You may be aware that the Australian Taxation Office recently challenged the validity of trustees using streaming clauses within discretionary trust Deeds to enable different classes of income to be distributed to different beneficiaries (e.g Franked income, capital gains, interest income etc).
Following the 2010 High Court decision in Bamford v F C of T, The ATO issued Practice Statement PS LA 2010/1 which outlined that the income of a trust should be treated as an undissected sum. Under this approach, a beneficiary who becomes presently entitled to a proportion of the trust’s net income for accounting purposes should also be assessed on the same proportion of the trust’s net income for tax purposes.
A copy of the ATO’s practice statement can be found using the following link.
The release of the ATO’s Practice Statement generated much industry debate and significant criticism. In essence, the practice statement reflected the ATO’s own interpretation of the decision in Bamford and was not a finding by the High Court.
On 4 March 2011, the Government announced that it would be amending the law dealing with the taxation of trusts to provide certainty for taxpayers and advisers. In an address to a tax conference in Brisbane, Assistant Treasurer Bill Shorten stated:
“First, the amended law will clarify the definition of the income of a trust estate. This will address situations where the tax burden falls on a beneficiary despite not receiving the economic benefit.”
“Second, the law will be amended to enable streaming of capital gains and franked distributions to beneficiaries.”
“Before the Bamford case, trusts commonly streamed income to particular beneficiaries and the Government wants to ensure that this flexibility can continue.”
The changes unveiled will apply in the current financial year. They are detailed in a consultation paper, with public submissions sought by Treasury until March 18.
We see this announcement as very positive as it potentially provides taxpayers who use trusts with long awaited certainty regarding the taxation of trust distributions.
If you have any queries regarding the above and how it will impact you, please don’t hesitate to contact your Blaze Acumen adviser.