Thursday, April 14th, 2011
Streaming of capital gains and franked distributions given the green light

With end of financial year fast approaching, the Government has been active in the trust taxation reform space. Mr Bill Shorten has been vocal about his desire to address the tax maze relating to trust investment vehicles. Whilst the Government has initially foreshadowed a more elaborate reform agenda to retrospectively take effect from the start of this financial year, it has wisely chosen to limit such reform for the time being after a relatively short public consultation period.

“The Government has taken our submission into account and has limited its current year trust tax reforms to the streaming issue only. We believe that it would have been overly optimistic for the Government to address major trust tax issues in such a short period and expect taxpayers to adopt and implement such changes. We need to bear in mind that the changes previously foreshadowed impact not only private family groups and farmers but also public entities such as funds management structures and last minute reforms could have been detrimental to them given that they have tight reporting deadline,” said Yanese Chellapen, Director of Machel Advisory Services.

The proposed tax changes have codified a long standing practice where trustees exercise their discretion to allocate capital gains and franked distributions to particular beneficiaries. This practice was at risk after recent Court decisions and with the ATO hinting that it will take a strict approach in relation to income streaming.

“We need to applaud the Government for its proactive stance in dealing with the uncertainties surrounding income streaming. However, we believe that the amendments should have been broader. The Government should have extended the ability to stream to other classes of income such as foreign income for which you may be entitled to a tax offset. This effectively means that income streaming now has a narrow application with the proposed legislature clarification. Also, the capital gains tax discount (“the discount”) will have to be flushed out as part of the distribution. The discount is a tax free component that previously could have been retained in the trust as working capital,” added Yanese Chellapen.

Yanese provided that “the proposed measures can be implemented rather easily but trustees will have to ‘quarantine’ expenses directly relating to capital gains and franked distributions to offset against these. Some trusts would already have the appropriate designated accounts in place to deal with this scenario but when you are investing in shares on a large scale, it may be hard to identify some of those costs at this rather late stage in the financial year.”

In addition, specific anti-avoidance rules will be developed to prevent sheltering taxable income in low tax/tax exempt entity (for instance a charity). “At this stage, no explanatory memorandum has been released so it will be interesting to see how extensive the anti-avoidance rules will be,” said Yanese Chellapen.

More elaborated tax changes will follow in relation to the trust taxation regime, including the rewrite of the current trust tax rules and the development of a managed investment trust tax regime to increase the attractiveness of Australia as a financial hub.

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Machel Advisory Services

Machel Advisory Services is a boutique business and tax advisory firm. Our focus is on providing strategic advice to businesses notwithstanding their business life cycle. Machel Advisory Services can assist in the structuring of a start-up, help with your business development while you are growing your business and assist you with your exit strategies. Seeking professional advice during the three phases (start-up, growth & consolidation and exit) is one of the many key ingredients for a successful venture.
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