Australia Clarifies Trust Taxation
Tuesday, June 7, 2011
Australia's Assistant Treasurer, Bill Shorten on June 2 introduced legislation
that will ensure that capital gains and franked distributions can continue to
be 'streamed' through trusts.
The government has provided a 'carve-out' for managed investment trusts (MITs) to ensure these trusts
can continue to use the current 'proportional approach' until the government's
new tax system for MITs starts on July 1, 2012. This, the government said, will
ensure a smooth transition to the new tax system for MITs that aims to increase
certainty, reduce complexity, and lower compliance costs for MITs and their
investors. The trustees of these trusts can choose to apply these interim streaming
changes if they make a valid election for the 2010-11 or 2011-12 income years.
The announcement comes after the recent High Court decision in Commissioner
of Taxation v Bamford, which highlighted ongoing discrepancies between the treatment
of trust income by trust laws on the one hand, and by the tax system on the
other. The decision also created significant uncertainty about the extent to
which amounts derived by trustees retain their character when they flow through
a trust to beneficiaries. The new tax system aims to eliminate such uncertainties.
Discussing the latest legislation, Shorten explained:
of this legislation delivers on the government's commitment to clarify the current
uncertainty about when the capital gains and franked distributions, including
any attached franking credits, of a trust can be effectively streamed for tax
"Specific anti-avoidance rules will ensure that all taxpayers continue
to pay their fair share of tax while the government progresses the broader update
and rewrite of the trust income tax provisions announced last year."
"MITs (and trusts treated like MITs), have been carved-out because these
trusts, unlike other trusts, do not generally 'stream' amounts to specific beneficiaries."
According to the Minister, these changes have been designed to minimize any
disruption to trusts by working with the existing operation of Division 6 of
Part III of the Income Tax Assessment Act 1936 (Division 6). As a result, the
changes appear complex. However, for trusts that do not stream any capital gains
or franked distributions to specific beneficiaries, the changes will broadly
produce the same outcome as the current law.
The measures are transitional ahead of the new tax system for MITs, announced
in October 2010. This new regime was deferred for 12 months in April 2011 to
July 2012, and includes:
- An elective attribution system of taxation under which investors will
be taxed only on the income that the trustee allocates to them on a fair and
reasonable basis, consistent with their entitlements under the trust deed
or the trust's constituent documents;
- Establishing the ability to deal with 'under' or 'over' distributions within
a 5% cap so that trusts are not required to reissue distribution statements
and investors are not required to revisit tax returns; and,
- Removing double taxation that can arise in certain circumstances.