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Trust reform start date deferred; fixed trust discussion paper released

This article discusses:

  • deferral of the proposed start date for the broader reform of trust income taxation and the new tax system for managed investment trusts to 1 July 2014; and
  • the issue of a discussion paper seeking views on "a more workable approach for fixed trusts" for the purposes of taxation of trust income.
Lisa Lynch, Thomson Reuters

The Assistant Treasurer has advised that the Government had received substantial feedback to its initial consultation paper on Division 6 of Pt III of the Income Tax Assessment Act 1936 (ITAA36) issued in November 2011. In response to the feedback, he said the Government will defer the proposed start date for the broader reform of trust income taxation from 1 July 2013 until 1 July 2014.

A policy design paper to "further develop options for a model for the taxation of trusts" is expected to be released in September 2012. The Assistant Treasurer said the paper "will tackle important issues like how character retention and streaming will operate and provide details that allow taxpayers and their advisers to determine how the possible reforms might apply to their particular circumstances". "And the reforms will tackle key practical issues such as when beneficiaries' entitlements need to be determined," he said.

In addition, the Assistant Treasurer announced the deferral of the proposed start date to 1 July 2014 for the new tax system for managed investment trusts (MITs) to coincide with the general update and rewrite of the trust provisions. Mr Bradbury said it "makes sense to progress these reforms together to provide more certainty for MITs, particularly because eligible MITs will have the choice of whether to enter into the new tax system".

In announcing the revised start date for the new tax system for MITs, the Government also announced extending the interim streaming rules for MITs, introduced in 2011, for a further 2 years to 1 July 2014. "This recognises that MITs generally observe the practice of distributing their income proportionately to unit holders rather than streaming income to specific beneficiaries," said Mr Bradbury.

Mr Bradbury has indicated that the Government intends to release draft legislation affecting reforms to Division 6, fixed trusts and MITs in early 2013, followed by introduction of the legislation in mid-2013. The Government also plans to host consultation roundtables before the introduction of legislation.

Fixed trust discussion paper

While on trusts, Treasury has also issued a discussion paper seeking views on "a more workable approach for fixed trusts". In November 2011, the Government announced it was aware that the current restrictive definition of "fixed trust" for the purposes of income taxation was an issue and that it would release a separate discussion paper.

Mr Bradbury noted that 10% of Australia's 700,000 trusts seek to be treated as fixed trusts - these include small private trusts through to large MITs. He said the Government recognised the uncertainty and complexity faced by these trusts following the Federal Court's decision in Colonial First State Investments Ltd v FCT (2011) 81 ATR 772 which took a narrow view of the definition of "fixed trust". This resulted in many trusts seeking the Commissioner of Taxation's discretion to treat them as fixed trusts which, in turn, meant increasing compliance and administrative costs for taxpayers and the ATO.

The Assistant Treasurer said the paper considers options that could ensure that taxpayers are able to satisfy the definition of fixed trusts under the ordinary provisions of the law without relying on the Commissioner's discretion to be considered a "fixed trust". The discussion paper is available on the Treasury website.


The paper explains that a trust is a "fixed trust" if entities have "fixed entitlements" to all of the income and capital of the trust. Broadly, beneficiaries have a "fixed entitlement" to the income or capital of a trust if they have a "vested and indefeasible" interest in the income or capital of the trust. The terms "vested" and "indefeasible" are not defined in the tax law and (subject to statutory modifications in some cases) take the meaning they have developed through case law.

The paper provides a discussion on the terms "defeasible" and "indefeasible". An interest is indefeasible where it cannot be terminated, invalidated or annulled. In Colonial First State Investments, the Court considered that the powers created by statute as well as by the trust deed may result in the rights of the beneficiaries not being "indefeasible". Accordingly, it is very difficult for trusts to meet the requirement that the rights of the beneficiaries be "indefeasible" to satisfy the definition of "fixed trusts", as beneficiary entitlements are commonly able to (at least theoretically) be defeated by the exercise of a power in the trust instrument or by a statutory power.

However, the paper notes that changing the meaning of any of these terms, that is, fixed trust, fixed entitlement or indefeasible, is likely to have flow-on effects throughout the income tax laws. It notes that various provisions directly use the term "fixed trust", for example, the carry forward loss rules, the value shifting rules, the trust loss measures, CGT event E4, and the consolidation membership rules. Also, there are other definitions that in turn use the term "fixed trust", for example, "closely held trust", "non-fixed trust", "excepted trust" and "widely held unit trust". These terms, and the provisions they are used in, may be then picked up indirectly in other parts of the income tax legislation. Similarly, a number of provisions and other terms use the term "indefeasible". The paper provides a detailed, though not exhaustive, list of potentially affected tax provisions and terms.

Reform options

The paper examines the "clearly defined rights" test which was identified as an alternative to requiring MITs to satisfy the "vested and indefeasible" requirement before receiving fixed trust treatment. The Board of Taxation has recommended that MITs with "clearly defined rights" be deemed to be a "fixed trust" for income tax law purposes as this would provide an appropriate balance between integrity and access to the relevant tax treatment. The paper suggests that it may be appropriate to adopt this approach, or a similar approach, in relation to trusts more generally. In doing so, the paper discusses using a "no material discretionary elements" approach (based on Subdivision 126-G of the Income Tax Assessment Act 1997) in implementing a "clearly defined rights" requirement.

The paper says the key to allowing access to "fixed trust" treatment using a "no material discretionary elements" test is to determine what types of discretions are consistent with treatment as a fixed trust. The test looks to the discretions of the trustee rather than the interests of the beneficiary. The paper adds that the test is largely principle-based in that it will be met if the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being significantly affected by the exercise or non-exercise of a power. The paper suggests which powers may be appropriate as constituting or not constituting material discretionary elements for the purposes of determining whether a trust is fixed. However, in raising the option, the paper indicates that additional safeguards may be required, particularly in relation to trusts that are not publicly listed or widely held.

Another option the paper raises is to remove the requirement that an interest be "indefeasible" to qualify as a "fixed entitlement" and replace it with a requirement that the interest has not been defeated at the relevant time or over the relevant period being considered. That is, an interest would be a "fixed entitlement" if it is vested and has not been defeated.


Comments on the discussion paper are due by 14 September 2012 and can be sent to: General Manager, Business Tax Division, The Treasury, Langton Crescent, PARKES ACT 2600 - email: Enquiries can be directed to Tim Beale of the Treasury on (02) 6263 3962.

Assistant Treasurer's media release No 080, 30 July 2012; Assistant Treasurer's speech to CPA Luncheon, Sydney, 30 July 2012

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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