Government outlines plans to simplify family trusts

Small businesses that use family trusts have been promised greater clarity via a simpler system under proposed Federal Government legislation.

It’s estimated there are more than 1.5 million Australians operating small businesses with family trusts, which are used to minimise the tax burden by distributing income to family members with lower marginal tax rates.

Assistant Treasurer Bill Shorten said yesterday the public consultation exposure draft legislation would increase certainty for the trustees and beneficiaries of more than 660,000 trusts in Australia.

Shorten said the Government has released a discussion paper outlining options on how to implement the recommendations made by the Board of Taxation.

According to Shorten, the recommendations would affect the streamlining of capital gains and franked dividends to different beneficiaries.

He said one of the key issues is to “successfully implement the proposal to better align the concept of ‘income of the trust estate’ with ‘net income of the trust estate’ from the current income year”.

Paul Shields, managing director of boutique firm Oyster Consulting, which uses family trusts, says they are an integral part of the way in which many small family businesses are structured.

“They allow for unpaid work by a variety of family members to be recognised, with much of this work [done] outside normal business hours,” Shields says.

“Any changes which clarify or simplify accounting treatments would be welcomed. However, changes to the fundamental tax status would be strongly opposed by many of these businesses, I suspect.”

Shorten said the Government will defer consideration of the proposal by updating and rewriting Division 6 of Part 111 of the Income Tax Assessment Act 1936.

“However, the Government is aware if there is no change to address the alignment problem, potential opportunities for tax manipulation would exist until the rewrite becomes law,” he said.

In order to avoid this, the government would introduce specific anti-avoidance rules to target the use of low tax entities to reduce the tax payable on the taxable income of trusts.

The intended outcome for the streaming of capital gains and franked distributions along with their associated tax characteristics is as follows:

• Capital gains made and franked distributions derived by a trustee to which beneficiaries are specifically entitled will be streamed on a quantum basis to those beneficiaries, along with their tax attributes (such as franking credits).
• Such amounts to which no beneficiary is specifically entitled will flow proportionally to beneficiaries based on their share of the ‘income of the trust estate’ (net of amounts to which a beneficiary is specifically entitled), or to the trustee if there is part of the ‘income of the trust estate’ to which no beneficiary is presently entitled.

Interested parties are invited to comment on the exposure draft.