Trusts
Capital Gains Tax — Reintroduction of Trust Cloning for Fixed TrustsThe Government recently announced changes to the tax law to eliminate CGT concessions for cloned trusts. However, the Government has now announced a limited CGT roll-over for assets transferred between trusts that have the same beneficiaries with the same entitlements and no material discretionary elements (that is, fixed trusts). These amendments will apply to CGT events happening after 31 October 2008, that is, they will have effect from 1 November 2008.
Trustees of eligible trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow eligible trusts to restructure without immediate CGT consequences. Without this Budget concession, the transfer of assets from one trust to another would trigger a CGT taxing point.
This measure will be accompanied by appropriate integrity rules. For example, beneficiaries of the trusts will be required to adjust the CGT attributes of their interest(s) in the trusts to take account of the transfer.
The abolition of the trust cloning exception and the CGT roll-over for fixed trusts will be combined into one set of amendments.
Legislation giving effect to these measures will be introduced as soon as practicable. An exposure draft of the legislation will be released for consultation in the coming weeks on the Treasury website (www.treasury.gov.au).
Closely Held Trusts
The Government will extend the application of the tax file number and withholding tax provisions to closely held trusts (including family trusts).
As closely held trusts currently operate, where a beneficiary is presently entitled to trust income (and the trustee is not taxed on the distribution), the beneficiary is not required to provide a tax file number to the trustee prior to receiving the distribution. The beneficiary is then required to include the distribution in their income tax return.
Under new rules to take effect from 1 July 2010, all distributions from closely held trusts and family trusts will be subject to the tax file number and withholding tax provisions. Beneficiaries who are presently entitled to a distribution from any of these trusts will be required to provide the trustee with their tax file number.
Where the beneficiary fails to provide the trustee with a tax file number, the trustee will be required to withhold tax from the distribution at the rate of 46.5% (and remit this amount to the Australian Taxation Office). The beneficiary will receive the net amount of the distribution and be entitled to claim a tax offset for the tax withheld by the trustee. The offset is refundable, and the beneficiary will be entitled to a refund for any excess taxes withheld by the trustee.
There will be no requirement for trustees to obtain tax file numbers from beneficiaries where the trustee is already subject to tax on the distribution, such as where the beneficiary is a minor.
Special Disability Trusts — Changes to the Taxation of Unexpended Income and the CGT Main Residence Exemption
The Budget contains measures to ensure that the unexpended income of a Special Disability Trust (SDT) is taxed at the relevant beneficiary's personal income tax rates rather than automatically at the top personal tax rate plus Medicare Levy. These measures will have effect from the 2008/09 income year.
A Special Disability Trust is a trust established for succession planning by parents and immediate family members for the future care and accommodation needs of a person with a severe disability.
The Government will also extend the CGT main residence exemption to include a residence that is owned by a Special Disability Trust and used by the relevant beneficiary as their main residence, with effect from the 2009/10 income year.
