TC
A
NATIONAL SECRETARIAT
Level 7, 34 Hunter Street, SYDNEY NSW 2000
GPO Box 1595, SYDNEY NSW 2001
Telephone: (02) 9221 1983
Facsimile: (02) 9221 2639
E-mail: association@trustcorp.org.au
Website: www.trustcorp.org.au
T rustee
C orporations
A ssociation
of A ustralia
28 April 2010
ANZ Trustees
Australian Executor
Trustees
The General Manager
Business Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600
Equity Trustees
National Australia
Trustees
New South Wales
Trustee and Guardian
Perpetual
Dear Sir / Madam
Public Trustee for the
Australian Capital
Territory
Special Disability Trusts
Public Trustee for the
Northern Territory
The TCA is pleased to offer comments on the draft legislation in
relation to the proposed changes to the taxation of the
unexpended income of SDTs.
The Public Trustee of
Queensland
Public Trustee
South Australia
In summary, our members remain reluctant to recommend
SDTs for the holding of significant funds (real estate might be
another matter) due to concerns about the taxation
arrangements and other overly restrictive conditions.
The Public Trustee
Tasmania
Public Trustee
Western Australia
Comments
Sandhurst Trustees
Fair and equitable
As indicated in our response last September to the Consultation
Paper ‘Greater fairness and equity in the taxation of Special
Disability Trusts’, we welcome the policy objective of ensuring that
unexpended SDT income is taxed at the beneficiary’s personal
income tax rate rather than the top marginal rate (plus Medicare
levy).
However, the proposed arrangements as set out in the draft
legislation could lead to situations which do not seem to be fair or
equitable.
The arrangements would involve all of the income of the SDT
(including that spent on ‘reasonable accommodation and care’)
being added to any other income of the beneficiary, who would
then be assessed on that total income at their marginal tax rate.
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State Trustees
Victoria
Tasmanian Perpetual
Trustees
Trust
The proposed approach implies that the tax paid by the trustee would exactly
offset the additional tax to be paid by the beneficiary, resulting in a neutral
outcome.
However, this will not be the case in practice. Rather than the unexpended
income being taxed at the beneficiary’s actual tax rate, it will be taxed
commencing at the lowest tax rate.
If the addition of trust income to the beneficiary’s other assessable income
leaves them in the lowest marginal tax rate bracket, then the tax paid by the
trustee will most likely cover their liability.
On the other hand, if the addition of the trust income puts the beneficiary into a
higher tax bracket (as in the example on page 5 of the Consultation Paper) the
beneficiary will have a resulting larger liability.
Ability to pay
Moreover, the beneficiary cannot access funds in the SDT to pay their tax
liability.
The beneficiary would have to fund that tax liability from their own pocket, as
the current Social Security (Special Disability Trust) Guidelines 2008 and the
Model Trust Deed do not appear to allow an SDT to assist a beneficiary in this
manner.
That situation might be likened to operating a family trust and distributing the
income to children, resulting in them having a high tax liability, but then refusing
to give them access to the money to which they are “presently entitled.”
Testamentary trusts
It is likely that most SDTs in the future will arise as testamentary trusts (TT’s)
from Wills of parents or relatives of disabled persons. TT’s currently are taxed
at more “reasonable” rates than inter-vivos trusts on unexpended income, ie: in
most cases where a trustee has the discretion to apply income or not (as in the
case of an SDT), the unexpended income is usually declared as “no beneficiary
presently entitled” and the trustee is assessed to pay tax at s99 rates.
By taking testamentary SDTs out of this arrangement and taxing them along
lines described for non-testamentary SDTs is disadvantageous.
Further, where the one Will specifies both SDT and discretionary TT provisions
for the one beneficiary it will be impossible to distinguish between the two forms
of trust income in the one “Estate” tax return.
This will complicate matters for trustees, tax agents, the ATO, DSS/DVA and,
most importantly, the disabled beneficiary. Assessment of the beneficiary’s
income by DSS/DVA for means tests currently relies on use of the trust tax
return for information about a beneficiary’s entitlement. Currently there is no
indicator in the trust tax return to distinguish what components of trust income
are SDT related.
It may be necessary that that an SDT operate and lodge under its own separate
tax file number rather than that of a deceased estate under which it arose.
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Presently entitled
Under the proposal arrangements, the beneficiary is ultimately shown to be
“presently entitled” to all trust assessable income (including capital gains
presumably). This raises a number of issues.
In “normal” trust cases, where a beneficiary is “presently entitled” to income
they have a right to claim that income then or in the future. However, this is not
possible without breaching the SDT guidelines.
It is unclear whether the common and trust law principles would be upheld by a
Court should a beneficiary exert their rights to their accumulated “presently
entitled” income from the trustee.
If this were upheld, it could result in the beneficiary receiving large sums from
the trust (eg: capital gains from investment realisation) – thus depleting the
trust’s ability to support them in the future.
This may also have a negative effect on their DSS/DVA entitlements – clearly
not the intention of the SDT provisions.
It could be held that in the case of the “legal disability” the beneficiary suffers
they still may not be entitled to access the income – but at least their estate
would be entitled to receive unexpended, accumulated income (and capital
gains) on their death – something which is not anticipated by the SDT
arrangement or Deed.
Recommendations
We strongly recommend that the Government consider two possible solutions in
respect of taxation of SDTs:
1. The Guidelines should be amended to allow the trustee to apply SDT funds
as ‘care’ of the beneficiary in the form of payment of their personal tax
liability.
If necessary this could be limited to the amount that represents the
difference in the beneficiary’s personal tax liability (had they not been
required to include trust income) and the actual liability as a result of the
inclusion of the trust income (in this way the trust would not, potentially, be
funding the liability resulting from the beneficiary’s
non-trust personal income).
Further, the trustee should be entitled to use SDT funds to pay for the cost
of having the beneficiary’s tax return prepared.
2. The income tax law should be changed so that the trustee is assessed on
undistributed income as income to which “No Beneficiary is Presently
Entitled” at s99 rates and thresholds - the beneficiary is then not required to
include the unexpended income in their personal tax return.
Yours sincerely
Ross Ellis
Executive Director
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