The Australian Taxation Office (ATO) has confirmed 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. Effectively, the proposition established in the High Court decision of FCT v Commercial Nominees Australia has been broadened to apply to unit trusts.
This article includes a link to a previous ClearLaw article that discusses Clark's case.Viviane Karoumbalis
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:
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:
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 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.
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.
The Commissioner view is that:
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.
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.
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.
  FCAFC 5
 (2001) 47 ATR 220
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