The Board of Taxation has today released a report into its review of the tax arrangements applying to bare trusts and similar arrangements. The Board has considered whether, and how, to legislate the current industry practice of looking through such trusts for income tax purposes. This treatment is specifically catered for in the CGT provisions but arguably not more broadly. The ATO is not in agreement with the industry practice but has stated that it will not disturb this practice while trust tax reform options are being considered.
The Board recommendations are as follows:
The Government should legislate to provide a look through approach for bare trusts and similar arrangements for certain income tax purposes.
A characteristics based approach be used to determine which trusts are subject to look through tax treatment.
The look through approach should be similar to that currently adopted for CGT purposes.
The core characteristics used to identify qualifying trusts should be:
(a) The trustee has no, or only minor, active duties or powers
(b) The beneficiaries are entitled to the benefit of all assets and income of the trust
(c) Each beneficiary can demand the trustee to transfer assets to them at their direction
Certain features should be disregarded when considering whether a trust qualifies for look through treatment (e.g. trustee indemnity, limited power of sale, power to vote in relation to shares held, etc.).
There should be exclusions from the look through treatment for certain purposes and that further consultation is required to identify those purposes.
The treatment of bare trusts has been considered in reviews into the tax system by Governments in the past and although similar recommendations had been made, no changes to the Tax Law followed. Let’s hope that this review is looked at by the Government and that the recommendations are adopted. If not, industry will be left with no option but to maintain its current approach in looking through such arrangements even though the Tax Law is arguably not fully supportive of this.