Improving the taxation of trust income – 2010-2011 administrative concession

Key Points

• The ATO will allow an additional two months to 31 August 2011 for trustees to put in place relevant records to stream franked distributions but only for the 2011 income year
• ATO staff will be instructed not to select cases for review/audit in respect of the 2011 income year solely for the purpose of determining the effectiveness of the streaming of capital gains and franked distributions (absent deliberate attempts to exploit weaknesses in the law)
• The ATO has foreshadowed the withdrawal of Income Tax Rulings IT 328 and IT 329 for the 2012 and subsequent income years.

In a much welcomed announcement made on 29 June 2011, the ATO indicated that it would put in place administrative arrangements for trustees seeking to stream franked distributions in the 2011 income year in accordance with the new rules contained in Tax Laws Amendment (2011 Measures No. 5) Act 2011 which received Royal Assent on 29 June 2011.

The announcement was made following representations from practitioners, including the Institute, that the passage of the legislation so close to the end of the income year to which it first applied created practical difficulties for them and also for trustees.

Under the new rules, in order for a beneficiary to be specifically entitled to a franked distribution of a trust, the beneficiary’s entitlement must be recorded in the accounts or records of the trust no later than the end of the income year. For the 2011 income year only, the Commissioner has agreed to adopt a similar approach to that set out in Income Tax Rulings IT 328 and 329 in respect of ‘present entitlement’ to trust income. More particularly, the Commissioner said that:

‘For trusts with a 30 June balance date the Commissioner will accept that a relevant record made in respect of a franked distribution by 31 August 2011 meets the requirements of the new law for the 2010-2011 income year in any case where ITs 328 and 329 would permit the trustee to take steps within that same period to make beneficiaries presently entitled to trust income for the purpose of Division 6’.

A relevant record made by 31 August 2011 will also be accepted for earlier balancing trusts and trusts with a later balance date (being before 31 August 2011).

The announcement is limited to the streaming of franked distributions as the new law already allows relevant records to be made in respect of capital gains no later than two months after the end of the relevant income year.

On the compliance front, the announcement indicates that ATO staff will be instructed not to select cases for review/audit in respect of the 2011 income year solely for the purpose of determining the effectiveness of the purported streaming (absent deliberate attempts to exploit weaknesses in the law). However, the ATO will apply the law in any case selected for review or audit for other reasons and in dealing with rulings or objections.

In the announcement, the Commissioner also indicates that he intends withdrawing ITs 328 and 329 for the 2012 and subsequent income years.

As indicated in last week’s Tax Bulletin, the Institute was sufficiently concerned with the timing issue caused by the new rules, particularly for the 2011 income year, it wrote to the government in relation to this and several other aspects of the new rules.

Article last updated 6 February 2012