Deductible debt, trust cloning and 328-G rollovers

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/S8gy1ZMhIzA

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

One factual scenario we have explored utilising the 328-G rollover concessions involves where there is an original trust and a cloned trust and the transfer of assets between the two trusts will satisfy all of the rules that need to satisfied.

If having setup the new trust, it goes to the bank to borrow money, it is necessary to analyse what that money is being used for to determine if any interest expense is deductible.

If the debt is to fund the acquisition of the business from the original trust, that is, the original trust is selling the business to the cloned trust, then the nature or the purpose of the borrowings is going to be income generating.

That is, the debt expense will be deductible.

The cash flow will be funds coming from a third party bank into the cloned trust, and then as part of the sale transaction, the payment is made to the original trust.

The cash received by the original trust will because of the 328-G provisions, be a tax free receipt.

At that point, the original trust can essentially make a form of ‘eligible termination payment’ to the ultimate controllers of the original trust.

Trust Cloning

A recent post focused on trust splitting as a useful tool to improve the administration and management of a discretionary trust http://blog.viewlegal.com.au/2016/03/trust-splitting-some-clarity-at-last.html

As has been widely publicised, trust cloning for family trusts was effectively abolished on 31 October 2008. Since 1 July 2016 trust cloning has been available for trusts that run businesses with an annual turn over of less than $10M – see http://blog.viewlegal.com.au/2016/04/tantalising-opportunities-for-trust.html (the $2M turnover test referred to there is intended to be $10M).

Interestingly, there are still situations when trust cloning might in fact be available, despite the tax concessions being removed on 31 October 2008.

Broadly, the main situations where we see trust cloning being used still are:

1. Where there is no capital gain in relation to the assets to be transferred;
2. Where the capital gains tax that would otherwise be triggered on the trust clone can be rolled over (for example, using the various types of small business CGT concessions or between testamentary trusts); and
3. Where the trust cloning falls within the CGT exemption available for unit trusts.

Generally, there will be stamp duty payable in relation to a trust cloning arrangement to the extent there is dutiable property, although there are areas where there may be a duty exemption, including –

1. In South Australia, for most transfers;
2. In Queensland, for all transfers;
3. In NSW, for business assets and land rich companies; and
4. In Victoria, for business assets.

Image courtesy of Shutterstock

Trust cloning is dead (or is it?)

On Friday, a lawyer in sole practice and I caught up in relation to reviewing a purported trust clone.

As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.

Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.

What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.

As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:

1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.

Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.
Until next week.

Matthew Burgess