22nd June 2011
The Government is proposing a re-write of the law surrounding the taxation of trusts. This will not happen for some months, but in the meantime, there are some current issues in regard to the 2010-11 income tax year.
Firstly there is the issue of income distributions to companies by Family Trust businesses that are made by book entry and remain unpaid. This practice is often adopted as part of legitimate tax planning to restrict the taxation of income made by a business to 30 cents in the dollar as against higher individual marginal tax rates of between 37 cents to 45 cents in the dollar. Put simply, distributions made to companies after 16th December 2009 will need to be either paid in cash to the relevant company, treated as a loan and repaid with interest under specific guidelines, or invested by the trust on behalf of the company in a form of special sub-trust.
This new law is particularly complex, however we would advise that the simplest way to handle trust distributions to companies from now on would be to physically pay the amount distributed to the company and then have the company invest the money. This should avoid the adverse outcome of the distribution being treated as a taxable unfranked dividend. Trust distributions are normally done in consultation with your accountant.
Secondly, where the trust deed of a trust allows it, different categories of income can be distributed or streamed directly to specific beneficiaries. For instance, where an individual beneficiary of a trust has their own capital loss for a year from selling some shares and their family trust has a capital gain for that year it can be possible to distribute part or all of the capital gain from the trust to that individual and utilise the capital loss.
The latest guidance from the ATO now restricts the categories of income that can be streamed to just three categories, Capital Gains, Dividends and Other Income. Being able to stream these categories of income effectively depends on the terms of the trust deed, the terms of the resolution to distribute the year’s income, and the treatment of the income in the accounts of the trust. Rental income, interest income, foreign income and primary production income categories can no longer be streamed separately.
Latest legal opinion is that if you are thinking that your trust deed needs amending that you hold off until the proposed new re-write of trust taxation law is enacted; unless your trust deed is fundamentally flawed in some way. BMO have had trust deeds reviewed by expert taxation lawyers in the past and we will be monitoring the latest developments in this area and reviewing existing trust deeds where necessary. Our accountants will be attending seminars in coming weeks to stay informed on this hot topic as well. If you have any queries on the above matters please contact BMO, 07 4662 3722.
Disclaimer – In preparing information BMO has not taken into account any particular persons objectives, financial situation or needs. Investor should, before acting on this information, consider the appropriateness of this information having regard to their objectives, financial situation or needs. We recommend obtaining financial advice specific to their situation before making any financial decisions or investments.
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