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Australia To Improve Taxation Of Trust Income

Wednesday, March 9, 2011

In December, Bill Shorten, Australia’s Assistant Treasurer, announced that the government would conduct a public consultation process as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 and rewriting them into the Income Tax Assessment Act 1997.

As part of this process Shorten also announced that he would seek advice from the Board of Taxation (Board) on whether there were any issues with the operation of the trust income tax provisions that must be addressed in this current tax year.

After examining the advice provided by the Board, a discussion paper has been released that considers ways to implement two interim reforms that will provide taxpayers with increased certainty, and reduce the scope for unfair tax outcomes and the manipulation of tax liabilities through the use of trusts.

While the update and rewrite of the trust income tax provisions in Division 6 will eventually address the current issues with the operation of the trust income tax provisions, the government is aware that there is a need for certainty in the interim. After examining advice provided by the Board of Taxation, it has decided to amend the law to better align the key concept of ‘income of the trust estate’ (which has been interpreted to mean distributable income) with the tax law concept of ‘net income of the trust estate’ (taxable income), so as to reduce anomalous outcomes and opportunities to manipulate tax liabilities; and secondly ensure that capital gains and franked distributions can be streamed to particular beneficiaries.

The paper examines the merits of the different approaches that could be adopted to amend the current tax law to achieve these outcomes, and the government is keen to point out that it is not suggesting that there should be any changes to the trust law.

The government has accepted the Board’s advice that the issues highlighted in this paper must be addressed for this current tax year. This will ensure that the current uncertainties about streaming and opportunities for manipulation are addressed by amendments applying from the 2011 income year.

Interested parties are invited to comment on the paper, and all information contained in submissions will be made available to the public on the Treasury website unless those submitting indicate that they would like all or part of their submission to remain in confidence. The closing date for submissions is Friday, March 18, 2011.