Our companion article Trust deductions and losses part 2 dealt with the carrying forward of trust losses and restrictions applying to this. The recent High Court decision of FC of T v Helen Clark has led to some confusion over how capital loss carry forward ought to work.
As discussed in our companion article, while restrictive tests apply where a trust is trying to carry forward revenue losses from preceding income years, no such tests apply to capital losses. Capital losses may normally be carried forward by a trust as if it were a resident capital entity, and used to reduce future capital gains.
However, there is in effect still a restriction on the carrying forward of trust losses. If the trust is entirely “resettled”, such that one trust estate comes to an end to be replaced by another, then the trust counts as terminating and all losses (including capital losses) are terminated too. Further, a CGT event may occur.
Such “resettlement” covers not just technical resettlement of the trust, but a broader range of situations where the ATO will deem the trust to be terminated. In brief, the factors the ATO will consider include:
- redefinitions of the beneficiary class;
- changes in trust deed or trustee rights or obligations;
- depletion of trust property;
- additions of property which could amount to a new separate settlement;
- a change to the trust outside the contemplation of the original deed; and
- a change in the essential purpose of the trust.
The principle of resettlement was set out in the ATO’s Statement of Principles on the subject in 2001 and has been widely followed since.
Helen Clark decision
The High Court decision of FC of T v Helen Clark has fundamentally altered the situation and overturns much of the ATO’s Statement of Principles.
The case involved a unit trust which made a capital gain in 2000/2001 and wished to make use of capital losses arising in the early 1990s.
In the early 1990s the trust was under the control of D Family, with all the units held by D Family members and associated entities.
In June 1993, instruments were executed giving control of the trust to C Family instead. The trustee was changed to a C Family entity, loans owing to the trust from D Family were waived, the C Family trustee injected money into the trust, and all the units were eventually transferred to C Family associated entities.
Against the ATO’s principles, the Full Federal Court and High Court permitted the carry forward of the losses from the early 1990s to offset the capital gain in 2001.
The ATO noted that, despite the Courts making a finding clearly opposed to its Statement of Principles, the Courts did state that the vital point is still whether there is continuity of the trust estate.
However, the ATO acknowledged that the Clark decision in effect restricts non-continuity of a trust estate to a situation of total “termination of the existence of the trust estate”.
This fundamentally alters how the ATO is obliged to deal with the carrying forward of trust capital losses. The ATO intends to create a revised Statement of Principles accordingly.
If you have concerns about trust capital losses, call LAC Lawyers and we can provide advice and assistance.