Tax & Accounting Blog

Trust splitting – some clarity at last

Blog, Tax, Trusts December 22, 2016

The Tax Office has issued a Private Binding Ruling on trust splitting. Writing in Thomson Reuters Weekly Tax Bulletin, Matthew Burgess, Director, View Legal, writes the Ruling is a timely reminder of the need to ensure care is taken with any intended rearrangement of an existing trust.

While trust cloning is generally seen as preferable to trust splitting, there are a range of reasons cloning may be commercially inappropriate including:

  • an inability to access any of the small business CGT rollovers;
  • assets that do not lend themselves to complete separation;
  • no stamp duty relief (which is the case in most Australian states).

The Ruling confirms the following key conclusions:

  • the insertion of powers into a trust instrument to provide a trustee the ability to create a split trust will not be a resettlement if the power of variation is sufficiently wide;
  • a change of trusteeship in relation to certain trust assets will not cause any tax consequences, again subject to the trust deed providing the requisite powers;
  • a change to the person nominated as principal or appointor of a split trust will not cause any tax consequences, again subject to the trust deed providing the requisite powers;
  • varying a trust deed to limit each trustee’s right of indemnity such that each trustee is only permitted to be identified from the assets of the split trust they act as trustee for will not cause a resettlement;
  • narrowing by deed amendment the class of beneficiaries of each split trust to focus around the family unit intended to control that trust will cause a resettlement.

Arguably, since the decision in FCT v Clark [2011] FCAFC 5; 79 ATR 550 and the ATO’s response in Tax Determination TD 2012/21, none of the above conclusions are controversial, other than in relation to the narrowing of beneficiaries causing a resettlement.  It is important to note however that the ability to limit the right of indemnity does change the previously adopted ATO position.

Each of these issues are further explored by Burgess in his article published in Thomson Reuters Weekly Tax Bulletin (Issue 6, 12 February 2016).