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05 Dec 11 Decision Impact Statement - Clark

The ATO has published a Decision Impact Statement in relation to the Full Federal Court decision in FCT v Clark [2011] FCAFC 5; 2011 ATC 20-236; 79 ATR 550.

The case concerned whether for tax purposes capital gains made in the 2001 income year could be reduced by prior year capital losses, where a number of significant changes were made to the trust in the intervening period.

In the Full Federal Court, Edmonds and Gordon JJ rejected the Commissioner's contention that there was a lack of continuity of the trust estate.

The Commissioner sought special leave to appeal against the decision of the Full Federal Court to the High Court, which refused the Commissioner's application - see [2011] HCATrans 236.

The Commissioner states in his Decision Impact Statement:

"Relevantly, in disposing of the Commissioner's special leave application, the High Court noted that the application raised the question:

'[w]hether a trustee of a unit trust could set-off, against capital gains, capital losses incurred some years before under a different trustee with different unit holders, with an intervening excess of liabilities over assets, subsequent recapitalisation of the trust and a waiver by the original trustee of its right to be indemnified from the assets of the trust.'

Accordingly, following Clark, there will not be a loss of continuity sufficient to deny a trustee access to any capital losses being carried forward without a termination of the existence of the trust estate."

In relation to the administrative treatment that the Commissioner will now apply, he states in the Decision Impact Statement:

"Even though this case considered whether changes in a continuing trust were sufficient to treat that trust as a different taxpayer for the purpose of applying a net capital loss, the ATO accepts the principles set out in this case may have broader application. In particular, the case is relevant to the question of the circumstances in which CGT Event E1 may happen by reason of a new trust coming into existence consequent on changes being made to an existing trust. Therefore, the ATO will review the 'Creation of a new trust - Statement of Principles August 2001'. The ATO is liaising with the NTLG Trust Subgroup in this regard."


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