Other ATO Developments
Artificially creating capital losses through default beneficiary arrangement
21.05.2009
A taxpayer alert has been issued in relation to arrangements under which a taxpayer with a current or future capital gain attempts to artificially create an offsetting capital loss by becoming a default beneficiary for a discretionary trust (for no consideration) and then transferring their interest in that trust (for no consideration) (TA 2009/14).
The arrangements have features that are substantially equivalent to the following:
(1) A trust is established for the benefit of discretionary objects.
(2) The deed for that trust confers discretionary powers of appointment of income and capital on the trustee or a third party appointor.
(3) The trust has a named default beneficiary who on the termination date will take any trust capital that has not been appointed.
(4) The default beneficiary may also be one of the discretionary objects.
(5) The default beneficiary does not give any money or property to acquire the interest in the trust capital.
(6) The default beneficiary assigns all their interests (default and discretionary interests) in the trust to a third party (for example, a spouse).
(7) The assignment of rights to trust capital is said to produce entitlement to a capital loss for the default beneficiary (under CGT event E8).
It may be noted that the taxpayer alert states that the ATO has seen cases where there appears to have been backdating of the documents and criminal prosecution action is being considered.
