ATO Challenges Trust Cloning, Again

6 November 2019

The ATO has recently issued Taxpayer Alert 2019/2, Trusts avoiding CGT by exploiting restructure rollover [the TA]. The rollover in question is in Div 126-G which allows assets to be transferred between 2 trusts with the same unitholders without triggering CGT.  It was inserted into the Act in 2010 as one of the suite of measures intended to counter, and regularise, the practice commonly called ‘trust cloning.’

The TA originated from the Private Wealth business line of the ATO such that it can be assumed that this arrangement has been more prevalent in the private group sector of the taxpayer market.

The transaction being challenged in the TA is structured in these steps:

  • the trustee of Transferring Unit Trust establishes a new entity, Receiving Unit Trust, with nominal capital; each trust has the same beneficiaries who hold fixed entitlements to the income and capital of both trusts
  • the trustee of Transferring Unit Trust then transfers a CGT asset to the trustee of Receiving Unit Trust
  • the trustee of Receiving Unit Trust promises to pay an amount to the transferor as the price for the asset
  • the trustee of Transferring Unit Trust and the trustee of Receiving Unit Trust both elect a rollover under Div 126-G (to ensure no tax for the transferor but an inherited cost base for the transferee)
  • the trustee of Receiving Unit Trust issues a large number of units to Purchaser to raise new capital (equal to the value of the CGT asset)
  • the Trustee of Receiving Unit Trust uses the funds raised to satisfy the debt owed to the Transferring Unit Trust
  • Purchaser then buys the remaining units in Receiving Unit Trust from the unitholders for their (modest) market value

If this transaction seems familiar, it is very similar to the AXA Asia Pacific case (which used the scrip-for-scrip rollover to similar effect): AXA exchanged its shares in an operating subsidiary for shares in a company which was a cash box.

The ATO’s concern is that these steps, ‘purportedly allow a unit trust to effectively dispose of a CGT asset to an arm's length purchaser with no CGT consequences.’  The TA challenges the effectiveness of the transactions on 2 grounds:

  • it may not satisfy all the requirements of the Div 126-G rollover,
  • Part IVA may apply.

Our comments

Like many TAs, this one announces the ATO’s general dislike of a transaction but many relevant questions are left unanswered. And the TA seems to approach the transaction in a way that differs from the apparent design of the legislation.

The ATO clearly wants to trigger CGT at the time of the transfer between the 2 trusts (because the ownership of the 2 trusts will subsequently diverge).  The problem is, the legislation is written –

  • to allow that transfer to happen tax-free, provided certain conditions are met at that time, and
  • instead, to trigger tax consequences at the next step, when circumstances subsequently change

To put this more concretely, it is a common design feature of our roll-overs that preconditions only need to be satisfied at the time of the transaction, and any subsequent change does not retrospectively disqualify the participants from enjoying the rollover.  For example, in Div 126-G, relevant preconditions have to be met ‘at the transfer time,’ ‘just before the transfer time’ and ‘just after the transfer time.’  The same is true for the demerger rollover – the company being demerged needs to hold active assets representing 50% of its value, but only at a time which is ‘just after the demerger.’  And the same is true for the incorporation rollover – the transferor must own all the shares in the company to which the asset is being transferred, but only at the time which is, ‘just after the time of the trigger event.’

Faced with this rule, the TA tries to argue that other preconditions to Div 126-G are not met:

  • the Receiving Unit Trust must be newly-established and hold no (significant) assets so the TA speculates, maybe the Receiving Unit Trust will hold, ‘some other rights …’. This is another manifestation of the ATO’s current approach to identify potential ‘rights’ to achieve the desired outcome;
  • the Receiving Unit Trust must have ‘the same beneficiaries’ as the Transferring Unit Trust ‘just after the transfer time’ so the TA speculates, maybe the arrangement for the Purchaser to subscribe for units in the Receiving Unit Trust means this test is failed before the new units are issued.

Either possibility might turn out to be correct on the facts of a particular transaction, but neither seems inevitable.

But the more obvious difficulty with the approach in the TA is that the apparent design of the legislation is to deal with this type of situation by triggering tax at the next stage – ie, to allow the initial transfer to occur tax-free but trigger tax once the circumstances change:

  • this might happen when the separation of the ownership of the 2 trusts occurs:


 o   the ordinary CGT rules would be triggered if the separation happens through the sale of units in Receiving Unit trust by the unitholders

o   the value shifting rules might be triggered if the separation is effected by the issue of units, shifting value out of the units held by the original unitholders in Receiving Unit Trust and into the units issued to Purchaser. The issue of units (and elimination of the debt) effectively shifts all the value in the Receiving Unit Trust to the Purchaser and, in appropriate circumstances, would amount to a ‘taxing event generating a gain’; the original unitholders would pay tax at that time, or

  • this might happen at a more distant time when either or both of these events happens:


o   the unitholders in Transferring Unit Trust attempt to retrieve the cash currently held in Transferring Unit Trust,

o   the trustee of Receiving Unit Trust transfers the CGT asset to another entity (since the cost base of the CGT asset remains at the cost base inherited from Transferring Unit Trust, which is presumably significantly below the asset’s market value).

We agree with the ATO that this structure cannot be allowed to result in, ‘a unit trust [disposing] of a CGT asset to an arm's length purchaser with no CGT consequences.’ It is more debatable whether the tax consequences are meant to be triggered at the time of the disposal or at a later time.



Andrew White



Professor Graeme Cooper