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02 May 11 Improving the taxation of trust income - ATO administrative treatment

Exposure draft legislation for the streaming of franked dividends and capital gains, as well as a targeted specific anti-avoidance rule, was released by the Government for public consultation on 13 April 2010. The proposed law changes are intended to apply to the 2010-11 and later income years. However the changes are not law at this time.

Accordingly, the ATO has published a document containing advice as to what trustees will need to consider before 30 June 2011.

In particular, the ATO says that trustees may be well advised to have regard to the proposed anti-avoidance rule in draft s 100AA in the exposure draft legislation. As currently drafted, that rule may apply if a tax exempt beneficiary is made presently entitled to trust income but is neither paid nor notified of their entitlement within two months after the end of the relevant income year. It may also apply if the exempt entity's entitlement exceeds the prescribed "benchmark percentage".

The exposure draft legislation also contains provisions designed to enable the streaming of franked distributions and capital gains. The accompanying advanced summary to the exposure draft legislation indicates that the intended outcome for the "streaming" of capital gains and franked distributions is that:

  • capital gains made and franked distributions derived by a trustee to which beneficiaries are specifically entitled will be "streamed" on a quantum basis to those beneficiaries, along with their tax attributes (such as franking credits), and
  • such amounts to which no beneficiary is specifically entitled will flow proportionally to beneficiaries based on their share of the "income of the trust estate" (net of amounts to which a beneficiary is specifically entitled), or to the trustee if there is part of the "income of the trust estate" to which no beneficiary is presently entitled.

The ATO advises that trustees should be aware that regardless of whether the proposed changes are enacted as currently set out, they will not allow for trustee resolutions made on or before 30 June 2011 to be amended. Therefore in framing a resolution, a trustee may need to also consider its tax effect should the law not be enacted as proposed.


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