Guide on Trust Funds – Part 26
High Court case – Bamford 2
|Tax laws have been changed to address a number of uncertainties and longstanding problems with the taxation of trusts, some of which were highlighted by the High Court decision in the Bamford case, effective from 29 June 2011.
The amendments enable the streaming of capital gains and franked distributions to beneficiaries for tax purposes and introduce targeted anti-avoidance rules.
These amendments do not give trustees a power to stream if they do not already have this power 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.
Which trusts are 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 changes set out when a beneficiary is taken to be ‘specifically entitled’ to a capital gain or franked distribution.
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.
Managed investment trusts
The changes allow the trustee of a managed investment trust (MIT) or an entity treated in the same way (for the purposes of Division 275) to choose whether to apply the streaming changes for the 2010-11 and 2011-12 income years.
The trustee of an MIT must make this choice in writing within two months of the later of:
when these amendments became law (29 June 2011) the end of the income year for which the choice is made.
Regardless of this choice, the anti-avoidance rules will not apply to MITs.
When do 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.
Practical issues in making beneficiaries specifically entitled
Broadly, in order to be specifically entitled to a capital gain or franked distribution:
a beneficiary must be entitled to an amount that is referrable to the capital gain (reduced by any losses consistent with the application of capital losses for tax purposes) or distribution (reduced by directly relevant expenses) their entitlement must be recorded (in its character as a capital gain or distribution) in the accounts or records of the trust.