Earlier today, the Government announced some further updates to its ongoing project of reforming the trust taxation rules.
Summary of developments relating to trust taxation
The key developments can be summarised as follows:
- The Government has released a discussion paper which sets out some reform options relating to the tax treatment of “fixed trusts”, including modifying or replacing the existing definition of “fixed trust” (“Fixed Trusts Discussion Paper”). The issue of whether a trust constitutes a “fixed trust” for tax purposes is important as it affects, for example, whether the trust is able to pass on the benefit of franking credits to its beneficiaries, whether the trust is able to carry forward its tax losses and whether the trust is able to claim various types of relief (such as scrip-for-scrip rollover relief).
- The Government has announced that it will amend the proposed start date for the broader reform/rewrite of the trust taxation rules in Division 6 from 1 July 2013 until 1 July 2014. The Government also announced that it will release a policy design paper in September 2012 in order to develop a model for the taxation of trusts, which is expected to take into account the recently completed consultation process in relation to the existing rules.
- The Government has also announced that it will amend the proposed start date for the previously announced new tax system for managed investment trusts (“MITs”) from 1 July 2013 to 1 July 2014. Amongst other things, the new MIT regime is intended to provide for a new “attribution” system of taxation on trust income for MITs.
- Further, the Government has announced that it will extend the interim streaming rules for MITs for a further two years to 1 July 2014 in order to coincide with the deferred start date of the proposed MIT regime (noted above). The interim streaming rules were enacted to confirm that a trust could stream capital gains and franked distributions in certain circumstances.
Likely impact for fund managers and investors
The above reforms have been much anticipated by fund managers and investors.
A copy of the Assistant Treasurer's press release is available here.
Each of the above reforms are intended to not only improve and simplify the administration of funds for managers, but also provide greater certainty for investors regarding the tax consequences of investing in a fund.
The fact that the Government is continuing to progress the various proposed reforms, and has committed to a timetable for stakeholder consultation and release of exposure drafts, should be positive news for investors and managers of funds structured as trusts in Australia.
If the proposed timetable is adopted by Treasury, it should provide comfort to managers that they may have sufficient time to update their systems to take into account the new regimes.
Fund managers and investors who have an interest in the ongoing developments in the area should continue to monitor developments relating to these important reforms.
Further details in relation to the above reforms are outlined below.
Fixed Trusts Discussion Paper
The Government has released the Fixed Trusts Discussion Paper, which sets out some reform options relating to the tax treatment of “fixed trusts”, including modifying or replacing the existing definition of “fixed trust”.
The issue of whether a trust constitutes a “fixed trust” for tax purposes is important for a number of reasons. For example, it affects whether the trust is able to pass on the benefit of franking credits to its beneficiaries, whether the trust is able to carry forward its tax losses and whether the trust is able to claim various types of relief (such as scrip-for-scrip rollover relief).
There has been considerable uncertainty in recent times as to whether a trust is capable of qualifying as a “fixed trust” for tax purposes where the ATO has not exercised its discretion to treat the trust as a “fixed trust”, particularly as a result of the recent Federal Court of Australia decision in Colonial First State Investments Ltd v Commissioner of Taxation, which some interpreted as meaning that no trust that is capable of being amended can qualify as a “fixed trust” for tax purposes.
The Fixed Trusts Discussion Paper recognises this uncertainty, and poses certain issues regarding how the law could be amended to deal with this question.
It appears, based on the Fixed Trusts Discussions Paper, that Treasury is considering whether to adopt all, any or a combination of the following approaches to deal with the issue:
- removing the reference to “trust instrument” in the definition;
- including additional “savings provisions” to suggest that a beneficiary’s interest will not be taken to be non-fixed purely because of the existence of certain powers;
- implementing a “clearly defined rights” test;
- implementing a “no material discretionary elements” test; and
- adopting a “vested and not defeated” test.
Managers who manage trusts and investors who invest in trusts may wish to review the Fixed Trusts Discussion Paper and consider which of the proposed reform options are likely to be the most beneficial, and consider whether to make a submission to Treasury. We would be happy to assist you with this if required.
Submissions for the Fixed Trusts Discussion Paper close on 14 September 2012.
A copy of the Fixed Trusts Discussion Paper is available here.
Proposed timetable for trusts reform
The Government has, in recent times, made a number of announcements regarding proposed changes to the taxation of trusts. This has included:
- a new proposed “attribution” regime for the taxation of MITs;
- a general review of the scope and operation of the trust taxation rules more generally in Division 6; and
- potentially addressing the current uncertainty that exists in the tax laws regarding the definition of a “fixed trust”.
The Government has today indicated that these reforms, when introduced, will now have a start date of 1 July 2014.
Treasury has also announced that it intends to adopt the following timetable for implementing these reforms:
Click here to view table.
This timetable represents a further delay of 12 months from the previously announced commencement date for the proposed “attribution” regime for MITs.
However, those MITs that had been relying on the “interim” relief over the past two years for the “streaming” of franked dividends and capital gains (such as qualifying ETFs) will be relieved to hear that the Government has confirmed that it will be extending this “interim” relief until the commencement of the new measures on 1 July 2014. This should provide managers and investors in those trusts with greater certainty while the details of the new regimes are being worked out.