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Edited version of your private ruling
Authorisation Number: 1012610251197
Ruling
Subject: Trust cloning
Question:
Would the equal transfer of your assets, to two identical trusts, result in CGT events happening to the assets transferred from you to those new trusts?
Answer:
Yes.
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You are a discretionary family trust, with two equal family related trust beneficiaries. Your trust assets comprise of shares in public companies. It is proposed to create two new trusts identical to you and to transfer to these two new trusts an equal share of the assets currently held by you.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-60
Income Tax Assessment Act 1997 Section 104-70
Income Tax Assessment Act 1997 Section 116-30
Income Tax Assessment Act 1997 Section 126-30
Reasons for decision
Section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) provides CGT event E2 happens when a CGT asset is transferred to an existing trust. The time of the event is when the asset is transferred.
If you received no capital proceeds from a CGT event, subsection 116-30(1) of the ITAA 1997 deems you are taken to have received the market value of the CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)
Prior to 1 November 2008, section 104-60 of the ITAA 1997 contained an exception to the happening of CGT event E2, widely known as the 'trust cloning' exception. Here, the CGT event was disregarded where the assets were transferred to a trust from another trust and the beneficiaries and terms of both trusts were the same.
However, from 1 November 2008, the Tax Laws Amendment (2009 Measures No. 6) Act 2010 repealed the trust cloning exception to CGT event E2 and, under Subdivision 126-G of the ITAA 1997, introduced a limited CGT roll-over for the transfer of assets between certain trusts with the same beneficiaries with the same interests in each trust.
To qualify for a CGT roll-over under Subdivision 126-G of the ITAA 1997, two requirements under section 126-230 of the ITAA 1997 must be met, namely: (i) CGT event E4 is capable of happening; and (ii) beneficiaries' entitlements are not discretionary.
CGT event E4 in section 104-70 of the ITAA 1997 happens if a non-assessable payment is received in respect of a unit or interest in a trust. If CGT event E4 happens, the consequences include cost base and reduced cost base reductions for the unit or trust interest. Section 104-70 of the ITAA 1997 includes the following example of its operation:
Mandy owns units in a unit trust that she bought on 1 July 1998 for $10 each. During the 1999-2000 income year the trustee makes 4 non-assessable payments of $0.50 per unit. If at the end of the income year Mandy's cost base for each unit (including indexation) would otherwise be $10.10, the payments require that it be reduced by $2, giving a new cost base of $8.10. If Mandy sells the units (CGT event A1) in the 2000-01 year for more than their cost base at that time, she will make a capital gain equal to the difference.
In summary, CGT event E4 is not capable of happening in relation to beneficial interests in a discretionary trust because a beneficiary does not hold units in the trust by which payments from the trust will cause changes to the cost base of units held.
In your case, the taxation laws that disregarded the happening of a CGT event when assets were transferred from one trust to an identical trust were repealed on 1 November 2008. Further, your proposed shares transfer cannot qualify for a CGT roll-over under Subdivision 126-G of the ITAA 1997 because CGT event E4 is not capable of happening in relation to you and because your beneficiaries' entitlements are discretionary. It follows CGT event E2 will happen if shares are transferred from you to another trust. Your capital proceeds will be the market value of the shares at the time of transfer.
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