Law changes impacting capital gains made by a trust
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Legislation was enacted on 29 June 2011 that updates the trust taxation provisions in Division 6 of the Income Tax Assessment Act 1936 (Division 6) to address particular uncertainties in the law following the Bamford High Court decision (the new trust provisions).
The new trust provisions introduce new anti-avoidance rules and measures to generally allow the streaming of franked distributions and capital gains to beneficiaries for tax purposes. They apply from the 2010–11 income year.
The anti-avoidance rules do not apply to the trustee of a managed investment trust (MIT) or an entity treated in the same way as a MIT (for the purposes of Division 275). However, such a trustee can choose to apply the streaming measures for the 2010–11 and 2011–12 income years (or just to the 2011–12 income year).
The new trust provisions modify the rules for trusts with net capital gains (Subdivision 115-C of the Income Tax Assessment Act 1997) and the rules for franked distributions received through a trust (Subdivision 207-B of the Income Tax Assessment Act 1997).
The amendments ensure that, where permitted by the trust deed, the capital gains of a trust can be effectively streamed to beneficiaries for tax purposes, by making them 'specifically entitled' to those gains. Generally, a beneficiary will be considered specifically entitled to an amount of a capital gain if the beneficiary has received (or can reasonably be expected to receive) an amount referrable to that gain.
A beneficiary specifically entitled to a capital gain will generally be assessed in respect of that gain, regardless of whether the benefit they receive or are expected to receive is income or capital of the trust. That is, unlike the law that applied prior to the amendments, under the new trust provisions, a beneficiary may be assessed based on a specific entitlement to a capital gain of the trust, even though they do not have a present entitlement to income of the trust estate.
Capital gains to which no beneficiary is specifically entitled will be allocated proportionately to beneficiaries based on their present entitlement to income of the trust estate (excluding amounts to which any entity is specifically entitled). This proportion is known as the beneficiary's 'adjusted Division 6 percentage'. If there is some income to which no beneficiary is entitled (apart from capital gains and/or franked distributions to which any entity is specifically entitled) the trustee may be assessed under section 99 or 99A of the ITAA 1936.
The new trust provisions will also allow the trustee of a resident trust to choose to be assessed on a capital gain, provided no beneficiary has received or benefitted from any amount relating to the gain during the income year or within two months of the end of the income year. This is similar to (and will replace) the choice that was available to the trustee of a testamentary trust under the law prior to the amendments, but is not limited to those trustees. This allows the trustee of a trust to choose to pay tax on behalf of a beneficiary who is unable to immediately benefit from the gain.
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