June 2011
In this Issue:
Proposed New Trust
Streaming Provisions
Overview
On 2 June 2011, Tax Laws
Amendment (2011 Measures No.
5) Bill 2011 was introduced into
Federal Parliament.
The Bill
contains important amendments
which are designed to modify the
taxation treatment of trusts with
effect for the 2010-11 and possibly
later income years.
The amendments seek to ensure
that, where permitted by the terms
of a trust deed, the streaming of
capital
gains
and
franked
distributions
(including
any
attached franking credits) to
beneficiaries will be effective for
tax purposes.
The amendments do not give a
trustee the power to stream it is
the long held ATO view that
streaming can only take place if
the relevant trust deed contains
such a power.
Further, the amendments do not
allow for tax effective streaming of
any other forms of income (for
example, foreign income or
interest income). The ATO view
is that streaming of such other
income is ineffective for tax
purposes, and great care should
therefore
be
taken
when
considering whether to stream such
other income.
Beneficiary must be specifically
entitled
The proposed legislation provides
that for the streaming of capital
gains and franked distributions to
be effective for tax purposes, the
trustee must in accordance with the
terms of the trust make a particular
beneficiary specifically entitled
to those amounts.
To be specifically entitled:
(a) a beneficiary must receive, or
reasonably be expected to
receive, an amount equal to the
net financial benefit referable
to the capital gain or franked
distribution in the trust; and
(b) the entitlement must be
recorded, in its character as
referable to the capital gain or
franked distribution, in the
accounts or records of the trust.
Receive or reasonably
expected to receive
be
To be specifically entitled, a
beneficiary must receive, or
reasonably be expected to receive,
an amount equal to their share of
the net financial benefit that is
referable to the capital gain or
franked distribution.
The Explanatory Memorandum to
the Bill states that this does not
require tracing to the actual trust
proceeds from the event that gave
rise to a capital gain or the receipt
of a franked distribution. For
example, it does not matter that the
proceeds from the sale of an asset
or a franked distribution were reinvested during the year, provided
that a beneficiary receives (or can
be expected to receive) an amount
equivalent to their share of the net
financial benefit.
A specific entitlement can be
expressed as a share of the trust
gain or distribution.
If done
correctly, a specific entitlement
can be expressed by reference to a
formula even though the formula is
to be calculated later. However,
the formula must relate to the
capital gain or franked distribution
it cannot relate merely to trust
income , even if the trust income
IMPORTANT: The articles in this newsletter are in summary form and should not be relied on as a substitute for detailed advice.
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NORTON & SMAILES
TAX matters
includes a capital gain or franked
distribution.
A beneficiary is considered to have
received an amount when the
amount has been credited or
distributed to them, or paid or
applied on their behalf or for their
benefit.
A beneficiary can reasonably be
expected to receive an amount if:
(a) the beneficiary has a present
entitlement to the amount;
(b) the beneficiary has a vested
and indefeasible interest in
trust property representing the
amount; or
(c) the amount has been set aside
exclusively for the beneficiary.
The net financial benefit is the
financial benefit or actual proceeds
of the trust referable to the capital
gain or franked distribution
reduced by certain losses or
expenses.
beneficiary
will
meet
the
requirement of being recorded in
its
character
as
referable .
However, a record merely for tax
purposes will not be sufficient.
The timing rules are critical.
For capital gains, under the
proposed
legislation
a
beneficiary s entitlement must be
recorded no later than two months
after the end of the income year.
Accordingly, if a trustee resolution
is to be used to record a
beneficiary s entitlement to a
capital gain for the 2010-11
income year, then this would need
to be prepared in writing by 31
August 2011.
For franked distributions, a
beneficiary s entitlement must be
recorded by the end of the income
year. Accordingly, if a trustee
resolution is to be used to record a
beneficiary s entitlement to a
franked distribution for the 201011 income year, then this would
need to be prepared in writing by
30 June 2011.
Record keeping requirements
In order for there to be an effective
streaming for tax purposes, the
amount of benefit that a
beneficiary has received or can
reasonably be expected to receive
must be recorded in its character
as referable to the capital gain or
franked distribution.
The accounts or records of the
trust include the trust deed,
statements of resolution or
distribution statements, including
schedules or notes attached to, or
intended to be read with them. By
way of example, the Explanatory
Memorandum to the Bill states that
a trustee resolution to distribute all
of the dividends of the trust to a
The manner in which a trustee
resolution is prepared is also
critical.
A trustee resolution must clearly
record a beneficiary s entitlement
in its character as being referable
to a capital gain or franked
distribution.
A
specific
entitlement cannot be created if the
trustee resolution merely records a
beneficiary s
entitlement
by
reference to trust income , even if
that trust income includes a capital
gain or franked distribution.
Exclusions
page 2
a number of circumstances
including the following:
(a) no
beneficiary
can
be
specifically entitled to the part
of a capital gain that arises
because of the application of
the market value substitution
rule;
(b) it is not possible to stream tax
amounts to beneficiaries where
there is no referable net
financial benefit remaining in
the trust, such as when the
gross benefit has been reduced
to zero by losses or directly
relevant expenses;
(c) generally no beneficiary can be
specifically entitled to a purely
notional gain, for example, a
deemed capital gain for tax
purposes which arises from a
trust ceasing to be resident
trust. This is because there is
no net economic benefit
referable to the notional gain
that beneficiaries can receive;
(d) it is not possible to make a
beneficiary specifically entitled
to franking credits, or to
separately stream franked
distributions and franking
credits;
(e) importantly, it is not possible
to
make
a
beneficiary
specifically entitled where the
beneficiary is entitled to an
unspecified amount such as
the balance of trust income,
all of the trust income , half
of the trust income or $100 of
trust income . This is because
the entitlements have not been
recorded in their character as
referable to a capital gain or
franked distribution.
A trustee cannot make a
beneficiary specifically entitled in
IMPORTANT: The articles in this newsletter are in summary form and should not be relied on as a substitute for detailed advice.
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NORTON & SMAILES
TAX matters
page 3
Implications
Review of Trust Deeds
Disclaimer
Where a beneficiary has a specific
entitlement to a capital gain or
franked distribution, the associated
tax consequences in respect of that
distribution will apply to that
beneficiary.
Accordingly, trust deeds should
therefore be reviewed, and if
necessary amended, to ensure that
trustees have sufficient power to
stream capital gains and franked
distributions in accordance with
the new law.
This publication is intended to
provide general commentary and
information. It is not intended to
be a complete or definitive
statement of the proposed new
streaming
provisions.
In
particular, this publication is based
on the terms of Tax Laws
Amendment (2011 Measures No.
5) Bill 2011 which was introduced
into Federal Parliament on 2 June
2011. The Bill may be amended
and enacted in a different format to
its current form. This publication
should therefore not be relied upon
as legal advice. Professional legal
advice should be sought before any
action is taken in relation to the
matters
described
in
this
publication.
For trusts with no capital gains or
franked distributions, the new
streaming amendments will have
no effect.
For trusts that have capital gains or
franked distributions but do not (or
cannot) stream them to specific
beneficiaries, the amendments
apply but they generally produce
the same outcome as under the
current law. That is, capital gains
and franked distributions to which
no beneficiary is specifically
entitled will flow proportionally to
beneficiaries, based on their share
of the income of the trust, or be
taxed in the hands of the trustee
depending on the operation of
section 97 of the Income Tax
Assessment Act 1936 (Cth).
Action required by 30 June 2011
It is important to keep in mind that
the new streaming provisions can
only apply where a trust deed
permits a trustee to stream
amounts to beneficiaries.
Further, as stated earlier, for the
2010-11 income year, the new
streaming provisions can only
apply where a beneficiary s
entitlement is recorded in the
accounts or records of the trust by:
(a) in the case of franked
distributions 30 June 2011;
and
(b) in the case of capital gains 31
August 2011.
Trustee Resolutions
In the case of franked distributions,
trustees must ensure that a
beneficiary s specific entitlement
to a franked distribution is
appropriately recorded in the
accounts or records of the trust on
or before 30 June 2011.
Importantly, it will not be possible
to rely on the ATO s long standing
administrative practice in Income
Tax Ruling IT 328 for such a
resolution or determination to be
put in place by 31 August 2011.
Trustees should also implement
other
trust
resolutions
or
determinations when required by
year end under the trust deed. For
example, a trust may have derived
other forms of trust income, and
the trustee may therefore need to
pass a resolution in relation to
those other forms of trust income
by 30 June 2011.
Should you have any questions
please contact Richard Norton,
Chris Smailes, Daniel Fry or Craig
McKie.
Norton & Smailes
We advise on:
income tax, GST, capital gains
tax, FBT
superannuation
superannuation deeds
and
In the case of capital gains,
trustees must ensure that a
beneficiary s specific entitlement
is appropriately recorded in the
accounts or records of the trust by
31 August 2011.
stamp duties, payroll tax and
other State taxes
We can assist
objections and appeals
Please contact us if you would like
our assistance to review, and if
necessary, update any existing
trust deeds, or to advise on suitable
trustee resolutions to comply with
the proposed new law.
wills, estate planning and
business succession planning
trusts and trust deeds
tax and commercial litigation
commercial
IMPORTANT: The articles in this newsletter are in summary form and should not be relied on as a substitute for detailed advice.
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