The Government has just released a policy paper regarding the modernisation of the tax rules for trusts. This paper outlines two new rules for the taxation of trust income:
- The economic benefits model – This is where beneficiaries are assessed on the amount of trust income distributed to them in the year that represents taxable income of the trust and the rest is taxable to the trustee.
- The proportionate assessment model – This where beneficiaries are assessed on their share of the trust’s taxable income based on their present entitlement to the trust’s profit. Trustees will be assessed on taxable income that is not assessed to beneficiaries.
Under both models is proposed that the following features apply:
- The trust’s income would retain its character on distribution, provided there is no limitation imposed by other parts of the tax law.
- All classes of income can be streamed to beneficiaries for tax purposes.
- That trustees must declare distributions by 31 August following the end of the financial year in order for beneficiaries to be taxed on trust income.
The proposals fortunately aim to facilitate streaming of all classes of trust income unlike the current system which only allows trustees to stream capital gains and franked dividends for tax purposes. The Government wants to hear what people think of these proposed changes and are seeking submissions by 5 December 2012.