- The Government has held off on defining trust or distributable income in taxation statutes. This measure was intended to better align trust distributable income with taxable income.
- Taxation of capital gains made by trusts and franked distributions flowing through trusts will be taxed under Subdivisions 115-C and 207-B of the ITAA 1997, not Division 6 of the ITAA 1936.
- Streaming of capital gains and franked distributions will be possible if the trust deed permits streaming, and beneficiaries are “specifically entitled” to individual capital gains and franked distributions. To the extent beneficiaries are so entitled, the capital gains and franked distributions will be allocated on a quantum basis. Where there is no specific entitlement, such amounts will be allocated on a proportionate basis.
- There is uncertainty as to whether other classes of income (including foreign income with credits attached) can be streamed. The exposure draft legislation is silent on this.
- There are two anti-avoidance rules for trust distributions made to tax-exempt entities. These rules are designed to ensure that:
- trusts notify tax-exempt beneficiaries of their entitlement within two months of the end of the income year, and
- a tax-exempt entity is not assessed on a disproportionate share of the taxable income of the trust relative to its entitlement.
The rules will apply from the 2010/11 year. Trustees and their advisers will invariably have to review trust deeds and distribution resolutions and minutes if contemplating streaming capital gains and/or franked distributions.
Phoenix activities and taxation law
The amendments to the director penalty regime and the issue of DPN notices to apply from 1 July 2011 (announced in the May 2011 Budget) will have a big effect on advisers.
The director penalty regime will:
- extend to superannuation guarantee amounts
- deny directors and their associates PAYG withholding credits for unremitted PAYG withholding by the company
- in certain circumstances (where certain unpaid company tax liabilities remain unreported after three months from becoming due), allow the ATO to commence recovery proceedings against directors without allowing a 21-day grace period.
Accountants and business advisers need to understand these new rules to advise clients, especially in cases where the client is facing systemic cash flow difficulties.
Changes for SMSF investment in collectables
The Government has released draft regulations for SMSFs investing in collectables that will govern how SMSFs can make, hold and realise such investments. There are currently no specific restrictions on SMSF investments in collectables; only the general rules, including the sole purpose test, apply.
The changes are designed to prevent SMSF trustees enjoying current-day benefits from investments in collectables and ensure such investments are made to derive retirement income. The rules will apply to the following lifestyle assets (defined as section 62A items): artwork (as defined in the ITAA 1997); jewellery; antiques; artefacts; coins or medallions; postage stamps or first day covers; rare folios, manuscripts or books; memorabilia; wine; cars; recreational boats, and memberships of sporting or social clubs.
Under the proposed Regulations, an SMSF trustee will commit an offence for any of the following activities involving investment in a section 62A item:
- allowing a related party of the fund to use any of the following items of the fund – jewellery, cars, recreational boats, membership of a sporting or social club
- leasing the item to a related party of the fund
- storing the item at the private residence of a related party of the fund
- failing to document in writing decisions of the SMSF trustee relating to storage of the item (written records of decisions must be kept for 10 years)
- failing to insure the item in the fund’s name within seven days of acquiring the item. Memberships for a sporting or social club are excluded from this rule
- disposing of an item to a related party at a price other than a market price determined by a qualified independent valuer.
The regulations will commence from 1 July 2011. There is a five-year transition period (to 1 July 2016) for existing investments in section 62A items held by an SMSF on 30 June 2011.
