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ATO’s trust splitting determination under scrutiny

ATO’s trust splitting determination under scrutiny

The ATO’s recently released draft taxation determination on trust splitting giving rise to a CGT event will cause “unnecessary and significant” taxpayer and industry backlash, warns a lawyer.

Tax&Compliance Jotham Lian 27 July 2018

The ATO’s TD 2018/D3 concludes that trust splitting will cause a CGT event E1, with the final determination proposed to apply retrospectively and in a prospective basis.

View Legal director Matthew Burgess said the new determination was contradictory to previous private rulings published by the ATO that confirmed that trust splitting arrangements on similar terms did not constitute an E1 event.

“In concluding that trust splitting will cause CGT event E1, it appears the ATO has ignored most case law and legislation in the area, and indeed its most recent private ruling and earlier private rulings,” said Mr Burgess.

“The conclusions in TD 2018/D3 are such that it would mean every single change of trustee or even a change of appointor, or principal of a family trust would be liable to trigger, if the ATO felt the arrangement was not usual, CGT event E1 – a clearly unsustainable position.”

Further, Mr Burgess believes the new determination effectively ignores decisions made in both the High Court and Federal Court in relation to previous cases on resettlement.

“It appears that TD 2018/D3 is implicitly predicated on a belief that, despite superior court authority, a separate set of rules apply to discretionary trusts as compared to unit trusts and superannuation funds,” said Mr Burgess.

“Such a belief is unsustainable in the context of both High Court and Full Federal Court authority and in the context of the ATO’s own publications. It is similarly unsustainable that steps as simple as changing an appointor, trustee and the potential range of beneficiaries could be said to amount to a resettlement.”

According to Mr Burgess, the ATO should, at a minimum, explain why such a change of approach has been implemented.

He believes that more examples highlighting a range of potential trust splits, including the types of trust splitting arrangements that will not give rise to any CGT consequences would also be beneficial to better understand the determination.

“Ultimately, there is a material risk that TD 2018/D3 will cause significant damage to the reputation of the ATO for failing to address these issues 10 years ago, if it truly felt an argument that trust cloning and trust splitting was essentially the same was sustainable,” said Mr Burgess.

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ATO’s trust splitting determination under scrutiny
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