Tuesday, November 26, 2019

Losing it** over losing it ... pre capital gains tax assets owned by trusts

View Legal blog Losing it** over losing it ... pre capital gains tax assets owned by trusts

Division 149 of the 1997 Tax Act is an anti-avoidance provision aimed at preventing access to tax free disposals of assets otherwise assumed to have been acquired before 20 September 1985.

Broadly Division 149 applies most commonly where a company has acquired assets prior to 20 September 1985, however at a later date there is a change of 50% or more of the underlying ownership of the assets evidenced by a change of 50% or more of the shares in the company.

One aspect of Division 149 that is often overlooked is the application of the provisions to assets held by trustees of family discretionary trusts.

Arguably the clearest explanation of the way in which the rules operate in this regard is set out in Taxation Ruling IT 2340. As usual, if you would like a copy of the ruling please contact me.

While the IT was issued under the 1936 Tax Act version of Division 149 (namely, section 160ZZS) it continues to apply.

In summary the Tax Office confirms:
  1. As the trustees of discretionary trusts have wide powers as to the distribution of trust income or property to beneficiaries, the question of whether majority underlying interests have been maintained in the assets of the trust will depend on the way in which the discretionary powers of the trustee are in fact exercised.
  2. If a trustee continues to administer a trust for the benefit of members of a particular family, it will not trigger Division 149 merely because (for example) distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of its discretion.
  3. However, if due to the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets Division 149 will be triggered. In other words, if it is the case that the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions then the assets will be deemed to have become post CGT assets. 
** For the trainspotters, ‘losing it’ is the key line from The Alabama Shakes song ‘Dunes’ from 2015.