Increased Certainty for Trusts
The Assistant Treasurer, the Hon Bill Shorten MP, today introduced legislation that will ensure that capital gains and franked distributions can continue to be 'streamed' through trusts.
The changes will provide certainty for trustees and beneficiaries of the approximately 660,000 trusts in Australia, specifically those that 'stream' capital gains and franked distributions.
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 1 July 2012. This ensures a smooth transition to the new tax system for MITs that will increase certainty, reduce complexity and lower compliance costs for MITs and their investors.
To ensure no MITs are disadvantaged, 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 recent High Court decision in Commissioner of Taxation v Bamford 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 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," Mr Shorten said.
"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."
These changes have been designed to minimise 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 Government remains committed to updating and rewriting the trust income tax provisions into the Income Tax Assessment Act 1997.
"Simplifying the system and providing more certainty to the many thousands of small businesses and farmers who use trusts will be a key benefit of this update and rewrite," the Assistant Treasurer said.
2 June 2011