The ATO has released draft taxation determination 2018/D3, outlining their view that a trust split potentially triggers CGT consequences (CGT event E1).
A ‘trust split’ is a process of dividing the assets of a trust (generally a family discretionary trust) into a number of smaller sub-trusts to enable one group of beneficiaries to control certain trust assets and another group of beneficiaries to control other assets.
Despite the uncertainty on the tax treatment, trust splitting has been used by many lawyers as an estate and succession planning tool.
After the publication of TD 2018/D3, trust splitting is now unlikely to be seen as a commercially viable option when considering your, or your client’s, succession planning options due to the potential tax consequences.
Cooper Grace Ward’s trust succession planning approach
Rather than use trust splitting, Cooper Grace Ward have developed unique generational transfer trust provisions that allow a trust to be divided among a number of beneficiaries in a practical way. These provisions:
- give the current controllers of the trust complete control over the trust assets while they are alive;
- automatically facilitate the succession of the trust to the designated successors on a trigger event (usually death);
- include protections to ensure key decisions must be made with the involvement of all designated successors; and
- allow the designated survivors to split off their share of the trust after a pre-determined cooling off period.
Compared to trust splitting (about which we have always had tax treatment concerns), Cooper Grace Ward’s generation transfer trust can achieve intergenerational trust succession without triggering any tax or duty consequences.
What to do if you have or are considering a trust split?
The Commissioner’s position is still only a draft view and may change. However, anyone who has implemented a trust split arrangement should carefully review their arrangements and further announcements from the ATO in any situation where:
- the existing trustee is removed as trustee for some of the trust assets and a new trustee is appointed to hold those assets;
- control of the original trustee is changed so that only a certain group of beneficiaries control that trustee and the new trustee is controlled by a different group of beneficiaries with different appointors being appointed for each trustee;
- there is an expectation that each trustee will act independently of the other for the benefit of their respective group of beneficiaries;
- the terms of the trust are changed so that each of the trustees can only be indemnified for their actions as trustee out of the assets of the trust over which they have control; or
- each trustee maintains separate books of account.
Anyone who is in the process of implementing a trust split should immediately stop and consider the potential consequences and other alternative arrangements.
Although the ATO admits there is no case law dealing directly with the implications of a trust split, and, as has happened in the past, the Commissioner sometimes gets it wrong, the costs, time and stress involved in any objection or subsequent court action will likely be significant.
Trust cloning is still viable for Queensland assets
An alternative to trust splitting where assets are located in Queensland is ‘trust cloning’, where a new discretionary trust is set up as a ‘clone’ of the original and assets moved to the new trust.
This has the advantage of clearly separating the assets into a new and different trust.
Stamp duty relief continues to be available in Queensland for trust cloning if certain requirements are met. However, there is no CGT rollover for discretionary trusts, so it is used where the CGT consequences can be managed, for example by the use of small business CGT concessions, or there is no capital gain.