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Chapter 22: Bringing trusts into the new entity regime

Current arrangements

Trusts are currently taxed differently to companies.

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A strategy for reform

To align the taxation of trusts as closely as possible with that of companies. However, issues specific to trusts will arise when incorporating them into a redesigned company tax system.

Key policy issues
What trusts should be excluded? What should be the taxation treatment of minors? How should some specific trust issues be addressed? How should an entitlement to unpaid income or capital of a trust be treated? When should a trust be treated as having been created or wound up for tax purposes? How should distributions from trusts attract the benefit from primary production and FMD funds? What other issues arise for trusts including cost bases of beneficial interests, deceased estates and testamentary trusts?
Option
List of trusts subject to modified Division 6.

Trusts to which beneficiaries are absolutely entitled from inception.

Constructive trusts.

Option
Division 6AA would apply to trust distributions to minors.

Entity taxation could apply to child maintenance trusts. Division 6AA would apply.

- Trusts that have multiple purposes.
- Distinguishing discretionary and hybrid trusts from fixed trusts.
- Restructuring of trusts.
- Subsequent settlements on existing trusts.
Option 1
Rebuttable presumption.

Option 2
Distribution and loan back.

Option 1
A trust exists when the law of equity first recognises a trust relationship.

A trust ends when it ceases to exist.

A resettlement could be defined for tax purposes.

Option 2
Same rules as for Option 1 but a resettlement would not be defined.

Value shifting rules would apply.

Option
Primary production income would retain its character.
Cost bases of beneficial interests.

Treatment of disposals of interests by ‘life interests’ and ‘remainderman’.

Treatment of asset transfers by legal personal representatives (LPRs), and asset transfers by testamentary trusts to beneficiaries.