Draft Taxation Determination TD 2018/D3 (‘TD 2018/D3’) outlines the Commissioner’s preliminary view that a trust split arrangement as described in the determination will result in a new trust to be settled. This view has potential capital gains tax (‘CGT’) implications for trusts that adopt a trust split arrangement.

What is a Trust Split?

A trust split is an arrangement in which a new trustee is appointed as trustee over certain assets within a trust. In a split trust the new trustee will hold the assets under the same terms as the original trust, for the same beneficiaries. A split trust arrangement is essentially a sub-trust.

The Commissioner’s View

The view held in TD2018/D3 is that a trust split will result in the creation of a new trust, causing CGT event E1 to occur (creation of a trust over a CGT asset). There are a number of reasons expressed in TD 2018/D3 that result in the formation of this position, including:

• After the transfer of assets from the existing trustee to the new trustee, the existing trustee no longer has a fiduciary obligation over those assets;
• In the exercise of their powers, both trustees operate independently from each other; and
• The terms of the trust instrument do not prevent each trustee from varying the terms of the trust of which they are trustee. It is therefore not inconceivable that each trust could be varied to the extent that the range of beneficiaries, the terms of the trusts, and their vesting dates all differ.[1]

As noted in TD 2018/D3, for CGT event E1 to arise, it is the necessary that the creation of the trust occur by settlement or declaration. The Commissioner is of the opinion that the creation of a trust split through the execution of a deed of variation or other means, will ‘demonstrate an express intention to hold the transferred assets subject to the terms of the trust deed, which is sufficient to create a trust over those assets by declaration’[2].

Issues with TD 2018/D3

As will be explained, this draft determination is problematic for a number of reasons.

Variation Between Trusts

As previously mentioned, TD 2018/D3 explains that in a trust split arrangement, it is conceivable that both trustees vary the range of beneficiaries, terms and vesting dates of the respective trusts of which they are trustee. The argument made is that both trusts could be varied to such an extent that neither trust resembles the other. As stated in TD 2018/3, ‘this fact again points to there no longer being a single trust fund.’[3]

However, the issue raised here by the Commissioner does not concern the very nature of split trust arrangements, but rather the way in which such arrangements are established. For instance, the trust in the example provided in TD 2018/D3 is a discretionary trust. In a discretionary trust exercising a trust split, the terms of both trusts could require the consent of a single appointor to vary the trust. Such a structure overcomes concerns that both trusts could be varied to such an extent as to not resemble one another.

Rights of Beneficiaries

The example provided in TD 2018/D3 demonstrates a situation in which the intention for establishing the split trust indicates a ‘new charter of rights and obligations’[4]. Although this may be the situation in this scenario given the specific facts of this case, generally speaking a trust split within a discretionary trust does not by itself give rise to new rights or obligations. The only right of a beneficiary under a discretionary trust is the right to be considered[5]. The creation of a trust split does not alter, change or vary this right.

Issues of Taxation of Trust Splits

Perhaps the most problematic issue with TD 2018/3 concerns the taxation implications of this determination. This draft tax determination outlines that the relevant CGT event that applies to a trust split is event E1. What is unclear however, is to which trust the event applies. Logically, if event E1 is considered to be the most relevant CGT event to a trust split, the new trust would bear the tax liability. However, with the execution of a trust split there is no separate tax registration via the obtaining of a tax file number by the new trustee.

Resultingly, there are two possible outcomes if event E1 applies. The first is that the ATO would require tax registration of the new trust entity. This is not made clear in the draft determination. Alternatively, the ATO could propose to tax the original trust. This would however mean taxing a trust that did not trigger the CGT event to occur.

The ATO was contacted for clarification as to whether CGT event A1 would be the more relevant tax event to occur via the execution of a trust split, to which it was explained that the Commissioner is of the view that E1 is the most specifically applicable CGT event.

Regardless of these issues surrounding TD 2018/3, this draft determination demonstrates an intention by the Commissioner to tax trusts that execute a trust split. Such a position is one that trustees of discretionary trusts should be aware of and pay attention to over the coming months.

[1] Australia Taxation Office, Taxation Determination 2018/D3 (2018) 6.

[2] Ibid 8.

[3] Ibid. 6.

[4] Ibid 7.

[5] Gartside v IRC [1968] AC 553.