Government to review trust laws, fix uncertainties created by Bamford decision

Tax experts have welcomed the Federal Government’s announcement that it will attempt to clear up uncertainties around trust and tax laws created by the controversial Bamford decision by launching a review of the laws affecting more than 500,000 discretionary trusts.

The review, announced last night by Financial Services Minster Bill Shorten, will focus on discrepancies between trust laws and tax laws and should resolve questions around income streaming, the ability of trusts to pass through tax benefits to beneficiaries and the application of capital gains tax rules in trusts.

However, it will not examine the major controversy created by the ATO’s recent crackdown on trusts with corporate beneficiaries with unpaid present entitlements.

Nonetheless, Paul Drum, head of investment and business policy at CPA Australia, is excited about the review, partly because the Government has specifically said it will not go down the path of seeking to tax trusts as companies and partly because it is long overdue.

“What the Government are looking at are what I would say are unintended consequences from encrustations and barnacles on what was once some pretty simply tax law,” he says.

“We’ve ended with a dogs breakfast that is very difficult for anyone to understand and comply with.”

“There is a lot of anti-trust sentiment out there in the business community. They see them as anti-avoidance vehicles used by the rich and famous.”

“But these are not just passive investment vehicles – they run businesses.”

Many of the questions Drum wants to see resolved were sparked by the High Court decision in the Bamford case, which examined the way income from a trust would be taxed. Essentially, the taxpayer argued that income from a trust should be treated according to trust law, while the ATO argued that income from a tax should be treated as normal accessible income.

Issues raised by Bamford, that Drum and the tax profession want to see resolved include:

• Whether income streaming – whereby different types of income (such as income from a business and dividend income from an investment portfolio) are streamed to different beneficiaries – is allowed.
• Whether capital gains tax benefits and exemptions – such as capital gains tax exemption on small business sales – can be passed through to trust beneficiaries.
• Whether other tax exemptions – such as the entrepreneur’s tax offset – can be passed through to beneficiaries.
• Whether franking credits can be passed through to beneficiaries.

The Government has promised to have its review completed by June 30, 2011 and Drum says it’s crucial this deadline is met to help clear up uncertainty for many trustees and trust beneficiaries.

“It needs to be resolved by then. That doesn’t mean it needs legislation, but we need government announcements so there is some certainty about what people need to do when the lodge their tax returns.”

“There is a real urgency to get this clarified.”