Trust Tax Reforms – Discussion Paper Update and Reform Announcements

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On 30 July 2012, the Government released a Discussion Paper outlining proposed reforms to the taxation of fixed trusts.  The link to the Discussion Paper can be found here.

The Discussion Paper follows on from the initial consultation paper, released in November 2011, outlining the Government’s broader trust reform agenda to modernise the taxation of trust income.

The Discussion Paper considers a number of options for reform, with a focus on addressing areas of uncertainty relating to fixed trusts, including modifying and/or replacing the existing definition of ‘fixed trust’.  The question of whether a trust constitutes a “fixed trust” under Australian tax law is central to a number of other tax provisions, including the ability to flow through franking credits to beneficiaries, carry forward trust tax losses and access certain types of roll-over relief.

The Government has also made a number of announcements relating to the broader reform of the trust taxation rules:

  1. The previously announced start date for the reform/rewrite of the trust taxation rules will be extended passed 1 July 2013, to 1 July 2014;
  2. The Government will release a policy design paper in September 2012 which will further develop options for a model for the taxation of trusts;
  3. The previously announced start date for the new tax system for managed investment trusts (“MITs”) will be extended passed 1 July 2013, to 1 July 2014 to coincide with the general update and rewrite of the trust provisions; and
  4. The interim streaming rules for MITs will be extended for a further two years until 1 July 2014 in order to coincide with the deferred start date of the proposed new MIT regime.

The Discussion Paper and these announcements will hopefully be directed at improving and simplifying the tax administration of funds for managers, in turn providing investors with greater certainty in relation to their taxation exposure within funds.  For this reasons, these reforms have been much anticipated by fund managers and investors alike.

The deferral of the proposed start dates should also provide additional time to managers to update their systems and allow both managers and investors sufficient time to consult their advisors and understand the impact of the new regimes.

The Government is welcoming submission in response to the Discussion Paper by 14 September 2012.