We have been recommending that clients amend their trust deeds to clarify a number of issues of uncertainty arising from recent cases and changes in the ATO position on trusts.
Our objectives have included ensuring, as far as possible, that there is a definition of distributable income of the trust that accords with the Bamford decision. At the same time the definition needs to allow the trustee flexibility to adopt a different concept of income if this will provide a better outcome. We also make a number of other important changes.
The government has announced it will undertake a review of the tax laws relating to trusts but only after a public consultation process, which means any amendments could be a long way off.
Our view has been that clients should therefore review their deeds now. Failure to do so could result in serious adverse consequences under the current law and there is no way of knowing when the proposed re-write of the tax legislation will occur and what changes will actually be made. For example, if there is a change of government, the review may not go ahead.
The government released a discussion paper on 4 March indicating it will now make some limited amendments to the legislation to deal with two areas of uncertainty arising from the Bamford decision and that these amendments will apply in the 2010/2011 financial year.
That discussion paper indicates several alternatives that the government is looking at in relation to how income should be defined and to ensure that capital gains and franked dividends can be streamed to different beneficiaries.
If these amendments are introduced before 30 June it may mean that some of the amendments we have recommended to trust deeds will then be covered by the legislation.
As our trust reviews also cover a number of other tax issues and update the trust powers to reflect current requirements of financiers we suggest clients still consider the value of a trust review to deal with other important tax related issues such as:
- removing the requirement to distribute income by 30 June;
- ensuring the trustee has the power to stream categories of income other than franked dividends and capital gains;
- ensuring the trustee has the power to make distributions out of gross income (rather than net income) to provide for the possibility of being able to claim franking credits even where the trust has a net loss.
Removing the 30 June requirement is particularly important. In our experience, the ATO have taken a strict line and have been arguing that unless distributions are made by that date (where the deed has a 30 June requirement) the trust distributions are invalid.
This can pose serious problems for clients who are not in a position to make trust distributions by 30 June.