This was the headline for the main story in the Australian
Financial Review on Monday 18 May 2009.
The article was triggered as a result of the issue by the ATO of
a draft Practice Statement (DPS) in relation to the determination
and taxation of trust income.
The approach suggested in the draft Practice Statement is not as
draconian as suggested in the Financial Review article, but it does
reflect a significant change in approach by the ATO.
While the DPS is still a draft document, it presumably
represents the current thinking of the ATO and advisors need to
consider the views in the document when advising clients on trust
There are several significant changes foreshadowed in the
Firstly, the ATO is suggesting that, in future they will
strictly apply the "proportionate approach" in
determining who is taxable on capital gains derived by a trustee.
Currently the ATO practice is to allow beneficiaries who receive a
capital gain to elect to be taxed on that gain (PS LA
The ATO position on this issue is a little confusing. They
indicate that, for the moment, taxpayers can continue to self
assess by applying the approach in PS LA 2005 but, in an audit
situation, they will strictly apply the law even if this is
contrary to the practice statement.
The ATO also suggests it may no longer apply the long standing
approach under which particular categories of income derived by a
trustee have been accepted as retaining that character when
distributed to beneficiaries (conduit approach).
In the DPS the ATO suggest it is unlikely that it will apply the
conduit theory in future where a capital gain is distributed
separately to particular beneficiaries.
This could be particularly important for clients endeavouring to
stream capital gains and franked dividends to particular
The ATO also repeat their stated view that they do not accept it
is possible for the trust deed to allow the trustee a discretion to
determine how to calculate income for the trust and that the only
concept of income which will be accepted is what it refers to as
The distributable income will the amount of income under
ordinary concepts which remains after the trustee has deducted
"expenses and outgoings properly associated with the
production of the income".
There are a number of practical steps practitioners should take
immediately to protect clients and themselves.
Firstly, all "standard" distribution minutes should
be reviewed and, if necessary, amended. Relying on existing
precedent distribution minutes could cause significant
Trust deeds should be reviewed to ascertain if there is a
definition of income. If the trust income is defined as being
equivalent to section 95 net income, this should be amended to
ensure that notional amounts (such as franking credits) are
excluded (subject to resettlement issues).
If this is not done, it may not be possible to ensure beneficiaries
are presently entitled to 100% of trust income.
If the trust deed does allow the trustee a discretion as to how
income will be determined in each year, then distribution minutes
should reflect whether the trustee has actually made a
determination. The failure to do this was fatal for the taxpayer in
Where the trustee has derived a capital gain it would be
prudent to frame the distribution minutes so that it is clear that
the capital gain is being distributed to particular beneficiaries
rather than simply as part of distributable income.
The distribution minute should cater for the possibility that the
distribution will in fact be a capital distribution.
If a capital gain is distributed to particular beneficiaries
then, at least while PS LA 2005/1(GA) remains in force, the
distribution minutes should incorporate an agreement by those
beneficiaries receiving the capital gain that they will pay the tax
on that amount in order to ensure that there is an agreement that
complies with that Practice Statement.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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