Possible options for reform
The paper looks at three models for reforming the taxation of trust income but invites other proposed options for reform excluding taxing trusts as companies. The three models are described below.
1. The “patch” model.
This would involve retaining the existing structure of Div 6, but defining the term “income of the trust estate” for tax purposes to more closely align the definition to net income of the trust estate for tax purposes. This method is the least intrusive way to update Div6.
The response to the Treasury discussion paper released on 4 March 2011 indicated that the preferred approach to defining the term “income of the trust estate” was to use tax concepts. Treasury says that this would require adjustments to be made to the concept of taxable income to better reflect the actual amount available for distribution to the beneficiaries of the trust (ie, to account for both notional income and expense amounts).
2. The “proportionate within class” model.
Rather than being assessed on a proportionate share of the taxable income of the trust, a beneficiary would be assessed on a proportionate share of the trust taxable income attributable to a particular class. If there is only one class of income, the paper says the “proportionate within class” model would operate in the same way as the current model.
The different classes of income could be determined in two ways: (i) with reference to the trust deed or (ii) the classes could be set out for tax purposes within the tax law and would not depend on how the amounts are treated in the trust deed.
The steps in the “proportionate within class” model would be:
- determine the trust’s distributable income
- determine the different classes of income that the trustee will maintain
- allocate the trust’s distributable income to these different classes of income
- calculate the taxable income of the trust
- allocate the trust’s taxable income to the classes maintained by the trustee
- determine the share of the relevant beneficiaries to each class of taxable income based on their proportionate entitlement to that class of trust’s distributable income.
This method follows the ATO administrative tax ruling (TR 92/13) which applied up until 30 June 2010.
3. The “trustee assessment and deduction” (TAD) model.
This is where the taxable income of a trust would be assessed in the hands of those beneficiaries who receive the economic benefits related to that taxable income. Assessable amounts that are not distributed by a certain time (or taxable income with no underlying economic benefits capable of distribution) would be taxed in the hands of the trustee. The TAD model would provide a deduction to the trustee for distributions of taxable income to the beneficiaries of the trust. If the trustee distributes all of the taxable income, no tax would be payable by the trustee.
Next steps
The Government’s indicative timeframe to modernise the taxation of trust income is shown in the table below.
Based on the above indicative timelines, a target start date as early as 1 July 2013 or more likely 1 July 2014 seems more realistic scenario depending on the model chosen. Let’s hope that the broad policy framework applying to the taxation of trust income remains intact through the review process. The consultation paper is an initial step in what will be lengthy consultation process. The one certainty is that the Government has ruled out taxing trusts as companies.
