Government delays trust reform another year as experts warn it’s “a quagmire”

The Federal Government has delayed an overhaul of trust rules for the third time in a little over a year. However, tax experts warn reform could take even longer.

Federal Assistant Treasurer David Bradbury announced the latest delay at a CPA Australia event today and the government has released a discussion paper which invites stakeholder views on options for a more workable approach for fixed trusts.

The discussion paper considers a number of options for reform, including modifying or replacing the existing definition of ‘fixed trust’. 

The government’s broader reform of trust income taxation has been delayed from July 1, 2013 to July 1, 2014, while the new tax system for managed investment trusts will now also have a start date of July 1, 2014, to coincide with the general update and rewrite of the trust provisions.

The government will also extend the interim streaming rules for managed investment trusts, introduced in 2011, for a further two years to July 1, 2014. 

“The options canvassed in the discussion will address some of the issues of uncertainty and complexity for taxpayers created by the current approach to the taxation of fixed trusts,” said Bradbury.  

“The government has listened to the message from consultations that a later start date is preferred, allowing more time to develop the law, and for industry to prepare for changes.”

Since the release of the initial Consultation Paper in November 2011, reform of trust law has largely stalled.

The three key issues at stake in trust law reform are fixed trusts, managed investment trusts and the general trust laws, known as Division 6.

Paul Drum, general manager of policy at CPA told SmartCompany the uncertainty around fixed trusts cut across all elements, including managed investment trusts, “because if you have a managed investment trust it is very important that they know what they are entitled to at any time.”

“The problem with managed investment trusts is that most of them have a deed that permits the trustee to admit further unit holders at any time and not necessarily at market value, because of this clause it calls into question whether a fixed trust should be a fixed trust,” he says.

Under the proposed managed investment trust rules, a trust will be able to elect to apply an “attribution model”, allowing trustees to allocate taxable income among beneficiaries.

Drum says the area covered by Division 6 includes trusts where there is no beneficiary presently entitled, disability trusts and child maintenance trusts.

“It’s just ripe for reform because of the differences between the black letter law and precedent. It has just become a quagmire and we need to get some more certainty,” says Drum.

He backs the delay, saying it provides “certainty about the uncertainty for the next little while” and “buys a bit of time to get it right”.

“We don’t want to race at breakneck speed for certainty that does not actually fit the market. You have to understand the implications and ramifications,” says Drum.

He expects the three key issues will be amalgamated so they are looked at as a whole rather than singularly.

Robert Jeremenko, senior tax counsel at the Tax Institute, told SmartCompany the institute also supported a delay but was concerned the revised deadline of one year’s time would not be achieved.

“What is good is that the government has put a revised timeline on the reform. Tax professionals at the Tax Institute had been making a lot of noise about the fact the government has been very silent about these reforms,” he says.

“There was months and months of radio silence until today. When governments go quiet on a policy idea, I think you can assume things are not proceeding as planned.”

“It’s the sort of area of tax law where you certainly don’t want to be rushing things. More important than the July 2014 date is whether the government has the appropriate resources to work on these reforms,” Jeremenko says.

“You have to question, given that it has taken this long for the government to get around to putting a new timetable together, when is the actual hard work going to occur?

“It’s a large reform project and it needs appropriate resourcing.”