Further to our previous Gilbert + Tobin Tax Updates from 11 March and 8 April 2011, the Assistant Treasurer Bill Shorten MP has made another announcement affecting the taxation of trusts and has made available exposure draft legislation (ED).
Provisions have been included in the ED which seek to address the issue of streaming of capital gains and franked distributions. Furthermore, the ED includes a specific anti-avoidance rule to deal with potential abuses arising from the deferral of the proposal to align the trust law concept of "income of the trust estate" with the tax law concept of "net income of the trust estate".
In broad terms, the ED provides that capital gains and franked distributions (and their attached franking credits) will not be subject to the rules dealing with the taxation of trusts in Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth). Instead these amounts will be dealt with by amended provisions of Sub-division 115-C (dealing with capital gains of a trust) and 207-B (dealing with franked distributions) of the Income Tax Assessment Act 1997 (Cth). A more income detailed paper will follow once the new rules are finalised.
The proposed specific anti-avoidance rule will effectively prevent streaming of taxable income to tax exempt entities where, broadly, the economic benefits flowing to a tax exempt entity do not correspond to the taxable income allocated to it. The effect of this rule would be to subject such amounts to income tax, despite the purported allocation to the tax exempt entity.
Although the ED states that the specific anti-avoidance rule is intended to apply where exempt entities become presently entitled to the income of the trust estate, the Assistant Treasurer's Press Release seems to suggest that exempt entities are only one type of entity which will be subject to the new rules and that the rules will target "the use of low tax entities, especially exempt entities, to reduce the tax payable on the taxable income of a trust". Accordingly, there appears to be scope for a broader application of the proposed rules once they are finalised.
The measures will apply from 1 July 2010 for 30 June balancing trusts.