The Assistant Treasurer, Mr Bill Shorten, released an Exposure Draft on April 13th 2011 containing proposed inserts for the Tax Laws Amendment (2011 Measures No. 3) Bill 2011 to enable the streaming of franked distributions and capital gains as well as anti-avoidance measures aimed at ensuring that low-taxed entities, specifically exempt entities, cannot be inappropriately used to reduce the tax payable on the net income of a trust.
These proposed changes have been classified as “interim” measures to remedy critical issues prior to the entire set of provisions being updated and re-written into the Income Tax Assessment Act 1997 (“ITAA1997”) at a later date.
Summary of the proposed measures are:
The taxation of a trust’s capital gains and franked distributions will effectively be removed from Division 6 of Part III of the Income Tax Assessment Act 1936 (“ITAA1936”) and dealt with under Subdivisions 115-C and 207-B of the ITAA1997 respectively. This approach essentially involves:
1. As is currently the case, Division 6 will apply to assess beneficiaries on their share of a trust’s net income based on their proportionate share of the total trust law income of the trust.
2. Subdivisions 115-C and 207-B as amended will apply to assess the beneficiary on their share of any capital gain made or franked distribution derived by the trustee. The share of these amounts will be determined by having regard to whether the beneficiary is “specifically entitled” to the relevant capital gain or franked distribution.
3. The new Division 5B will adjust the Step 1 amounts of taxpayers to avoid double taxation.
From a practical perspective, the trustee will be required to prepare and maintain appropriate accounts that indentify the net capital gain and net dividend (that is, after expenses) that is to be streamed and the specific allocation of that amount to beneficiaries.
The trust streaming measures contained within the Exposure Draft are proposed to apply for the 2011 and later income tax years.
