ATO Draft Ruling – The Meaning of Income for Trust Tax Law purposes

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On 28 March 2012, the ATO released draft tax ruling, TR 2012/D1, outlining the ATO’s view on the meaning of ‘income’ for trust tax purposes.  The draft ruling comes after a number of recent cases and legislative changes forming part of the broader reform of trust tax law in Australia.

The draft ruling outlines the ATO’s view on the taxation of trusts based on three broad principles:

  • The income of the trust must be measured in respect of distinct years of income;
  • The income of the trust is a product of the trust estate, representing an increase, separate to the trust estate (compared to the preceding income year); and
  • The income of the trust must be an amount in respect of which a beneficiary can be made presently entitled.

In broad terms, the current wording of the draft ruling appears to suggest that a trust’s deed has a limited role in respect of the tax rules and the taxation outcomes for trustees and beneficiaries.  That is, the income of the trust estate represents an actual net accretion to the trust estate over a the relevant income year.

In summary, the ATO’s position does cast doubt on, among other things, the use of trust deed clauses which seek to align trust income with taxable income, specifically in respect of notional income and deductions.  For both trustees and investors, we are once again reminded of the complexity of Australia’s trust tax laws and the importance of reviewing trust deeds in light of legislation.

The ATO have invited comments on the draft ruling by 11 May 2012.