Impacts for Trusts
The Government has implemented three tax integrity measures to improve the taxation of trusts:
- Extending anti-avoidance rules for circular trust distributions
- Improving the taxation of testamentary trusts
- Removing the capital gains discount at the trust level for Managed Investment Trusts (MITs) and Attribution MITs (AMITs).
Circular trust distributions
The Government has extended a specific anti-avoidance rule that applies to closely held trusts engaging in circular trust distributions to also include family trusts. Currently, family trusts acting as beneficiaries of one another are able to distribute in a ‘round robin’ manner, which results in the distribution ultimately returning to the original trustee without any tax being paid on the ‘circular distribution’.
By extending the specific anti-avoidance rule from 1 July 2019, the ATO will be able to more effectively pursue family trusts exploiting this by imposing tax on such distributions at the top personal tax rate, plus the Medicare levy. This measure is estimated to have a gain to revenue of $20 million over the next four years.
Exploitation of testamentary trusts
Under new measures, taxpayers will be prevented from exploiting testamentary trusts by injecting assets unrelated to the deceased estate into the testamentary trust. Currently, income distributed from testamentary trusts to minors is taxed at normal adult rates rather than the higher tax rates that apply to minors.
From 1 July 2019, the concessional tax rates available for minors will only apply to income derived from assets that are transferred from the deceased estate or proceed from the disposal or investment of those assets.
The new anti-avoidance rules terminate some aggressive tax planning approaches. The question is whether the existing powers of the ATO would have been sufficient to deal with these matters, without adding more pages to the already overflowing tax law.