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Medical Insurance Australia and Tax Deductions in Australia please visit our website http://www.taxforhealthprofessionals.com.au/ "> Various aspects of the tax law relating to trust have been the subject of long-term uncertainty. Some clarification was provided in the 2010 year High Court decision in the Bamfordcase, however the Tax Office indicated that the judgment of the court raised further issues, which it outlined in a Decision Impact Statement. Background The Bamford decision highlighted the fact that the amounts on which a beneficiary is assessed for tax do not always match the amounts they are entitled under trust law. This mismatch can result in unfair outcomes and, according to the Tax Office, opportunities for tax manipulation. In Bamford’s case, the High Court held that ‘income of the trust estate’ is to be determined according to trust law (as opposed to tax law concepts). The key impact of this is that when calculating what constitutes the income of a trust estate, the definition of the term in the trust deed is very important in determining the outcome. Amendments in the law were enacted on June 29, 2011, to specifically enable capital gains and franked dividends to be streamed provided particular legislative requirements were satisfied. Meaning The Tax Office says the legislated amendments have been made to ensure that, where permitted by the trust deed, the trust’s capital gains and franked distributions can be effectively streamed to beneficiaries for tax purposes by making those beneficiaries ‘specifically entitled’ to those amounts. A beneficiary specifically entitled to a capital gain will be assessed on the gain, regardless of whether the benefit they receive is income or capital for trust law purposes. Capital gains and franked distributions to which no beneficiary is specifically entitled may be allocated proportionately to beneficiaries based on their present entitlement. Anti-Avoidance Rules The changes introduce two specific anti-avoidance rules to address the inappropriate use of exempt entities to shelter the taxable income of a trust. The first, the ‘pay or notify rule’, generally applies where an exempt beneficiary has not been notified of or been paid their present entitlement to income of the trust estate within two months of the end of the income year. The second rule, the ‘benchmark percentage rule’, generally applies where an exempt entity’s share of the income of the trust estate (ignoring any franked distributions and capital gains) exceeds a benchmark percentage. Under both rules, the trustee is assessed on the share of the trust’s taxable income that corresponds to the income ‘to which the exempt beneficiary is taken as not being entitled to’. The Tax Office maintains discretion to not apply the anti-avoidance rules if in the circumstances it would be ‘unreasonable for it to apply’. These amendments do not give trustees the power to stream if they do not already have this power under the trust deed. Alternatively, a streaming power may be implied where the deed confers on the trustee a power to distribute income or capital at the trustee’s absolute discretion and there is nothing further in the deed or trust law in the relevant jurisdiction that fetters that power. The existing integrity rules continue to apply in respect of the streaming of franked distributions. The streaming changes only affect trusts that make a capital gain or that are in receipt of a franked distribution for the 2010-11 or a later income year. For more information about Medical Insurance Australia and Tax Deductions in Australia please visit our website http://www.taxforhealthprofessionals.com.au/
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