A draft Taxation Determination (TD 2018/D3) released by the Australian Taxation Office on 11 July 2018 sets out the Commissioner of Taxation’s views on when a trust split arrangement will cause a new trust to be settled over some, but not all, assets of the original trust and as a result trigger Capital Gains Tax (CGT) Event E1.
Taxpayers considering undertaking a type of trust split arrangement specified in this Taxation Determination should be aware of the information which will apply before and after its issue date.
For the purposes of the Taxation Determination, ‘trust split’ refers to an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled and held for the benefit of others. A trust split usually involves a discretionary trust that is part of a family group. The trust splitting arrangement allows different parts of the family group to have autonomous control of their part of the trust fund.
The Taxation Determination only applies to trust split arrangements that have all or most of the following features:
- The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets
- Control of the original trustee is changed so that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries
- Different appointors are appointed for each trustee
- The rights of indemnity of the trustees are segregated such that each trustee can only be indemnified out of the assets held by that trustee
- The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit the subset to the exclusion of others. The original trustee will also exercise its powers in respect of the assets held by it independently of the new trustee to benefit a different subset, again, to the exclusion of others
- The rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed
- The original trustee and new trustee keep separate books of account
Summary of the Taxation Determination
The Taxation Determination provides that:
- A trust split, as described in the Taxation Determination, will result in the creation of a trust by declaration or settlement as the trustee has new personal obligations and new rights have been annexed to property. Such a trust split will trigger CGT Event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) at the point in time that the trust is created.
Creation of a Trust
- The first element necessary to trigger CGT event E1 is the creation of a trust.
- The general trust law principles should be considered when determining whether “you create a trust over a CGT asset”.1
- In order to ‘create’ a trust there must be a creation of both elements of a trust i.e. a creation of personal obligations and a creation of rights annexed to property (see DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties2).
- The Commissioner of Taxation contrasts the views in FC of T v Commercial Nominees Australia Ltd3 and FC of T v Clark4 (where the legal question was whether the existing trust had come to an end, such that the assets of the original trusts were now held on a different trust) to the trust splitting arrangements considered in the Taxation Determination.
- The Commissioner of Taxation provides that the question posed by a trust split is not whether the original trust has come to an end, rather, whether the assets transferred to the new trustee are settled on a new trust fund that has been separated from the original trust fund.
- A trust split achieves functional separation in the operation of the trust, resulting in two distinct trust funds which are both administratively and legally separate.
- The intent is that, those who control and can benefit from the part of the trust corpus that is transferred to the new trustee will be different from those who control and benefit from the remaining assets held by the original trustee.
By declaration or settlement
- The second element necessary to trigger CGT Event E1 is the creation of a trust by declaration or settlement.
- A trust is created by declaration within the meaning of subsection 104-55(1) of the ITAA1997 when it is created by words or conduct sufficient to demonstrate an intention to create an express trust over property.5
- A trust is created by settlement when property is vested in a trustee for the benefit of others.6
- Where existing trust property is transferred and there is a vesting of this property in a new trustee for the benefit of others, a trust split will arise.
For more information or discussion, please contact HopgoodGanim Lawyers’ Taxation team.
1. FC of T v Bamford (2010) 240 CLR 481 at 
2.  1 NSWLR 510 at 518-519.
3. (1999) 43 ATR 42 (FCAFC).
4. (2011) 190 FCR 206.
5. Kafataris v DC of T (2015) 243 FCR 291 at .
6. Taras Nominees Pty Ltd v FC of T (2015) 228 FCR 418 at .