On 11 July 2018, the ATO released Draft Taxation Determination TD 2018/D3 (Draft Determination) outlining the Commissioner’s preliminary view on when a ‘trust split’ arrangement will result in the settlement of a new trust over some (but not all) of the assets of the original trust, giving rise to Capital Gains Tax (CGT) event E1 under subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997).
There are many forms of arrangements and manoeuvres that may be described as a trust split. For the purposes of the Draft Determination, ‘trust split’ refers to an arrangement whereby the parties to an existing trust decide to split the operation of the trust, so that some trust assets are controlled by and held for one class of beneficiaries, while the remaining trust assets are controlled and held for the benefit of others.
This often involves a discretionary trust of which a family group are beneficiaries and is generally undertaken for the purpose of allowing different parts of the family group to gain autonomous control over their own part of the trust fund.
Broadly, the Draft Determination clarifies the Commissioner’s view that a trust split of the type outlined above will result in the creation of a new trust by declaration or settlement (as the case may be). The Commissioner takes this view on the basis that the trustee has taken on new personal obligations, while new rights have been simultaneously annexed to property, causing the occurrence of CGT event E1 at the time of the trust split.
While there is no case law dealing directly with the tax implications of such an arrangement, the Draft Determination states that such a trust split will ordinarily exhibit all or most of the features below:
- 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 one deed.
- The original trustee and new trustee keep separate books of account.
The Draft Determination is proposed to have retrospective application (but not to the extent that that this conflicts with the terms of settlement of a dispute agreed to prior to the date of the Determination). The Commissioner has asked that comments on the Draft Determination be submitted by 10 August 2018.
It is unclear if the ATO will take the same view in cases where a trust split is performed to “ring fence” risky assets from other assets in circumstances where control of the trustees does not change.