New Exposure Draft of Amendments to Clarify Taxation of Trusts Released – MIT Carve out Welcomed

07 June 2011 – On 2 June 2011 the Government released draft legislation aimed at reforming the taxation of trusts in Australia and simplifying the proposed new streaming provisions. The draft legislation amends the Government’s previous releases and draft legislation aimed at limiting the ability of Trusts to stream capital gains and franking credits.

The 2 June 2011 amendments are intended to provide interim reforms for the taxation of trusts whilst the Government continues its broader rewrite of the existing trust provisions.

The 2 June 2011 draft legislation still limits the streaming of capital gains and franked dividends to particular beneficiaries subject to the particular beneficiary being ‘specifically entitled’ to that capital gain/dividend. Similarly, where no beneficiary is ‘specifically entitled’ to an amount of capital gain/dividend income, the income will be allocated amongst all beneficiaries under the Proportionate Approach.

The key amendment under the draft legislation relates to a specific carve out for managed investment trusts (MITs) who can elect not to apply the new streaming rules for the 2010-11 and 2011-12 income years. The election must be made by the later of the end of the relevant year of income and two months from the commencement of the proposed amendments.

MITs are also excluded from the proposed Anti-avoidance Rules directed at preventing trusts sheltering income through tax exempt beneficiaries. As we noted in our previous media release on the trust reforms, the Anti-avoidance Rules were expected to have a potentially negative impact on MITs and thus this exclusion is a welcome amendment.

The draft legislation is intended to apply to the 2010-11 and later income years. However the changes are not certain to receive royal assent before 30 June 2011. In light of the uncertainty, MITs with capital gains and dividends income are advised to review the draft legislation and consider whether the election should be made. Where the election is not made, trustees and managers are advised to review their Trust Deeds and ensure “specifically entitled” requirements are satisfied and that all trust net income and expense allocations can be made and recorded in a timely manner prior to 30 June where streaming is required.