Over the last few years, there have been a number of announcements and case decisions made potentially impacting on how trusts and their beneficiaries are taxed.

This will impact on a large number of businesses in Australia, particularly in the small to medium enterprise sector, given that the significant majority are operated through trust structures.

The Federal Treasurer has stated that the predominant objectives in considering the taxation of trust income are:
 - better aligning the concept of income of the trust estate (distributable income) with net income of the trust estate (taxable income); and
­  - to enable the streaming of capital gains and franked distributions to beneficiaries.

The first of these objectives has been temporarily deferred by the Federal Government for further consideration.  However, this deferral may create opportunities for manipulation of tax outcomes, the Federal Government has therefore introduced anti-avoidance rules. In particular, these rules target the use of tax exempt entities to inappropriately reduce the tax payable on the taxable income of a trust.

The legislation containing measures to give effect to the second objective recently received Royal Assent.  The result is that a trust’s taxable income of capital gains, franked distributions and franking credits can be streamed to certain beneficiaries, forming part of the beneficiaries’ assessable income.

However, trusts will only be able to take advantage of this measure where:
 - the trust deed gives the trustee the authority to stream distributions; and
 - the trust records detail that the beneficiary is permitted to receive, or is specifically entitled to the distributions, before the close of, or two months after, the financial year.

Only if there is no beneficiary specifically entitled will the distribution be distributed to the beneficiaries on a proportionate basis. Trust income may become assessable to the trustee when a beneficiary has not been entitled to the income.

Having the ability to stream specific types of income to certain beneficiaries may be of significant benefit.  One common example would be streaming franked income to beneficiaries who can access the benefit of the franking credits.  Another example is distributing capital gains to beneficiaries who can access Capital Gains Tax concessions or have capital losses that can be utilised.

What do businesses need to do?

It is recommended that trustees review their trust deeds to ensure that the deed provides for the streaming of income to specific beneficiaries. This is usually achieved through the definition of income and the rules governing the distribution of that income. Modern trust deeds often permit such streaming, whereas more historical deeds may not.

Further, in doing so, it may be appropriate to review other terms contained in the deed, for example, the Appointor, powers of trustees etc, to ensure that no other changes should be made.

Professional advisers should be engaged for such reviews.