination requires careful reading for those looking to undertake a trust split as part of a succession planning exercise. Importantly, whilst TD 2019/14 leaves a lot of issues unresolved (including those other CGT events referred to above), the existence of example 2 illustrating that a trust split can be undertaken in a succession planning context without triggering a CGT liability will provide significant comfort for those undertaking the more considered and careful trust splitting arrangements. Alternatives to limiting the right of indemnity will need to be considered in order to provide trustees with comfort in relation to asset protection.
Sladen Legal have written extensively on these issues and trust splits in general in our papers at The Tax Institute’s Victorian Annual Tax Forum on 12 October 2017 and the Western Australian Trusts Day on 13 June 2017. Those papers will now need to be revised in light of TD 2019/14 but are available upon request.
Sladen Legal’s taxation and succession lawyers are leaders in dealing with trust and tax issues on behalf of high-net wealth individuals and private groups. If you have any questions or require help in this area, please contact a member of our team.
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105
E: dsmedley@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
