Transferring assets to a trust is a common tax and estate planning strategy used by business owners, investors, and individuals looking to protect their wealth, distribute income efficiently, and plan for succession. However, transferring assets such as real estate, shares, or business assets often triggers Capital Gains Tax (CGT), which can result in substantial tax liabilities if not structured correctly.
Does CGT rollover apply when transferring assets to a trust? The answer depends on several factors, including:
- The type of trust receiving the asset.
- Whether the asset is an active business asset or an investment asset.
- The purpose of the transfer (business restructuring, estate planning, asset protection, or tax efficiency).
- Whether the transfer qualifies for specific CGT rollover provisions under the Income Tax Assessment Act 1997 (ITAA 1997).
In this guide, we explore how CGT applies to asset transfers into trusts, when rollover relief is available, and the conditions that must be met to defer capital gains tax.
How CGT Works When Transferring Assets to a Trust
Under Australian tax law, when you transfer an asset to a trust, the ATO treats this as a CGT event even if the transfer is not made for cash. This means you may be liable for CGT if the market value of the asset exceeds its cost base (original purchase price plus associated costs).
This CGT event applies regardless of whether
- The asset is gifted to the trust.
- The transfer occurs between related parties (e.g., moving a personally owned asset to a family trust).
- The trust does not provide any payment in return for the asset.
The key reason for this is market substitution rules which state that where an asset is transferred to an entity, and no clear market price is established, the ATO assumes the asset was disposed of at its market value, rather than its original purchase price.
Example: How CGT Applies When Transferring to a Trust
John owns a commercial property he purchased for $500,000 in 2010. He decides to transfer it into his family trust in 2024.
- The market value of the property in 2024 is $1,000,000.
- Since the ATO considers transfers at market value, John has effectively “sold” the property for tax purposes.
- CGT is calculated on the $500,000 capital gain ($1,000,000 market value – $500,000 cost base).
If John qualifies for CGT rollover relief, he can defer the capital gain rather than paying it immediately. However, if CGT rollover does not apply, he must report the gain in his income tax return and pay tax accordingly.
When Does CGT Rollover Apply to Asset Transfers to a Trust?
1. Small Business Restructure Rollover (Subdivision 328-G)
Who It Applies To
- Small businesses with an aggregated turnover of less than $10 million.
- Transfers of active business assets from an individual, partnership, or company to a trust.
Key Conditions
- The restructure must be genuine and not undertaken solely for tax benefits.
- The transfer must maintain continuity of economic ownership.
- The asset must continue to be used in a business after the transfer.
If eligible, CGT rollover allows the transferor to defer the capital gain, meaning they won’t have to pay CGT at the time of transfer. Instead, the trust inherits the asset’s original cost base, meaning CGT is only triggered when the trust sells the asset in the future.
📌 Related: Small Business Restructure Rollover: A Quick Guide
2. CGT Rollover for Marriage or Relationship Breakdowns (Subdivision 126-A)
Who It Applies To:
- Individuals transferring assets to a trust as part of a family law settlement.
Key Conditions:
- The transfer must be due to a binding financial agreement or court order following a relationship breakdown.
- The trust must be established for the benefit of a former spouse or children.
If eligible, CGT rollover applies, meaning the capital gain is deferred, and the recipient trust takes on the transferor’s original cost base.
3. Fixed Trust Restructuring Rollover (Subdivision 126-G)
Who It Applies To:
- Transfers of assets between fixed trusts as part of a business restructure.
Key Conditions:
- The transfer must maintain continuity of economic ownership.
- The restructuring must be for legitimate commercial reasons, not just tax benefits.
If eligible, businesses can move assets between qualifying fixed trusts without triggering an immediate CGT liability.
Steps to Transfer Assets to a Trust with CGT Rollover
If you believe you qualify for CGT rollover relief, follow these steps:
Step 1: Determine Eligibility for CGT Rollover
- Identify whether your trust structure qualifies under Subdivision 328-G, 126-A, or 126-G.
- Ensure the transfer maintains continuity of economic ownership if required.
Step 2: Obtain a Market Valuation
- The ATO requires a fair market value assessment to ensure compliance.
- Work with a registered valuer to establish the correct asset valuation.
Step 3: Prepare Transfer Documentation
- Document the terms of the transfer, including consideration (if any).
- If claiming Small Business Restructure Rollover, document the business purpose of the restructure.
Step 4: Report the CGT Rollover in Your Tax Return
- Make an election for CGT rollover relief when filing your tax return.
- Maintain detailed records in case of an ATO audit.
Step 5: Monitor Future CGT Implications
- If CGT rollover applies, the deferred capital gain will be triggered when the trust sells or disposes of the asset.
Final Thoughts: Should You Seek Professional Advice?
Transferring assets to a trust can be a highly effective tax and asset protection strategy, but it is essential to understand CGT implications before proceeding. While CGT rollover can help defer tax liabilities, not all transfers qualify, and failing to structure the transfer correctly can lead to unexpected tax consequences.
📞 Need expert guidance? Our team at Blackwattle Tax can help assess your eligibility and structure your asset transfers efficiently.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
Stay informed and empowered by subscribing to our monthly newsletter, where you’ll receive valuable insights on business advice, investment tips, and strategic tax planning.
Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
The amount of the FTL penalty depends on the size of the entity and the duration since the lodgement due date:
- Small Entities: One penalty unit for each 28-day period (or part thereof) that the return or statement is overdue, up to a maximum of five penalty units. As of 1 July 2023, one penalty unit is $313.
- Medium Entities: The penalty unit is multiplied by 2.
- Large Entities: The penalty unit is multiplied by 5.
- Significant Global Entities: The base penalty amount is multiplied by 500
The amount of the FTL penalty depends on the size of the entity and the duration since the lodgement due date:
- Small Entities: One penalty unit for each 28-day period (or part thereof) that the return or statement is overdue, up to a maximum of five penalty units. As of 1 July 2023, one penalty unit is $313.
- Medium Entities: The penalty unit is multiplied by 2.
- Large Entities: The penalty unit is multiplied by 5.
- Significant Global Entities: The base penalty amount is multiplied by 500
