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ARTICLE 1:

Misconceptions surrounding the taxation of trusts

Misconception 1:
There is such a thing as a trust for the purposes of Capital Gains Tax (CGT). CGT event E1 happens if a trust is created by declaration or settlement[1], but the terms declaration and settlement are not defined in the act and therefore take their common law meaning. Edmonds J explains what is required to create a trust by declaration or settlement in Oswal v FC of T 2013 FCA 745 (Oswal), but these principles have also been discussed in other prominent cases[2] and more recently by the Commissioner in TD 2018/D3.

As the words settlement and declaration take their ordinary meaning they can be applied equally to Div6 ITAA1936. Therefore, there is no such thing as a trust for the purposes of CGT. Furthermore, the ease at which taxpayers can create a trust to shift the derivation of income has increased over the last decade as the Commissioner was successful in the above mentioned cases.

Misconception 2:
Trusts must be in writing to be accepted by the ATO. While there are many circumstances where a trust must be in writing, such as the creation of a trust over real property which can be evidenced at any time,[3] many trusts do not have to be in writing. This view is accepted by the Commissioner in TD 2017/11, and this determination should not be restricted to income from interest bearing bank accounts.[4]

Misconception 3:
Trusts must have a TFN to be accepted by the ATO. Please see my answer to 2 above.

Misconception 4:
All trusts that derive assessable income must lodge an income tax return. PSLA 2000/2 is one example of a situation where trusts do not need to lodge an income tax return even though they may derive assessable income.

Misconception 5:
Beneficiaries must be aware that they are receiving a distribution to be presently entitled to the trust net income. A beneficiary need not be made aware that they are a beneficiary of the trust to be presently entitled to a portion of the net income of the trust.[5]

Misconception 6:
Stamp duty must be paid before a trust can be created. Many case decisions, including Edmonds J in Oswal, have discussed that a trust can be created without the need for stamp duty being paid.

Misconception 7:
The main residence CGT exemption cannot be claimed in a discretionary trust. The question of whether a real property that is legally owned by a trustee can be subject to the main residence exemption is whether the correct beneficiary is absolutely entitled to the asset.[6] If you are a beneficiary of a trust who is absolutely entitled to property held by a trustee then you may treat that property as your main residence for the purposes of the ITAA 1997.[7] Furthermore, developing case law has made it easier for an individual to use the main residence exemption since TD 58 was issued, as the Commissioner has become more accustomed to accepting sub-trust arrangements.[8]

Although, be mindful that your financial statements and income tax returns must evidence your absolute entitlement and creating an absolute entitlement can have its own ramifications including CGT, asset protection and stamp duty. A failure to have your absolute entitlement relationship properly recognised in the tax return and financial statements may cause your argument to fail.[9] Finally, it is much easier to win an absolute entitlement argument when you have a bare trust, in contrast to a discretionary trust. 


Disclaimer: This document should not be interpreted as tax advice. All information is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.

[1] S104-55(1) ITAA1997

[2] Oswal V FC of T 2013 FCA 745 & Taras Nominees Pty Ltd v FC of T 2015 ATC 20-483, Kafataris v Deputy Commissioner of Taxation [2015] FCA 874 at 25.

[3] Kafataris v Deputy Commissioner of Taxation [2015] FCA 874 at 25 and the relevant state legislation such as Tas Conveyancing and Law of Property Act 1884 s60(2)(b).

[4] PBR 1051416275154

[5] Lewski v Commissioner of Taxation [2017] FCAFC 145

[6] TR 2004/D25 & TD 58

[7] TD58

[8] TR 2010/3, TD 2018/D3 and the Aussiegolfa Decision Impact Statement.

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