Trust cloning

The CGT 'trust cloning' exception discussed on this page has been repealed by Tax Laws Amendment (2009 Measures No. 6) Act 2010 in respect of CGT events happening on or after 1 November 2008.

Taxation Ruling TR 2006/4W deals with a CGT exception that applies when an asset is transferred between two trusts that have the same beneficiaries and terms - commonly referred to as trust 'cloning'.

The ruling says that even minor differences between the two trusts may prevent the exception from applying (though the trusts can have different trustees and settlors). Further, the exception is not necessarily satisfied by two trusts with identically worded trust deeds. Rather, it is the effect of the terms that must be the same.

Our understanding of the original policy is that the exception was designed to apply only in respect of the transfer of an asset as a result of a change of trustee of a single trust. That is, it was not intended to provide an exception or a rollover in respect of the transfer of an asset between two separately existing trusts. Nevertheless, we have acknowledged that the law was drafted and applies more broadly than suggested by the original policy. It can literally apply in relation to two trusts. However, it can only do so in our view where the requirements that the terms and beneficiaries are the same are strictly satisfied.

Since issuing the ruling, we have become aware of further examples where trusts, particularly discretionary trusts, may not be 'the same' and therefore assets transferred between the trusts will trigger a CGT event.

We are concerned that some practitioners may not appreciate what is required for the exception test to be satisfied. As a result, it is possible that asset transfers between trusts are being undertaken in the mistaken belief that the exception test is satisfied. An asset transfer that does not satisfy the exception test will trigger a CGT event and, depending on the particular circumstances, tax may be payable.

One example shows how careful practitioners must be in 'cloning' trusts that exclude a particular office holder from benefiting under the trust. For example, if the original trust excludes the trustee from benefiting and the new or cloned trust does likewise, but the two trusts have different trustees, then the two trusts are not the same and therefore the exception does not apply. See ATO Interpretative Decision ATO ID 2006/318 (Withdrawn).

Another example shows the difficulties of 'cloning' a discretionary trust with a widely-drawn beneficiary clause. For example, it may not be possible to clone a trust with named beneficiaries and a clause that also includes as a beneficiary any trust in which a named beneficiary has an interest (including as a potential object). Including this same clause in both trusts will result in the trustee of the new or 'cloned' trust being a beneficiary of the original trust, and the trustee of the original trust being a beneficiary of the new trust.

Therefore, the beneficiaries of the original trust will be the named beneficiaries and trustee of the new trust, and the beneficiaries of the new trust will be the named beneficiaries and the trustee of the original trust. However, because it is not possible for a trust to be a beneficiary of itself, the two trusts do not have exactly the same beneficiaries and the exception therefore would not apply.

Taxpayers or their advisers who have relied on the exception to 'clone' trusts, but who are now concerned that the exception test was not satisfied are encouraged to contact us on 13 28 66 or lodge a private ruling in respect of their circumstances. For further information, see TR 2006/4W.