In November last year the government announced it was reviewing the taxation of trusts in an attempt to modernise the provisions of Division 6 of the Income Tax Assessment Act (ITAA) 1926 and rewrite them into the ITAA 1997. For farmers and small business this is potentially a significant taxation reform -arguably the most important in recent times. So is this a minor tune-up or a major service? In its announcement the government has indicated that this is not a ‘crack down’ on the use of trusts. The government considers that, where used appropriately, trusts are a legitimate structure through which Australians should be able to conduct their personal and business affairs. According to the Assistant Treasurer, any options for reform will be developed within the ‘broad policy framework that currently applies to the taxation of trust income’. In other words, the taxable income of a trust will continue to be assessed primarily to beneficiaries, with trustees being assessed to the extent that amounts of taxable income are not otherwise assessable to beneficiaries.
The government has outlined several key issues impeding the effective taxation of trusts:
•the interaction between distributable income and taxable income of a trust;
•the method by which the taxable income of a trust is allocated to either the beneficiaries or trustee of the trust;
•whether the amounts received by a beneficiary retain their character and source (and when ‘streaming’ of those amounts is effective for tax purposes); and
•the scope of Division 6 and other taxing provisions applying to trusts.
To address these issues requiring reform, the government’s Consultation Paper has detailed a number of options. These options range from minor changes to the current operation of Division 6 to the introduction of a new model for the taxation of trust income.
Whatever the extent of reform, the government maintains it will use five ‘principles’ in the review process:
•tax liabilities in respect of the income and gains of a trust should ‘follow the money’ in that they should attach to the entities that receive the economic benefits from the trust;
•the provisions governing the taxation of trust income should be conceptually robust, so as to minimise both anomalous results and opportunities to manipulate tax liabilities;
•the provisions governing the taxation of trust income should provide certainty and minimise compliance costs and complexity;
•it should be clear whether amounts obtained by trustees retain their character and source when they flow-through, or are assessed, to beneficiaries; and
•trust losses should generally be trapped in trusts subject to limited special rules for their use.
Currently there are a number of consultation forums in progress to listen to community views before rewriting the trust tax law. Mid-year there will be a release of exposure drafts with the government aiming to introduce the final piece of legislation in November 2012. The effective start date of any new trust tax law is set for 1st July 2013 but this will depend, of course, on the scope of the trust tax law rewrite. Many tax professionals welcome the process of modernising trust tax law which has in the past been complex, uncertain and the cause of many compliance headaches for the over 600,000 trusts in Australia. We will be watching carefully however, the extent to which the government rewrites the legislation.
For more information on the government’s rewrite of trust legislation please refer to the following links:
•Government Announcement of Consultation Paper: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/155.htm&pageID=003&min=brs&Year=&DocType
•Copy of the Consultation Paper: http://www.treasury.gov.au/documents/2215/PDF/Consultation_Paper_Modernising_Taxation.pdf
•Government Consultation Process: