NO.081

TAXATION OF DISCRETIONARY TRUSTS

The Government will legislate with effect from today to introduce new provisions

in place of Section 109UB of the Income Tax Assessment Act 1936 dealing

with distributions from trusts.

This is a recommendation of the Board of Taxation in its report on the Taxation

of Discretionary Trusts released today.

The Board has recommended these measures:

• to improve the effectiveness of the deemed dividend rules so as to more

  effectively prevent beneficiaries accessing trust income that has borne tax

  only at the company tax rate; and

• to remove the unfairness in the operation of section 109UB that is currently

  inducing some small and medium-sized business operators to establish arrangements

  that enable them to avoid the operation of the section completely.

In addition the Board has recommended the Australian Taxation Office clarify

and publish its views on interest deductibility for borrowings used to finance

non-assessable distributions to beneficiaries of discretionary trusts. The Government

has requested clarification and will, if the rulings are unable to deal with

the matter, consider a legislative solution.

The Board was requested in February 2001 to consult on principles which can

protect legitimate small business and farming arrangements whilst addressing

any tax abuse in the trust area.

The report notes the success of previous government measures in the following

areas:

• Use of non-resident trusts to transfer funds offshore (Division 6AAA Part

  III ITAA 1936).

• Inappropriate utilisation of losses (Schedule 2F ITAA 1936).
• Circulating distributions and tracing distributions through to the ultimate

  beneficiaries (Division 6D Part III ITAA 1936).

• Personal services income rules (Part 2-42 ITAA 1997).
• Revised social security means test treatment of private trusts and private

  companies.

The Report recommends that the Government should retain the current flow-through

treatment of distributions of non-assessable amounts by discretionary trusts

rather than a company type taxation model.

The Board’s report is available at www.taxboard.gov.au

CANBERRA

12 December 2002

Contact: David Alexander (02) 6277 7340