Government to review trust and tax laws

Tax experts have welcomed the Federal Government’s decision to launch a review of the trust and tax laws that affect more than a half million small businesses.

The review will focus on discrepancies between trust laws and should resolve uncertainty around income streaming, the ability of trusts to pass through tax benefits to beneficiaries, and the application of capital gains tax rules in trusts.

The Government has promised to have its review completed by June 30, 2011. Assistant Treasurer Bill Shorten said trust tax law has been an ongoing issue for awhile.

“It is important to simplify the system, rewrite the rules and give more certainty to the thousands of small businesses and farmers who use trusts,” he said.

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, says the review is a positive step forward.

“It demonstrates the government is prepared to act courageously to bring some tax uncertainty to hundreds of small businesses out there. This is a complex, tricky and very sensitive part of the tax environment,” he says.

Paul Drum, head of investment and business policy at CPA Australia, welcomes the review into what he describes as a “dog’s breakfast”.

“[The current laws are] very difficult for anyone to understand and comply with. There is a lot of antitrust sentiment out there in the business community,” he says.

Many of the issues relating to the laws were sparked by a High Court decision, which examined the way income from a trust would be taxed.

Essentially, the taxpayer argued that income from a trust should be treated according to trust law, while the ATO argued that income from a tax should be treated as normal accessible income.

Issues the tax profession would like to see resolved include:

• Whether income streaming is allowed, whereby different types of income – such as income from a business – are streamed to different beneficiaries.
• Whether capital gains tax benefits and exemptions, such as capital gains tax exemption on small business sales, can be passed through to trust beneficiaries.
• Whether other tax exemptions, such as the entrepreneur’s tax offset, can be passed through to beneficiaries.
• Whether franking credits can be passed through to beneficiaries.