By Domenic Festa (Accredited Tax Specialist and Chartered Tax Adviser)
Trust splitting is a process that involves appointing a separate trustee for certain identified assets of a single trust. The purpose of a trust split is to separate the control and legal ownership of assets into separate trustees. Reasons for implementation include: succession planning, separating control of certain assets to different persons, separating passive investments from business activities, and separating different businesses.
Trust splitting is viewed by some as a replacement for the trust cloning exception that existed until 31 October 2008. However, a significant disadvantage is irrespective of the number of separate trustees, there is a single trust; therefore, trust splitting does not deliver the same benefits as a trust clone.
Some advisers had attempted to introduce additional steps into trust splitting to produce the same effect as a separate cloned trust. After the release of TD 2018/D3, all forms of trust splitting may be subject to challenge either because they are covered by the draft determination, or by the application of what the ATO considers to be the law under its revised interpretation.
There are a number of alternatives for dealing with trust assets.
Trust Restructures
For Queensland clients, restructures can be implemented without triggering stamp duty by using a particular process that is not covered by the dutiable categories. Importantly, it does not require a clone with the same terms and beneficiaries, but merely a commonality of trust interests. It also allows a restructure from one type of trust into a different type of trust e.g. from a unit trust to a discretionary trust or a superannuation fund, and vice versa.
It is therefore possible to restructure trust assets into a different trust without stamp duty, and CGT can be addressed if eligible for one of the following alternatives:
Fixed/Unit Trusts – utilising the CGT rollover, if eligible, under subdivision 126-G.
No capital gain/sufficient available losses – despite a CGT event occurring, no tax liability will arise if there is no capital gain or any gain is offset by capital or revenue losses.
Small business CGT concessions – these concessions require satisfaction of active asset conditions and either $2 million turnover or $6 million maximum net asset value test requirements. If eligible, they can allow a restructure of a trust asset without tax and provide a market value cost base to the new trust.
Small business restructure rollover – this rollover is available for entities with active assets associated with small businesses with turnover of up to $10 million. It is a true rollover with the cost base of the new trust being the same as the existing trust (there is no upgrade as occurs under the Small business CGT concessions).
Family Splitting Arrangement
This is an alternative which provides many of the benefits of a trust restructure, without triggering any CGT or duty events. It can be used to transfer the control among beneficiaries, or alternatively, to separate the risk attached to each particular asset.
This alternative comprises the following elements:
- New entities (companies or trusts) are established as required;
- The current controllers can retain control over the existing trust and the new entities. Alternatively, they can pass control of the new entities to the separate beneficiaries at any time they choose;
- Current equity in the relevant asset is transferred to the identified new entity;
- The new entity takes a registered security interest over the relevant asset, providing it with control in respect of disposal of the asset;
- The new entity is provided with use and enjoyment of the asset;
- Protections are included to provide the new entity with future increases in the equity value of the relevant asset;
- Does not require the triggering of any CGT or duty event until the new entity requests the disposal of the asset.
The process allows a separation of trust assets not provided for by trust splitting, and done in a manner that does not trigger any CGT or duty events.
Case Study
Bruce Green as the sole director and shareholder of Green Pty Ltd, the corporate trustee for the Green Family Trust. The trust fund of the Trust includes a substantial trading business, and a real estate portfolio. Bruce wishes to change the trust arrangements regarding the ownership and operation of the trading business in a separate trust. Bruce’s usual adviser has suggested a process of trust splitting. Bruce is concerned about the ATO determination on trust splitting and is interested in alternatives to a trust splitting process. Bruce establishes Green Services Pty Ltd which is to act as trustee for the Green Business Trust. The Family Splitting Arrangement is implemented, resulting in the future conduct of the business being operated by the trustee of the Green Business Trust (which is separate from the Green Family Trust). No CGT or duty events are triggered on the transaction.
Please contact one of our team for the options available to assist with trust rearrangements and trust succession.
NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.