The legislation to abolish the capital gains tax (CGT) exemptions for trust cloning has not yet been prepared. When it is passed, it will be effective retrospectively from 1 November 2008 — the day after the change was announced by Assistant Treasurer, Chris Bowen MP.
Trust cloning became a popular tax planning strategy because it enabled assets pregnant with capital gains to be transferred from one trust to a new trust without triggering a CGT event. Circumstances in which trust cloning could be used included:
A trust was 'cloned' when the deed establishing the trust was replicated in exactly the same form (terms, beneficiaries, vesting date) through a new trust settlement. The old and the new trust existed side-by-side with or without the same trustee.
The tax advantage of the cloning arose under exemptions that apply to CGT events E1 and E2 in the Income Tax Assessment Act 1997:
In either of those 2 events, a capital gain arises if the proceeds from the creation of the trust or the transfer is greater than the cost base of the CGT assets.
The general capital gains tax rule would have meant that the capital gain had to be included in a taxpayer's assessable income (subject to the 50% discount if that applies). However, exceptions to that general rule apply:
To read more about the Federal Government's proposal, click here.
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Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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