Trust Cloning – Is the window of opportunity closing?

07 April 2008 Topics: Trusts, Tax and revenue

The ATO issued a fact sheet in January 2008 which clearly indicates they have concerns in relation to the way in which the trust cloning exemption is being used.

This was reinforced in a speech given by Bruce Quigley (Second Commissioner of Taxation) at the national conference of the Taxation Institute of Australia on 13 March 2008 (which is published on the ATO website).

The ATO position is that “the original policy is that the exception was designed to apply only in respect of the transfer of an asset as a result of a change of trustee of a single trust. That is, it was not intended to provide an exception or a rollover in respect of the transfer of an asset between two separately existing trusts. Nevertheless, the Tax Office has acknowledged that the law as drafted applies more broadly than suggested by the original policy. It can literally apply in relation to two trusts”.

In his speech Bruce Quigley indicated that:

  • the test of sameness should be strictly interpreted and applied and that even differences that might be considered minor will prevent the exception applying;
  • the reasons for this approach is that the provision says “the same” not almost the same or nearly the same, and given the ATO view that the provision is intended to deal with a change of trustee, strict compliance will be required in other situations;
  • given the issues are contentious, the Test Case Funding Panel has recommended on an in principle basis that the ATO fund test cases in relation to some of the issues outlined in TR 2006/4.

Bruce Quigley also hinted that the ATO may be reconsidering their original view that the cloned asset “has the same cost base, reduced cost base and date of acquisition in the hands of the transferee trust as the transferor trust”.

The fact sheet and Bruce Quigley’s speech strongly suggest that clients should get a private ruling before implementing a trust cloning exercise.

However, clients who apply for a ruling may have to be patient. Cooper Grace Ward have recently applied for a number of private rulings on trust cloning exercises. We have been advised that the ATO has set up a separate group to review all of these rulings and that it may take months to process each ruling request.

The risk for clients who are waiting on a ruling is that the government may announce changes to the legislation before they can implement their restructure.

Clients will have to weigh up the potential downside if the cloning exercise “goes wrong” in deciding whether the risk of waiting for a ruling (and certainty) is appropriate.

If you have any queries regarding this issue or would like to discuss any other matters related to tax law, please contact any of our team on (07) 3231 2444.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.