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Taxation, Trust review

Taxation of Australian trusts under review

New Zealand isn’t the only jurisdiction carrying on a love affair with trusts.  Although the numbers of trusts in Australia, once population adjusted, are less per head than in New Zealand, the numbers are significant with the Australian Tax Office reporting over 660,000 trust tax returns for the 2008-09 year.  These trusts spanning a broad range of industries the majority of which are associated with small and family businesses.

In Australia as in New Zealand, the taxation of trusts has developed incrementally.  Although both countries have different aproaches at a more detailed level at a superficial level both jurisdictions tax income as beneficiary income or trustee income.  However, in Australia unlike New Zealand there is greater scope for a  result that appears less “fair” from a New Zealand perspective due to the different ways in which beneficiary income is calculated in Australia through the application of rules relating to “distributable income” and “net income”.  Simply put under Australian tax rules the trust’s net income is generally taxed in the hands of the beneficiaries based on each beneficiary’s entitlement to trust income (whether or not the beneficiary has actually received the amount).

However, of more concern from a New Zealand perspective is the different way the two countries determine whether a trust comes under that country’s jurisdiction. 

A trust can be resident for Australian tax purposes if a single trustee is an Australian resident at any time during that year or if the central management and control of the trust is in Australia at any time during the year of income.This test can pose significant problems for trusts that have multiple trustees when only one of a number is in Australia during an income year.  Of greater concern, often is the fact that double tax agreements, which normally apply when two jurisdictions have claims to a single taxpayer, are often silent or unhelpful with regard to trusts.

These issues are included in the subject matter of a new review of how trusts are taxed in Australia.  The initial consultation paper is available from:

http://www.treasury.gov.au/documents/2215/PDF/Consultation_Paper_Modernising_Taxation.pdf

To date five principles have been distilled, which form a frame-work for this review.  These are summarised in the consulation paper as follows:

1. Tax liabilities in respect of the income and gains of a trust should ‘follow the money’ in that they should attach to the entities that receive the economic benefits from the trust.

2. The provisions governing the taxation of trust income should be conceptually robust, so as to minimise both anomalous results and opportunities to manipulate tax liabilities.

3. The provisions governing the taxation of trust income should provide certainty and minimise compliance costs and complexity.

4. It should be clear whether amounts obtained by trustees retain their character and source when they flow-through, or are assessed, to beneficiaries.

5. Trust losses should generally be trapped in trusts subject to limited special rules for their use.

To achive these objectives one option mooted is to adopt a taxation model that is closer aligned to the New Zealand model.  That is, a model that is based on what the consultation paper describes as essentially a ‘quantum approach’ based on distributions of taxable income rather than assessing tax on an entitlement basis (whether received or not).

The review process will be interesting to observe particularly if some aspects of the New Zealand approach are adopted.

The proposed timetable for the review spans a year from the release of the consultation paper to the introduction of proposed amending legislation in November 2012.  In the meantime, the next step will be the proposed release of the policy design documentation in May 2012.

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