The practice of ‘trust cloning’ is becoming increasingly popular, however many people are not completely aware of the current complex provisions that are in place regarding the conditions and execution of this procedure.

‘Trust cloning’ is a colloquial term that is essentially used to describe the CGT exemption, or exception, that is applied when an asset is transferred between two trusts that have the same beneficiaries and terms.

The two most common reasons that the practice of ‘trust cloning’ may be utilised for are: 1) family succession planning – planning for the transfer of asset control to the next generation; and 2) asset protection – a method of isolating passive (or personal) investment assets from business assets.

Problems in this area begin with the interpretation of the current provisions, which are quite broad in their wording. The ATO is finding, particularly in relation to discretionary trusts, that it is not so easy to determine whether or not two trusts are ‘the same’ for the purposes of the CGT exemption.

In light of this, the Tax Office has now adopted the view that the sameness test should be strictly interpreted and applied. This means that even the smallest of differences will see the asset transfer be non-exempt. There were two main reasons nominated as to why this view was taken. The first is that, the wording of the provision reads ‘the same’, not ‘almost the same’ or even ‘nearly the same’. The second reason is that the background of the policy is understood to be for a situation whereby the trustee changes, but everything else does not.

In the ATO’s recent ruling regarding ‘trust cloning’ a number of examples were provided. Among others, the following two situations were included and the outcome of each are explained in simplified terms below. 

1.      Discretionary Trusts – establishment date and trustee
As long as the beneficiaries and terms of the two trusts are the same, the exemption applies. The establishment date and trustee of each trust need not be the same.

2.      Discretionary Trusts – appointers           
The appointers must be the same for each trust in order for the exemption to apply.

As can be seen, even from the two very simple examples above, the practise of ‘trust cloning’ is not as cut and dry as it may seem. There are a number of variable factors that can influence the outcome for each individual transaction.

The recommendation is such that anyone who is considering transferring assets from one trust structure to a ‘cloned’ entity, should seek a private ruling in order to be fully informed of the implications prior to proceeding with the transaction.