On 24 October 2012, the Assistant Treasurer released a Policy Options Paper, seeking to further progress the Government’s modernisation of the Australian trust income tax provisions and broader reform of Division 6 of the Income Tax Assessment Act 1936.
The Policy Options Paper follows the Initial Consultation Paper, released in November 2011, and provides further detail on the two proposed models currently being considered in the reform of trust taxation, the ‘Economic Benefits Model’ and the ‘Proportionate Assessment Model’.
Whilst the Policy Options Paper does not provide any detail in terms of how the broader reform of Australian trust taxation will operate, it does offer some detail on the proposed reforms:
- Bare trusts, Managed Investment Trusts (MITs) and Investor Directed Portfolio Services (IDPS) are likely to be excluded from the new operative provisions under Division 6. It is understood that the Government is preparing a separate paper that will consider the tax treatment of MITs.
- The Government are considering two proposed models, the Economic Benefits Model (EBM) (similar to the “trustee assessment and deduction” model) and the Proportionate Assessment Model (PAM) (similar to the “proportionate within class” model).
The EBM of taxation is similar to the “quantum” based approach to trust taxation, whereby beneficiaries are assessable based on the quantum and character of the distributions made to them, with the trustee assessable on any residual taxable income in the trust. The PAM of taxation is similar to the existing proportionate system of trust taxation whereby beneficiaries are taxable on their proportionate share of each class of trust “profit”.
- The reforms will likely provide for character retention upon income distribution as well as allowing for trustees to stream different categories of income through to beneficiaries.
- Tax deductions within a trust may be subject to expense allocation rules, that is, trust expenses may be effectively ‘quarantined,’ such that they are only deductible against particular classes of a trust’s assessable income.
- The time for determining beneficiary entitlements may be extended from 30 June to 31 August or potentially some later date.
- The default trustee tax rate (currently the highest marginal tax rate) is likely to remain unchanged, with no compelling policy reasons recognised to align the default trustee rate with the corporate tax rate.
As previously noted, the proposed reforms will result in significant implications for all taxpayers operating through trust vehicles. It is also expected that existing trust deeds will need to be updated once the reforms are operative. With this in mind, since the Options Policy Paper does not provide any further guidance on the effective start date for the proposed reforms to Division 6, it is expected that 1 July 2014, as previously announced, will be the effective start date.