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Are asset revaluation reserve distributions 'ordinary income' for discretionary beneficiaries?


This article analyses whether an asset revaluation reserve distribution made by a trustee of a discretionary trust could be regarded as ordinary income for the receiving beneficiary. This is important as normally only the capital gains tax treatment is considered, with the resultant conclusion that such a distribution is not assessable. Through this article's analysis, the accepted position that an asset revaluation reserve distribution has no adverse income tax consequences for a beneficiary of a discretionary trust will be challenged. In particular, it will be submitted that the receipt of such a distribution by a discretionary beneficiary could be assessable as ordinary income.

The article will initially consider whether an asset revaluation is ordinary income for the trust estate itself. Then the conduit theory's application to asset revaluation reserve distributions by trustees of discretionary trusts will be considered. Following this analysis, the article will consider whether the receipt of an asset revaluation reserve distribution is ordinary income for the beneficiary of a discretionary trust.

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Dr Brett Freudenberg CTA
Photo of author, Brett FREUDENBERG Brett Freudenberg is an Associate Professor – Taxation at Griffith University (Australia). Brett is known for his research expertise in the tax law and policy issues facing private enterprises, as evidenced by his Fulbright Scholarship (2006) and over 50 refereed publications in leading Australian and international journals. Associate Professor Freudenberg’s research has analysed whether Australia should introduce a tax flow-through company (S Corporation), the tax treatment of discretionary trusts and the motivation for choice of business structure. Associate Professor Freudenberg’s research has informed government policy as he was invited to present his PhD research findings to the Australian Treasury as part of the Henry Tax Review. Brett is passionate about education being a transformative process, and his effectiveness as a teacher has been recognised through five national awards (including the award of two Australian Learning and Teaching Council citations: 2008 & 2011). - Current at 29 May 2017
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