The Assistant Treasurer has announced that the Government will update Australia’s trust taxation laws as a result of the recent High Court decision in Bamford which highlighted ongoing discrepancies between the treatment of trust income by trust laws, on the other hand, and by the tax system on the other.
Tax outcomes for beneficiaries of trusts often do not match the amounts they are entitled to under trust law and the trust deed which can result in unfair outcomes as well as opportunities for taxpayers to manipulate their tax liabilities.
There are also major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.
To address these issues, the Assistant Treasurer announced a public consultation process as the first step towards updating the trust income tax provisions in Division 6 of Part III of the ITAA 1936 and rewriting them into the ITAA 1997.
Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries.
Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries.
The options will not include the taxation of trusts as companies, which would be a major departure from the current law.
Changes for farmers with trusts
The Government also announced that it plans to introduce amendments before 30 June 2011 so that beneficiaries of trusts carrying on primary production activities can continue to use the primary production averaging and farm management deposits provisions in a loss year.