In what will be very welcome news for approximately 23,000 Australian farmers who have trusts, the Government plans to introduce amendments before 30 June 2011 so that beneficiaries can continue to use the primary production averaging and farm management deposits provisions in a loss year.
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. Tax outcomes for beneficiaries of trusts often do not match the amounts they are entitled to under trust law and the trust deed. This can result in unfair outcomes as well as opportunities for taxpayers to manipulate their tax liabilities.
As well as farmers, thousands of family businesses will enjoy more certainty as the Gillard Government today made a commitment to update Australia's trust taxation laws.
There are also major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.
To address these issues, the Assistant Treasurer, the Hon Bill Shorten MP, today announced 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 (ITAA 1936) and rewriting them into the 1997 Act.
"In developing an initial consultation paper for release in the first part of 2011, Treasury will draw heavily on the expertise of the private sector, particularly through the established Tax Design Panel process and the Board of Taxation," said the Assistant Treasurer
"The options to be canvassed in public consultation will be developed within the broad policy framework currently applying to the taxation of trust income," he said.
Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.
"Based on advice I have sought from the Board of Taxation, I will also consider further whether there are any issues that must be addressed in this current tax year, " said the Assistant Treasurer.
The development of these options and the updating and rewriting of the trust income tax provisions responds to Recommendation 36 of Australia's Future Tax System review, which was conducted by an independent panel chaired by Treasury Secretary, Dr Ken Henry.
"Trust tax law has been an ongoing issue for some time and it is important to simplify the system, rewrite the rules and give more certainty to the many thousands of small businesses and farmers who use trusts. I encourage all interested stakeholders to make a submission to the consultation," the Assistant Treasurer said.