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18 Mar 11 Trust Consultation

Tax Counsel Tamera Lang and Andrew Mills FTIA (Life) represented The Tax Institute at a meeting on Wednesday 16 March between the Treasury, ATO and various professional bodies regarding the "Improving the taxation of trust income" discussion paper (available online).

The meeting was convened by the Treasury so that they could hear the preliminary views of the professional bodies ahead of the lodgment of formal written submissions.

Treasury stated at the outset that they have a very tight timeframe for introducing any legislation required as a result of the consultation. Some time after the 2 week consultation on the discussion paper, they plan to release exposure draft legislation for what will hopefully be a 4 week consultation period. Following that consultation, the legislation will be introduced (and hopefully passed) in the Winter sittings.

The ATO stated that any legislative change would need to fit within the boxes on the 2011 trust income tax return forms, which are soon to be finalised. However, the information that needs to be input into the various boxes could be changed (and the accompanying instructions adapted to advise taxpayers and agents accordingly).

All of the professional bodies present welcomed the government's announcement to update and re-write the trust income tax provisions in Division 6, as well as to immediately address the uncertainties facing taxpayers for the 30 June 2011 income year. However, all of the professional bodies agreed that there are significant concerns about what can realistically be achieved in such a short time frame.

The professional bodies raised concerns about the models for better aligning the concepts of distributable income and taxable income that are set out in chapter 2 of the discussion paper.  Due to the lack of uniformity in discretionary trust deeds and the lack of time to review and possibly revise trust deeds ahead of 30 June 2011, the professional bodies consider that it is impossible to dramatically amend the law without adverse consequences for the 2011 income year.  In particular, the proposed models for determining the "income of the trust" all present significant difficulties for many trusts.

To this end, it has been suggested that the Treasury adopt an "interim solution". That is, the past administrative practices of the ATO, set out in PS LA 2005/1 and TR 92/13 (which were withdrawn after the Bamford decision) should be legislated for the income year ending 30 June 2011.  This will ensure that the longstanding practice of the ATO which existed prior to the Bamford decision can be utilised for the current year. It is a practice that all trustees and their advisers understand and could be applied with reasonable confidence. It should be acceptable for the current year, provided it is accurately codified in the legislation. The professional bodies consider that once 30 June 2011 has passed, the government can reform the "net income" difficulties as part of the broader reform of Division 6.

The professional bodies expressed general approval with the streaming solutions that are set out in the discussion paper. We acknowledged that there are other types of tax attributes that should be allowed to stream through a trust (such as foreign income tax offsets, entrepreneurial tax offsets etc) and encouraged Treasury to ensure that such streaming and flow-through could occur.

It was also discussed whether in implementing the "interim solution", there could be some modifications to the CGT and franking provisions to remove the gross-ups from the calculations of the trust's net income, and leave the notional adjustment to be done at the beneficiary level.

Finally, it was suggested that Managed Investment Trusts (MITs) be excluded from any new regime. This is because the new attribution regime for MITs will soon be in place, and it would be undesirable to impose a new regime in the meantime. In any case, trustees of MITs generally lack discretion in allocating income/capital of the trust, and therefore are not subject to the difficulties experienced by discretionary trusts.

The Tax Institute will be lodging our formal submission to the Treasury today, and a copy of the submission will be available on our website. Our views are broadly in line with those set out above. If you have any questions about the approach that we have taken, please contact us at Tax Policy.

The Tax Institute would like to thank the members who have been part of our trusts expert working panel. They have devoted a significant amount of time to craft our response to the discussion paper, and we appreciate the valuable assistance they have provided.


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