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On 16 December 2010, the Assistant Treasurer announced that the government would conduct a public consultation as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (Division 6) and rewriting them into the Income Tax Assessment Act 1997.
The Assistant Treasurer also announced that he would seek advice from the Board of Taxation (Board) on whether any issues about the operation of the trust income tax provisions needed to be addressed for the 2010-11 tax year.
On 4 March 2011, the government released a discussion paper that canvassed options to implement recommendations made by the Board to:
- better align the concept of 'income of the trust estate' with 'net income of the trust estate'
- enable streaming of capital gains and franked distributions.
The government received a substantial amount of feedback from stakeholders following the release of this paper. Concerns were raised regarding the challenge of successfully implementing the proposal to better align the concept of 'income of the trust estate' with 'net income of the trust estate' for the 2010-11 income year.
The government decided to defer consideration of the income alignment proposal until the broader update and rewrite of Division 6.
However, it was aware that if the alignment problem was not addressed, opportunities for tax manipulation would continue to exist until the rewrite became law.
To address these opportunities, the government announced it would introduce specific anti-avoidance rules to target use of exempt entities to inappropriately reduce the tax payable on the taxable income of a trust.
On 29 June 2011 Tax Laws Amendment (2011 Measures No. 5) Act 2011 received royal assent. This Act enables streaming of franked dividends and capital gains for tax purposes, as well as introducing targeted anti-avoidance rules.
- Media release No. 025 (16 December 2010) Farmers benefit with changes to trust laws.
- Media release No. 040 (4 March 2011) Providing certainty for trusts.
- Media release No. 052 (13 April 2011) Improving the taxation of trust income.
- Media release No. 086 (2 June 2011) Increased certainty for trusts.
The changes are contained in Tax Laws Amendment (2011 Measures No. 5) Act 2011.
The Explanatory Memorandum is available.
For further information on these changes refer to Interim changes to the taxation of trusts.
The Act also introduced amendments to enable beneficiaries of trusts carrying on a primary production business to continue to use the primary production averaging and farm management deposit provisions in a year in which the trust makes a loss.
For more information about these changes (announced in the Assistant Treasurer's media release No. 025), refer to Trust beneficiary access to income averaging and farm management deposit concessions in a loss year.
Administrative arrangements for the 2010-11 income year
The Commissioner recognises that the passage of this legislation so close to the end of the income year to which it will first apply gives trustees and practitioners little time to familiarise themselves with its content and to determine how it might affect the circumstances of a particular trust for that income year (that is, the 2010-11 income year).
Therefore, following representations from practitioners, and in recognition of the practical difficulties faced by them and by trustees as a result of the timing of the new law, the Commissioner will put in place the following administrative arrangements for the application of the new law to the 2010-11 income year.
In order for a beneficiary to be specifically entitled to a franked distribution of a trust, the beneficiary's entitlement to the franked distribution must be recorded in the accounts or records of the trust no later than the end of the income year.
However, as regards the timing of recording such an entitlement for the 2010-11 income year, the Commissioner has agreed to adopt a similar approach to that set out in Income Tax Rulings IT 328 and 329 in respect of 'present entitlement' to trust income.
That is, for trusts with a 30 June balance date the Commissioner will accept that a relevant record made in respect of a franked distribution by 31 August 2011 meets the requirements of the new law for the 2010-11 income year in any case where ITs 328 and 329 would permit the trustee to take steps within that same period to make beneficiaries presently entitled to trust income for the purpose of Division 6.
For trusts that balance earlier than 30 June 2011 (or later than 30 June 2011 but before 31 August 2011) the Commissioner will likewise accept a relevant record made by 31 August 2011.
As the new law will permit relevant records to be made for capital gains no later than two months after the end of the relevant income year, there is no need for this arrangement to be extended to a beneficiary's specific entitlement to capital gains.
It should be noted that the arrangement outlined above concerning a beneficiary's specific entitlement to franked distributions will apply only for the 2010-11 income year. Further, the Commissioner has withdrawn ITs 328 and 329 and they will not apply for the 2011-12 and later income years.
The ATO will not select cases for review or audit in respect of the 2010-11 income year for the sole purpose of determining whether the purported streaming of capital gains or franked distributions by a trustee is effective.
This instruction will not apply where there has been a deliberate attempt to exploit weaknesses or deficiencies in the law. In those cases we will apply the law as we understand it to operate.
We will also apply the law as we understand it to operate in any case that has been selected for review or audit for other reasons, and in preparing rulings or objections, and in arguing cases before the Tribunal or the courts.
Last Modified: Monday, 6 August 2012