Exposure Draft of Amendments to Clarify Taxation of Trusts Released

20 April 2011 – In April 2011, the Treasury released draft legislation directed at reforming the taxation of Trusts in Australia. The draft legislation, which has been described as interim, is intended to increase certainty for trustees, fund managers, investors and beneficiaries in relation to streaming capital gains and franked distributions through trust structures.

One of the key reforms in the draft legislation is the recognition that capital gains and franked dividends can be streamed to particular beneficiaries, as per the Quantum Approach. This ability to stream capital gains and dividends is however limited by the requirement that the particular beneficiary is ‘specifically entitled’ to that capital gain/dividend. Where no beneficiary is ‘specifically entitled’ to an amount of capital gain/dividend income, the income will be allocated amongst all beneficiaries under the Proportionate Approach.

Whether a beneficiary is ‘specifically entitled’ is dependent on the terms of the relevant Trust Deed and the records of the trust (distribution statements, accounts etc.). As such trustees and managers are advised to review their Trust Deeds and ensure all allocations in a timely manner prior to 30 June where streaming is required.

The draft legislation also provides guidance as to the application of trust expenses, (to be applied against capital gains and dividends only where they are directly relevant) and the allocation of taxable and discounted capital gains amount (i.e. the discounted amount must attach proportionately to the taxable gain and cannot be allocated separately to beneficiaries).

The draft legislation also includes proposed Anti-avoidance Rules intended to prevent trust structures being used to shelter trust income through tax exempt beneficiaries. These proposed Rules potentially negatively impact larger trust structures and managed funds with tax exempt beneficiaries and there is a question as to whether the current drafting unfairly penalises legitimate trust/tax exempt beneficiary arrangements.

On the whole, the draft legislation seems to confirm the longstanding practice that trust structures are able to stream capital gains and dividends, albeit restricting streaming to cases where the beneficiaries are ‘specifically entitled’. Whilst there is still a question of whether other forms of income can be streamed through trusts, the draft legislation does go some way to alleviate the uncertainty. The draft legislation is currently in the consultation stage and further changes to the final draft (the Bill) are expected.