Taxation Law - CGT and Trust Cloning Exception

1. the trust is created by the transfer of an asset to the trust from another trust;
2. the beneficiaries of the trust are identical; and
3. the terms of the trust including the beneficiaries’ interest are identical.

In addition the mere change of a trustee of a trust without any change in the arrangement of the trust is not considered to be a change of ownership of the asset of the trust for CGT purposes. The trust cloning exception is not effective if it involves even a minor difference between the two trusts. The meaning and effect of the trust must be identical. Consequently trust cloning has become an integral part of a trust structure when considering the issue of wealth and asset protection, risk minimisation, family succession planning and tax restructuring. The message from the Commissioner is clear that the beneficiaries and terms of both trusts are to be the same. Trust deeds are complex instruments which require great care and skill when drafting due to the intricacies involved. This is more so whenever replica trusts are being created. To ensure they are effective they must be drafted by a lawyer who possesses the appropriate skill, knowledge and expertise. All too often this task is left to professionals who fail to understand exactly what they are doing and often being paid scant attention. Obviously where asset protection, wealth preservation or succession planning are driving the project the object fails when a tax liability is triggered impairing the net asset value of the replica trust.

On 31 October 2008 The Assistant Treasurer, Chris Bowen announced that the government will remove the capital gains tax (CGT) trust cloning exception to the CGT events E1 and E2. With the announcement of the Assistance Treasurer we may see the end to the existence of trust cloning. The Treasurer is currently seeking opinion from various parties in relation to the abolishment of the Trust Cloning Exception and the exact extent of the abolishment can only be determined upon legislation being introduced in parliament.

At LAC Lawyers we are able to advise clients on the implications of the announcement made by the Assistant Treasurer on the abolishment of the trust cloning exception and assist clients to restructure their affairs appropriately. This is highly technical complex work which requires proper attention. Sometimes we have been asked to review documents only to find that they are replete with errors failing to address the client’s particular circumstances rendering them void. Don’t spend the money unless it is done properly and worse still don’t leave it to someone else to work out when you die as much of your legacy may be disipated in legal costs. Financial responsibility costs money but do it whilst you are alive as it is the best risk and wealth management strategy available to you. Should you require tax, asset protection, wealth preservation or succession planning advice do not hesitate to contact LAC Lawyers.