Simplification: Has the trust been broken?

Many readers will be aware that your President is a keen student of trust law and the taxation of trusts in particular. As matters have developed since the decision of the High Court in C of T v. Bamford [2010] HCA 10 and the introduction of streaming rules for capital gains and dividends, I get the feeling that we are slipping into the abyss.

The pressure on practitioners has never been greater. The need to deal with trust resolutions before 1 July 2012 has placed extraordinary pressure on advisers to anticipate the accounting outcome of a year’s trading and shape trust distributions according to that anticipation along with the Taxation Office looking over their shoulder. There is no doubt that some practitioners will make mistakes, having been forced to abandon their more practical approach of earlier years to comply with the strict letter of the law, whatever it may be. This situation is untenable.

The very recent decision of the Full Federal Court in C of T v. Greenhatch [2012] FCAFC 84 has added to the uncertainty. Although the decision was made in rather unusual circumstances, the 10% limitation on income from employment denying a deduction for an individual’s own contributions to a superannuation fund, the upshot of the decision appears to be that the notion of general streaming is dead.

The Commissioner has withdrawn IT 92/13 with effect from 29 June 2011. Strictly speaking this ruling condoned streaming of franked dividends only even though it was built on the notion that "income distributed by a trustee of a discretionary trust estate retains the character it had when it was derived by the trustee..." Capital gains and income of another stripe are not covered by the ruling.

It will be interesting to see to what extent the Commissioner abides by his practice to extend the ruling beyond franked distributions when streaming issues arise prior to the withdrawal date. The streaming rules have, aside from their complexity, application limited to capital gains and franked distributions. The interest withholding tax riddle has not been resolved.

Ken Schurgott

Ken Schurgott is President of the National Council at The Tax Institute.

The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.


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