On occasions, it is desirable to restructure the assets of a trust. The motivations for a restructure can include: succession planning, separating control of certain assets to different persons, separating passive investments from business activities, and separating different businesses.
For Queensland practitioners, these restructures can be implemented without triggering stamp duty by implementation in accordance with a particular process that is not covered by the dutiable categories.
The sticking point is CGT. Until 31 October 2008, a trust cloning exception existed in CGT events E1 and E2 where the terms and beneficiaries of each of the trust were the same.
After 31 October 2008, an alternative often contemplated was through a process of trust splitting, which on a basic level involves appointing a separate trustee for certain identified assets of the main trust. Such a process would be effective for CGT purposes provided the trust split did not cause the creation of a new trust in respect of the assets held by the separate trustee.
Of itself, a trust split does not have the same effect as trust cloning prior to November 2008 since a trust split simply involves having separate trustees of one trust, whereas a trust clone resulted in a separate trust.
Some practitioners implemented additional steps – excluding beneficiaries in respect of the split assets, limiting the right of indemnity of each trustee to the assets held by that trustee, and placing the power to change trustees in respect of the split assets in a different person. These additional steps raise the question of whether the split trust caused the creation of a new trust.
The issue is considered in the ATO’s draft Taxation Determination TD 2018/D3. It concludes that an arrangement that displays certain factors are considered by the ATO to result in the creation of a new trust. In our view, the key factors identified by the ATO are:
- the existing trustee is removed as trustee of certain assets and a new trustee appointed to hold those assets;
- control of the original trustee resides with certain beneficiaries, and the new trustee is controlled by other beneficiaries;
- different appointors for each trustee;
- the trustee’s right of indemnity is limited to the assets held by each trustee;
- distributions are limited to a subset of beneficiaries associated with the controller.
Various trust splitting arrangements can be implemented without incorporating these factors. In particular, arrangements separating passive investments from business activities and different businesses would only require factor number 1.
Joe Ryan as the sole director and shareholder of Ryan Pty Ltd, the trustee for the Ryan Family Trust. The trust fund of the Trust includes a substantial professional services business, and a passive investment portfolio. Joe wishes to change the trust arrangements by placing the ownership and operation of the professional services business in a separate trustee company. Joe establishes Ryan Services Pty Ltd, removes Ryan Pty Ltd as trustee of the professional services business, and appoints Ryan Services Pty Ltd as trustee for that business. These changes are not covered by the draft tax determination and are not considered to create a new trust. In addition, if the indemnity of Ryan Services Pty Ltd were limited to the services business (where legally permitted), we also consider the arrangement is not covered by the draft tax determination.
The draft tax determination is limited in its terms to trust splitting arrangements evidencing particular features. Opportunities remain to implement trust splitting arrangements that are not covered by the draft tax determination.
Nevertheless, trust splitting involves appointing separate trustees of a single trust. For that reason, we consider trust splitting arrangements should be a last resort option and other available alternatives should be canvassed.
By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)
NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.