17 March 2011
The Australian Government has released the first of its proposed reforms to the taxation of trusts. As the
Government undertakes a broader rewrite of tax law as it applies to trusts, they are immediately implementing a number of proposals, including an
amendment that addresses the issue of trust beneficiaries being considered liable for tax on income that they are not entitled to.
The issue arises because of the principal attribution rule, which means that trust beneficiaries' share of the net income of the trust is considered equal to their
proportion of income that they are entitled to if the trust earns equal amounts of ordinary income and capital gains.
For example, as the rule stands, if a life beneficiary is entitled to 100% of the trust's income and none of the capital gain, they would be assessed on all taxable income of the
trust – including the capital gain. The proposed changes would address this issue by re-drafting the main attribution rule so that each beneficiary is
assessed on the share of the net income they are entitled to without reference to the share of trust income in the trust law sense to which they are
Another, separate change would allow trustees to stream particular types of income to different beneficiaries. For example, if all
beneficiaries of the trust are entitled to shares of both income and capital gains, the trustee could determine which beneficiaries will receive trust
income and which will receive capital gains, allocated based on which type of receipt is most tax effective for particular beneficiaries. Trustees
would also be able to stream different types of dividends to different types of beneficiaries.
Australian income tax law makes a clear distinction between franked and unfranked dividends. Franked dividends are paid fully taxed from company profits, and currently carry a refundable credit equal to
30% company tax, while unfranked dividends are derived from a company's profits before tax. Because the credit cannot be used by non-residents, it is
viewed as an incentive to pay franked dividends to residents and unfranked dividends to non-resident beneficiaries and would be allowed under the
The amendments would address this problem, effective from 1 July 2010 and would apply to future tax years.
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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.