Guide on Trust Funds – Part 11
Bamford v. Commissioner of Taxation:
Anti-avoidance rules
The changes also introduce two specific anti-avoidance rules.
- The first rule, the pay or notify rule (s 100AA ITAA1936)
Generally, it applies where an exempt beneficiary has not been notified of or paid their present entitlement to income of the trust estate within two months of the end of the income year. In this circumstance, they are treated as not being – and never having been – presently entitled to that income.
If an exempt beneficiary has not been notified of or paid their present entitlement to income of the trust estate within two months of the end of the income year, they are treated as not being – and never having been – presently entitled to that income.
- The second rule, the benchmark percentage rule (s 100AB ITAA1936)
Generally, it applies where an exempt entity’s entitlement to the income of the trust estate (ignoring any franked distributions and capital gains to which any entity is specifically entitled), expressed as a percentage, exceeds a benchmark percentage.
If an exempt entity’s entitlement to the income of the trust estate (ignoring any franked distributions and capital gains any entity is specifically entitled to), expressed as a percentage, exceeds a benchmark percentage, they are treated as not being – and never having been – presently entitled to the percentage share of the income of the trust estate that exceeds the benchmark percentage.
Under both rules, the trustee is assessed on the share of the trust’s taxable income that corresponds to the income to which the exempt beneficiary is taken as not being entitled to.
We have discretion not to apply the anti-avoidance rules if in the circumstances it would be unreasonable for it to apply.
What has not changed
These amendments do not give trustees a power to stream if they do not already have this power, express or implied, under the trust deed. The existing integrity rules (such as the ’45-day holding period’) continue to apply in respect of the streaming of franked distributions – particularly to determine whether the beneficiary can receive the benefit of franking credits.
Trusts affected by the changes
The streaming changes only affect trusts that make a capital gain or that are in receipt of a franked distribution for the 2010-11 or a later income year. In income years in which the trust does not make a capital gain or receive a franked distribution, the streaming changes will not affect how tax law applies to the trust.
If your trust makes capital gains or receives franked distributions but no beneficiary is made specifically entitled to any capital gain or franked distribution, the changes should generally produce a similar result to that achieved in the past.
The new anti-avoidance rules may apply where an exempt entity, other than an exempt Australian government agency, is a beneficiary of a trust and is entitled to income of the trust.
When the changes apply from
For trusts with a 2010-11 income year that started on or after 1 July 2010, the changes apply from the 2010-11 income year.
Trustees of a trust with a 2010-11 income year that started before 1 July 2010 (an early balancing date) can choose to apply these changes for the 2010-11 income year. They must make their choice in writing on or before 29 August 2011.
