ATO Targets Disc Trusts - Capital Gains may be taxed at 46.5%

Hi Gang,

I just posted the following on Somersoft but thought some here might also be interested:

I see in Monday's Aust Financial Review that the ATO's evolving view on age old complex trust law is that Capital Gains should not be able to be distributed to a benificiary. That is, the Trustee should be taxed at 46.5% in line with the trust rules on undistributed amounts - rather than the benificiary being eligible for the 50% CGT discount. The ATO is awaiting the decision by the Full Federal Court in relation to the Bamford test case which they have funded. The decision is expected in the next couple of months.

I'm no expert on trusts but the arguements put forward by the ATO seem to have some substance.

Perhaps some of the forum members who have more expertise on trusts may wish to comment.

Cheers - Gordon

 

Hi Gordon,

Do you have a link (maybe the ATO) where we could read up on this case a bit more?
It sounds very interesting. Maybe we will have to start investing with companies instead of trusts.

Cheers,
Ash.

 

I haven't been following this too closely, but I hope 'Kevin 07' pays attention to his sliding popularity before this goes much further. The Treasury has very little credibility either, since it threw its lot in with him.

The ATO has had success in attacking details of trust deeds in the past regarding validity of trust distributions.

The Commissioner has now made a more fundamental attack on current legal practice.

According to Trust Law, income retains its character when distributed. However, a capital gain is not income so a purported distribution is ineffective. The ATO argues that a trust deed clause equating trust income to 'net income' for tax purposes is ineffective.

For Taxation Law a net capital gain is statutory income. Therefore if it is not attributed to a beneficiary then it is assessed to the Trustee at 46.5% WITHOUT THE DISCOUNT as I understand s.115-225 ITAA97 to operate.

See for instance ID 2003/749.

Maybe this is a carry-over from the failure of the Ralph Review to tax trusts like companies.

Cheers,

Rob

 

I forgot to mention that s.115-225, if it applies, can also kill the 50% small business concession.

Cheers,

Rob

 

Here is a link to an opinion ...

http://www.mccullough.com.au/downloads/2477Business and Revenue - 18 March 2009.pdf

So it looks like we had better only rely on the proportionate approach for the time being.

i.e. no separate streaming of net capital gains.

Cheers,

Rob

 

Thanks again Rob.

In our case all "income" distributions since Trust inception have been distributed to me and this is likely to continue well into the future. To date there have been no capital gains distributions. Given we are looking to sell one or two Trust properties in the next couple of years, should things pan out as suggested by McCullough then it appears that we may not be affected in regard to CG distributions. Also I want to take advantage of $50K concessional contributions to the SMSF before it reduces to $25K in 2012.

However given the possibility of increased legislative risk going forward we are now investing back in personal names. So having investments spread across both personal names, the SMSF and last remaining Trust is about all we can do to manage risk. I'm quite comfortable with this.

Cheers - Gordon

 

Hi Sim,

Thanks for that. I did see some info on this yesterday but not as detailed.

Yes, good news. It will be interesting to see what the ATO does going forward. Fortunately all remaining properties in our Trusts will be sold in the not too distant future hopefully before any possible future decision affects us. Will still have substantial shares in a Disc Trust but tax planning is a lot easier with shares given they're not such a lumpy investment.

Cheers - Gordon