In the ATO's view, the decision of the Full Federal Court in Commissioner of Taxation v Clark does not change the basic proposition established in the High Court decision of FCT v Commercial Nominees Australia, that:
- a change in trust circumstances, including a change in membership and trust property, does not necessarily create a new 'trust estate' or cause a 'resettlement' of the trust; and
- the relevant focus for determining the issue is whether the continuity of the estate has been maintained.
The ATO's view is expressed in a Decision Impact Statement on 2 December 2012 following the Full Federal Court decision in Commissioner of Taxation v Clark.
Even so, the decision in Clark gives practitioners much greater comfort on these issues as the rationale applied in Commercial Nominees — in the context of an indefinitely continuing superannuation fund — has been broadened to apply to a unit trust.
Broadly in Clark's case, a unit trust made net capital gains in the 2001 income year in connection with the sale of properties acquired in 1997. In the 1991, 1992 and 1993 income years, the trust had made significant capital losses.
Between June 1993 and 30 June 2001, various characteristics of the trust changed including:
- a change in trustee;
- changes in unitholders;
- extinguishment of liabilities of the trust;
- extinguishment of a former trustee's right of indemnity out of the trust assets; and
- changing trust activity from a dormant trust to an active trust (through the new trustee adding $1.8 million to the trust).
The issue was whether the capital losses made by the trust between 1991 and 1993 could be offset against the gains made from those sales to reduce the net capital gain to nil.
The Commissioner's argument
The Commissioner argued that the capital losses were not available to be offset against the gains because the trust estate that made those capital losses was not, for tax purposes, the same trust estate that made the gains.
The Court disagreed with the ATO and held that the trust had maintained continuity and therefore the capital losses incurred between 1991 and 1993 were available to be offset against the capital gains in the 2001 income year.
- rejected the Commissioner's argument that there was a 'substantial discontinuity' with respect to each of the three main criteria identified by the High Court in Commercial Nominees; and
- found that as long as continuity of trust property, membership and trust obligations can be established, then various changes made to a trust's characteristics, membership and property, will not necessarily create a new trust — particularly if the trust deed contemplates these changes.
Appeal to the High Court
On 18 February 2011, the Commissioner sought special leave to appeal to the High Court. The High Court refused the Commissioner's application on the basis that the decision of the Full Federal Court 'involved characterisation and evaluation of the continuity of the trust estate' and there was not enough doubt for an appeal.
ATO's view of the Decision
The Commissioner view is that:
- the trust estate must be terminated for the loss of continuity to deny a trustee access to any capital losses being carried forward;
- the High Court in Commercial Nominees left open the possibility that there might be a loss of continuity in circumstances short of the trust's existence ending;
- to determine whether the existence of the trust has ended, the test to be applied is to look at changes to:
- the trust's constituent documents;
- the trust property; and
- the identity of those with a beneficial interest in the trust property, and
- Clark's case is not definitive on the issue of whether or not an attempt by a trustee to waive its right of indemnity may be effective at law.
The ATO accepts that the principles set out in Clark's case may have broader application. In particular, in the circumstances in which CGT Event E1 (section 104-55 of the Income Tax Assessment Act 1997 a trust is created over a CGT asset by declaration or settlement) may happen by reason of a new trust coming into existence as a result of changes being made to an existing trust.
Consequently, the ATO will review the 'Creation of a new trust - Statement of Principles August 2001'. We will monitor whether any further developments arise.
Request for comment
If you feel the Decision Impact Statement has consequences that have not been identified by the ATO, or if a Public Ruling or an ATO ID requires reconsideration or amendment, then the ATO invites comments by 1 February 2012.
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Tax and Revenue or General Commercial Teams.
More Information from CleardocsFor more information about the Cleardocs:
- Discretionary Trust, see here. You can order a trust online from that page;
- Unit Trusts (fixed or non-fixed), see here. You can order a trust online from that page;
- Hybrid Trust, see here. You can order a trust online from that page.
- a comparison table of key benefits and things to be wary of in each type of trust, here; and
- a comparison table of the key features of each type of trust here.
  FCAFC 5
 (2001) 47 ATR 220