Tax law amendments currently before the Senate remove the potential for certain trust estates, with significant tax exempt complying superannuation fund investors, to be taxed as companies for tax purposes from 1 July 2016. Neil Lamb and Michael Spencer highlight the potential implications.
As previously discussed, whilst the reform provides welcome flexibility for new investment, existing trusts will need to navigate the impact of the change in law to ensure investor value is not eroded.
Transitional measures were introduced for trusts impacted by the amendments following submissions which highlighted that these trusts faced losing the benefit of franking credits (being tax paid at the time the trusts were taxed as companies for tax purposes) due to loss of public trading trust status. This effectively leads to double taxation for beneficiaries on later distribution of profits.
The transitional measures intended to provide a two year transition period to preserve the benefit of these franking credits, but the measures fall short of achieving this as franking credit balances accumulated as at 30 June 2016 will still be lost under the current drafting.
Impacted trusts will have a limited time period to deal with this issue and also ensure their trust deeds appropriately account for the change in tax treatment. There may be a range of options available, including paying up distributions prior to 30 June 2016, managing the timing of tax payments or considering, for example, whether a structural solution by forming a tax consolidated group is appropriate.
With no amendments expected on this matter, careful consideration and planning is required to ensure that value is not lost for investors.