Tax experts welcome trusts consultation paper but warn case law must be harmonised with legislation

Tax experts have welcomed a new consultation paper from the Government that confirms it will not move to tax trusts as companies, but have warned there will be issues in the long-term unless case law around trusts can be harmonised with legislation.

Tax organisations say the consultation is long overdue, complaining of significant complexity in both trust and tax law, and the confusion that surrounds individuals and small businesses as to their obligations.

The confusion over trusts comes after a tumultuous few years for the sector. The Bamford decision in 2010 clarified that a beneficiaries’ share of trust income would be decided as a percentage of total income, rather than a fixed amount.

“This is certainly a welcomed acknowledgement for trusts as an estate planning vehicle,” tax counsel at the Tax Institute, Deepti Paton, told SmartCompany this morning. “We’re very pleased to see the acknowledgement of many issues in the paper.”

“Several of them are really aimed at cleaning up how the tax and trusts system works, as it’s not an exaggeration to say it’s been a mess for a long time.”

The Bamford decision has caused a number of trusts to rethink how they organise payments, while tax experts have warned trust holders to make sure all beneficiaries are clarified in writing.

Institute of Chartered Accountants tax counsel Yasser El-Ansary says although a confirmation trusts won’t be taxed as companies is welcome, he has urged the Government to look at how to harmonise these types of common law cases with legislation.

“There’s a bigger policy question that needs to be asked. I don’t think there are any silver bullets, and there will be a fundamental tension that continues to exist even after this process has been completed.”

“I don’t think the two areas of law are fully combined. So in the next five years, in the long-term, the policy question that needs to be asked is whether we should in fact move to a different type of flow through vehicle for small business.”

Bill Shorten released the consultation paper earlier this week, saying it would give over 660,000 trusts the ability to have their saw in the future of taxation law.

“The interaction of the trust law and tax laws has been an ongoing issue for some time, and it is time to resolve it for all the farmers and small businesses in Australia who use trusts to manage their financial affairs,” Shorten said.

The paper itself is focused on how the Government can tax trusts more effectively and simply. Specifically, the Board of Taxation has looked at some changes that could be made including look at issues surrounding the definition of “fixed trust”.

“The Government is aware that the current restrictive definition of ‘fixed trust’ is an issue for trusts other than MITs and considers that a review of different options for a more workable approach is warranted.”

The paper itself lists out five separate principles that underpin any new policy content:

• Tax liabilities should “follow the money”, and attach to the entities that receive economic benefits.
• Provisions governing tax of trusts should be “conceptually robust”.
• Provisions governing taxes should prove certainly and minimise complications.
• It should be clear whether amounts earned by trustees “retain their character and source”.
• Trust losses should be kept in trusts subjected to special rules.

El-Ansary says after the 12 month consultation period is over, he’s hopeful the Government will implement meaningful changes that incorporate those principles and offer a long-term solution.

“We need to look at changes that will give small businesses more flexibility and asset protection. There needs to the maximum amount of certainty around their tax obligations.