Tax experts warn trust managers to review deeds ahead of new legislation

Tax experts are warning trustees and trust holders to review their deeds before the end of the month with the Government preparing to introduce new laws that will clarify rules around the streaming of income to beneficiaries.

The warnings come alongside cautions from the Australian Taxation Institute last week, which said directors of private companies need to be sure they are not incorrectly claiming deductions for bonuses and fees.

Assistant treasurer Bill Shorten introduced legislation to Parliament last week that would ensure trusts are still able to stream capital gains and franked distributions through trusts.

“The Government has provided a ‘carve-out’ for managed investment trusts (MITs) to ensure these trusts can continue to use the current ‘proportional approach’ until the Government’s new tax system for MITs starts on July 1, 2012,” Shorten said.

“This ensures a smooth transition to the new tax system for MITs that will increase certainty, reduce complexity and lower compliance costs for MITs and their investors.”

The legislation effectively acts to clarify the Bamford decision heard in the High Court last year, which found there was a discrepancy between income trust laws and the actual tax system.

But tax experts say the Bamford decision, and the upcoming legislation, mean trustees need to review their deeds as they may become out of date when the new laws come into effect.

Institute of Chartered Accountants tax counsel Yasser El-Ansary says trustees need to make sure their deeds line up with the coming laws.

“This was outlined in the budget and goes back to last year, when the assistant treasurer said he would amend the trust laws,” he says.

“What they ought to do is examine the legislation that’s before Parliament, and ensure their deed works appropriately within the framework of that legislation.”

PKF tax partner Sharon Burke says the issue is that many trusts are streaming income to beneficiaries in a way that isn’t actually spelled out in their deeds. This practice will be outlawed under the new legislation.

“In the Bamford decision, there were a lot of arguments about who determines net income and distributions, and in the end it comes down to the deed and how it’s written.”

“Up until now you’ve had interest income, dividend income and rental income, and you could say that as long as the trustee allows you to stream it you can do so. There were questions over whether that was going to continue as a result of the decision.”

Burke says that under the new laws income cannot be streamed unless the deed says so – and trust managers will need to change their deeds as a result.

“You need to review your trusts. A lot of people have just streamed their income without the deed saying so. But the commissioner has made it clear that he doesn’t have a problem with streaming, as long as there is a committed, expressed clause and you account for that by the way of a journal entry in your accounts.”

The warnings come after Tax Commissioner Michael D’Ascenzo said last week the ATO will be cracking down on private companies over improper deductions for directors’ fees and bonuses.

Under current tax law, businesses can claim deductions for bonuses that are declared before the end of the financial year.

“We are concerned that some companies may be using that arrangement to claim amounts that are never intended to be fully paid out,” D’Ascenzo said in a release. “As the fees aren’t returned as income until received, this practice results in a mismatch of deductions and income.”

D’Ascenzo said the ATO was not concerned where businesses are paying those bonuses, but will be looking at businesses which have not paid those extra fees within “a reasonable period of time”.