On 4 March 20011, following an announcement by the Assistant Treasurer, Treasury released a discussion paper on measures to alleviate uncertainty in the taxation of trust income in light of the High Court decision last year in Commissioner of Taxation v Bamford.
The Treasury discussion paper deals with two recommendations made by the Board of Taxation in order to addresses two key areas of uncertainty for trusts, namely:
- the alignment of the concept of '"income of the trust estate" with the tax law concept of "net income of the trust estate"; and
- the streaming of capital gains and franked distributions by trusts.
The changes are proposed to apply from the 2010-11 income year (ie 1 July 2010 for 30 June balancing trusts).
Alignment of the concepts of "income of the trust estate" with taxable income
In relation to the first issue, a number of options are canvassed in the discussion paper including:
- the creation of a new definition called "distributable income" which would broadly reflect "net income of the trust estate" (ie taxable income) but subject to a number of specific adjustments;
- alternatively, defining "distributable income" by reference to accounting concepts and standards; and
- specifically including capital gains in the concept of "distributable income".
If the proposals are effected, the measures will mean that the allocation of the tax liability to the beneficiaries may not be able to be controlled by specific drafting adopted in the trust deed or instrument. Entitlement to particular amounts under the general law of trusts will remain unchanged.
The measures do not expressly deal with the concept of "present entitlement" and accordingly, the measures may give rise to a taxation liability for particular beneficiaries even though they may not be entitled to any actual distribution from the trust estate.
If adopted, all trusts will need to urgently review and possibly consider amending their trust deeds. This in turn may give rise to other tax issues including capital gains tax and stamp duty which would arise on any possible resettlement of the trust estate.
It appears that these measures will be subject to considerable discussion and lobbying.
Streaming of capital gains and franked distributions
Under the second proposed measure, the Assistant Treasurer has said that the Government will amend the current tax laws to enable both franked distributions and capital gains to be streamed to particular beneficiaries for income tax purposes.
Under the proposed measures, only those beneficiaries entitled to the capital gain under the terms of a trust deed will be required to include the capital gain in their taxable income and beneficiaries not entitled to share in a capital gain of the trust under the terms of the deed would not be required to include the trust's capital gain in their own taxable income. This will be done by deeming the trust's capital gain to have been made by a beneficiary in accordance with that beneficiary's entitlement to that capital gain for trust law purposes.
Short consultation period
The proposed measures are only open for a very limited consultation period which ends on 18 March 2011.