Family businesses may be hit by CGT rule change

The Federal Government’s decision to abolish a capital gains tax concession for the cloning of trusts could hit private businesses, a tax expert has claimed.

The Federal Government’s decision to abolish a capital gains tax concession for the cloning of trusts could hit private businesses, a tax expert has claimed.

Trust cloning involves the creation of a new trust that has the same terms and beneficiaries as an original trust. Capital assets could then be transferred to the cloned trust free without potentially triggering capital gains tax.

Deloitte tax partner Craig Holland says trust cloning was becoming increasingly attractive to private companies because of the CGT exemptions. The main reasons were related to succession (assets could be passed from one generation to the next without triggering CGT) and asset protection.

“You could effectively split your investment portfolio over a number of different entities,” Holland says.

But Holland says the tax office was growing increasingly worried about how the trust cloning concession was being used. He says the rules have now changed.

“I think the ATO was concerned that people were cloning trusts without getting advice or a private ruling from the ATO. They didn’t understand the complexities, and inadvertently triggering a CGT event in any case.

“Treasury has decided to remove the concession given the uncertainty.”

As a result of the change, private businesses that operate through trust structures and want to move a capital asset from one trust to another will need to look at other options.

Holland says one option is to do nothing and not risk triggering a CGT event, although this may not work for private companies looking to shift assets for asset protection or succession reasons.

These companies need to realise that shifting assets is now likely to result in a tax liability, Holland says.