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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:

"The introduction 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 purposes."

"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.