Changes proposed to the tax law for trusts

Following the recent decision of the High Court in Bamford’s case, the Government will adopt two recommendations from the Board of Taxation with the intention of removing uncertainty for trusts. The government’s objectives are to:

• align the concept of ‘income of the trust estate’ with the tax law concept of ‘net income of the trust estate’.  The mismatch between the two concepts to date has resulted in some unfair and anomalous results for tax payers; and
• “stream” capital gains, franking credits and franked distributions to particular beneficiaries.

‘Income of the trust estate’ has been interpreted to mean distributable income.  ‘Net income of the trust estate’ means the taxable income.  The distinction has meant that some taxpayers have been taxed for income they did not in fact receive, for example, where an income beneficiary is assessed on capital gains which a capital beneficiary is entitled.

Some commentators have said the proposed changes to deal with the definition of the income of the trust may create real challenges for the funds management industry because the changes may require a minimum distribution for all trusts.

The “streaming” changes are expected to confirm the position taken by many taxpayers and to that extent will be welcome.

The government has announced that the changes will apply to the 2010-11 and later income years although the actual amendments have not yet been finalised.  A discussion paper has been released for public consultation.  Comments and submissions are sought.

For further information please contact us.
Hadyn Oriti
March 2011
P: +61 2 6583 0449
E: horiti@dohlaw.com.au