It’s alright** (trust splitting is coming back)

Previous posts have explored in detail the July 2018 release from the ATO and its views on trust splitting in TD 2018/D3.

As explored in previous posts, there were a range of concerns with TD 2018/D3 for all trust advisers.

These issues have only been partially addressed by the final ruling released in December 2019 as TD 2019/14 - a near Christmas release date that continues the (apparent) tradition of the “last ATO officer out the door has to issue an attack on trusts and then turn off the lights”.

Critically, TD 2018/D3 assumed a single factual matrix which is very specific, and it lists a number of line items that may, or may not, be a part of a trust splitting arrangement.

Many trust splitting arrangements involve a change of trustee in relation to specific assets and few (or indeed none) of the other features listed in TD 2018/D3 (for instance, no changes to the appointors, right of indemnity or range of beneficiaries).

Given the extended delays in finalising TD 2018/D3, there must be a legitimate question as to its correctness in relation to the one example included in the draft.

This is particularly the case given the ATO conveniently:

1. ignores both High Court and Full Federal Court authority in decisions such as FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and FCT v Clark (2011) 190 FCR 206 when making conclusions about trust resettlements;
2. makes unsubstantiated and unexplained assumptions about how a trustee may or may not act following a trust split.

More positively TD 2019/14, does now include two key changes that address other serious issues in TD 2018/D3.

Namely:

1. a second example has been included, which suggests how the ATO believes a form of trust split may be able to be implemented, without causing a resettlement.
2. the ATO has effectively abandoned its previous attempt to make the TD retrospective by acknowledging that its “view of the potential CGT implications of the arrangement discussed in this Determination may have been subject to conjecture prior to the publication of TD 2018/D3 on 11 July 2018. The Commissioner will not devote compliance resources to apply the views expressed in this Determination to arrangements entered into before this date.”

The second example included in TD 2019/14 essentially confirms that a trust split will not be a resettlement, so long as:

1. if each trustee keeps separate accounts in respect of the assets they hold, the results are consolidated for the entire trust fund and a single tax return is prepared for the trust as a whole;
2. there is no attempt to apply for a separate tax file number;
3. there is no amendment of beneficiary classes;
4. there is no narrowing of the trustee’s right of indemnity (ie each trustee must continue to have recourse to all of the assets of the trust to satisfy its right of indemnity);
5. there are no changes to the trustee who remains in control of assets not subject to the trust split; 
6. the trustees of each 'split' trust must still act jointly in relation to issues such as choosing an accountant, incurring joint expenses, amending the trust deed and determining an earlier vesting date. 

Based on the second example, all other aspects of a trust split are permissible, for example:

1. amending the trust deed to allow the trust split to occur (assuming there is an adequate power of variation);
2. appointing a new trustee (and replacing the previous trustee) to certain assets that are to be subject to the trust split;
3. changing the appointor or principal in relation to the assets the subject of the trust split;
4. updating third party records (eg Land Titles Office, share registries etc) in relation to the change of trusteeship.

** For the trainspotters, today’s title is riffed from the Eurythmics and ‘It’s alright (baby’s coming back)’.

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