The Tax Office advised that it has discussed with Treasury the difficulties in administering the trust cloning exception to CGT events E1 and E2. Many of those difficulties are outlined in a paper by Mr Glenn Davies entitled Some CGT aspects of 'trust cloning' - a Tax Office perspective, delivered at a Taxation Institute of Australia (TIA) seminar in Melbourne on 29 April 2008.
One member said they understood the Tax Office was currently 'sitting on' private ruling requests. The Tax Office said that is not correct and that all requests are being progressed. However, the complexity of the deeds seen to date, and the fact that all cases are being escalated to senior officers because of the high risk of error, means the process is a lengthy one. The Tax Office is looking carefully and properly at these cases which is a time consuming process.
Members asked whether the Tax Office might consider providing a 'checklist' of issues that those applying for a ruling need to address. The Tax Office advised that it has been attempting to alert taxpayers to issues as they are identified (eg. via speeches and web publications).
The Tax Office said it was concerned that:
- some taxpayers and practitioners may be claiming both the benefit of the exception and an uplift in the transferred asset's cost base - this would be contrary to the Tax Office view set out in Taxation Determination TD 2004/14 which says that if the exception applies, the transferred asset retains its cost base and reduced cost base, and
- taxpayers and practitioners may be seeking to take advantage of the fact that the exception applies on a 'point in time' basis by amending trust deeds, for example, to make the appointors different immediately after the asset transfer - the Tax Office said it could not rule out the application of Part IVA in such cases.
There was a discussion as to whether disclaimers and other techniques designed to avoid the cross-holding problem caused by widely-drawn beneficiary clauses had the effect of also removing the trustee's power to transfer an asset to a newly cloned trust. Some members were of the view that an asset could be gifted to the newly cloned trust, notwithstanding that the trustee of the newly cloned trust would not be a beneficiary of the original trust, on the basis that the asset would continue to be held for the benefit of the same persons. Others were concerned that such a transfer might be in breach of trust with the possible consequence that the new trustee might hold the asset on a resulting or remedial trust in favour of the trustee of the original trust - if this were the case then the beneficiaries and terms of both trusts would not be the same.
A note prepared by the Tax Office was discussed. The note indicated that a person who acts in different capacities is considered a different entity for tax purposes when acting in their respective capacities. For example, if a person acts in a trustee capacity and a personal capacity, or in the capacity of trustee of two different trusts, they will be considered a different entity in respect of each capacity.
One significance of this issue for the trust cloning exception is that two trusts do not have the same beneficiaries if a person is a beneficiary of one in say a trustee capacity and of the other in a personal capacity.
Another concern is, if the trust cloning exception applies, whether the exception to CGT event A1 about a mere change of trustee can also apply if the same person is the trustee of both trusts. In this regard the Tax Office confirmed that its view is as set out in TD 2004/14. That is, if the exception to CGT event E2 applies, then CGT event A1 does not happen. And this is the case regardless of whether the two trusts have the same trustee or different trustees.
The group's attention was drawn to a Western Australian stamp duties case, Commissioner of State Revenue v Serana Pty Ltd [2008] WASCA 82. Some considered this case to be relevant to the Tax Office's consideration of the circumstances in which the trust cloning exception is satisfied.
There followed a discussion of trust splitting - that is, the appointment of separate trustees to a part of the trust property. There is no Tax Office view on the income tax consequences of trust splitting and members' views were sought.
At issue is whether the appointment of new trustees to a part of the trust property causes a new trust to arise in respect of that property. As the driver of these arrangements is the isolation of passive assets from business assets, it follows that in practice the appointment of new trustees is usually accompanied by arrangements designed to ensure that each of the trustee's rights of indemnity are quarantined to apply only to certain assets. That is, after the appointment, each trustee's right of indemnity (in respect of both past and future expenses) is confined to the assets it holds after the appointment.
Some members were of the view that a single trust continued despite the quarantining of the rights of indemnity. Others expressed the view that the separation of assets and indemnities pointed to there being two trusts. No conclusion was reached.
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Last Modified: Friday, 21 May 2010