Consultation Paper - Modernising the Taxation of Trust Income

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On 21 November 2011, the Government released a consultation paper relating to the broader reforms for the taxation of trusts in Australia.

The Consultation paper is directed at updating and rewriting the trust income tax rules to increase certainty and reduce compliance costs for the many hundreds of thousands of taxpayers that use trust structures.

The key points from the consultation paper include:

  • Managed Investment Trusts (MITs) will not be subject to the review, as they are dealt with separately under specific MIT tax provisions
  • Issues relating specifically to Fixed Trusts are not addressed in detail (it is expected that the Government will provide further comment on fixed trusts separately.)
  • The Government’s target start date for the trust reforms is expected to be from 1 July 2013
  • The reforms are directed at providing greater certainty to taxpayers in relation to the character flow-through and streaming aspects of trusts as well as determining the allocation of expenses within the trust
  • The possibility of allowing an extended period for determining beneficiary entitlements for tax purposes

The paper also outlined three key alternative options for reforming the trust provisions, including:

i.      Retaining the existing rules and rectifying specific errors, such as the definition of income, net of the trust income.

ii.    Requiring trust income to be allocated proportionately across different categories and classes (thereby limiting the ability to stream)

iii.   Taxing the trustee on the income of the trust net of any distributions paid to beneficiaries.

In light of the current state of the trust provisions and the recent changes regarding streaming of dividends and capital gains amounts, it is expected that the Consultation Paper and the proposed reforms will be welcome news for those fund managers, other institutions who are seeking greater clarity around their Australian taxation obligations.

Please click here to view the Consultation Paper.