Trust reform – What? We’re no longer public? | KPMG | AU

Trust reform – What? We’re no longer public?

Trust reform – What? We’re no longer public?

Neil Lamb, Connie van Werkum and Michael Spencer discuss tax law amendments operating from 1 July 2016 that may impact on the status of unit trusts.


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Royal Assent has been granted to long anticipated trust tax law amendments which have the potential to fundamentally change the status of unit trusts with complying superannuation fund or some life insurance company investors. The amendments will apply to new and existing trust estates from 1 July 2016 and will mean some trusts currently taxed as companies (public trading trusts) will now become ‘flow-through’ vehicles with income taxed in the hands of investors.

This provides a limited window for impacted trusts to act now to ensure there is no permanent erosion of value for investors.

There are a number of the potential transitional issues, including the need for all trusts impacted by this reform to be aware that any accumulated franking credit balances at 30 June 2016 will be effectively lost. Accordingly, trustees should consider paying a franked dividend on or before 30 June 2016 to pass on the value of franking credits to unit holders to the greatest extent possible or face losing these credits forever. Importantly, this will also require distribution statements to be prepared in accordance with the corporate imputation rules and provided to unit holders on or before the day the distribution is made.

In addition, it is likely many existing trust deeds were not drafted to contemplate the potential for a fundamental change in the tax status of the trust to become a ‘flow-through’ vehicle. Given the importance of trust deeds to ensure investors are presently entitled to the income of the trust, any ineffective drafting may cause trustees to become liable to tax on the income of the trust estate at the top marginal rate.

Trustees and unit holders should act now to ensure there are appropriate mechanisms in the trust deed to account for the change in tax status and that distribution and present entitlement clauses ensure income of the trust appropriately flows through to investors.

Whilst many trust deeds may have been drafted long ago and filed away with the expectation they will not be seen again, it is time to dust off these deeds and ensure they are drafted for the future.

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