Overview of the Subdivision 126-G roll-over – CGT-free transfer of assets for fixed trusts
The Subdivision 126-G roll-over was introduced as part of other changes that were enacted by the Tax Laws Amendment (2009 Measures No. 6) Act 2010 to address concerns relating to a practice often referred to as ‘trust cloning’.
Broadly, trust cloning may be described as the process of replicating an existing trust such that there is another trust (the ‘cloned trust’) with the same terms and the same beneficiaries as the original trust. Assets may then be transferred from the original trust to the cloned trust.
Trust cloning may be used for a variety of purposes, including for example:
- to separate ownership of the (valuable) assets of a business carried on by a trust for asset protection purposes;
- to transfer control of assets to the next generation as part of a succession or estate plan; or
- to divide assets as a result of a marriage or relationship breakdown.
From a tax perspective, the creation of a trust (whether by declaration or settlement) over a CGT asset triggers CGT event E1, and CGT event E2 happens where an asset is transferred to an existing trust. Refer to S.104-55 and S.104-60 respectively.
For CGT events that occurred before 1 November 2008, an exception to CGT events E1 and E2 existed, often referred to as the ‘trust cloning exception’, and effectively allowed assets to be transferred to cloned trusts without triggering these events (i.e., the transfers were CGT-free).
However, concerns arose that the trust cloning exception was being used as a CGT planning tool for restructuring (and not just for bona fide purposes), particularly where discretionary trusts were involved. Consequently, the exception was abolished with effect from 1 November 2008.
Since the repeal of the trust cloning exception, there has been no specific CGT roll-over for the transfer of assets between discretionary trusts. Instead, taxpayers would generally need to rely on accessing the Small Business CGT concessions in Division 152 for CGT relief in such cases (if eligible).