Taxation of Trusts

This research paper explores the taxation of trusts, including flow-through taxation, distribution requirements, legal and equitable relationship between trustee and beneficiaries, and differences between fixed trust and discretionary trusts. It also discusses the entity approach and early refunds of excess imputation credits.

Running head: TAXATION OF TRUSTS
Taxation of Trusts
Name of the Student
Name of the University
Authors Note
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1TAXATION OF TRUSTS
Table of Contents
Stage 1: Synopsis:......................................................................................................................2
Stage 2: Research Paper:............................................................................................................3
Introduction:...............................................................................................................................3
Flow-through taxation:...............................................................................................................3
Complete Distribution requirements:.....................................................................................3
Consistency with direct investment:......................................................................................4
Legal and equitable relationship between trustee and beneficiaries:.........................................4
Differences between the fixed trust and discretionary trusts:....................................................5
Entity Approach:........................................................................................................................7
Early refunds of the excess imputation credits:.....................................................................7
Multiple trust with the common trustee:................................................................................8
Rollover and stamp duty relief upon entity restructuring:.....................................................9
Rollovers in an entity that are taxed like company:...............................................................9
The treatment of distribution of income, capital gains and corpus:...........................................9
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

2TAXATION OF TRUSTS
Stage 1: Synopsis:
A significant corporate tax reformation suggestion was presented to the government
of Australia on 30 July 1999 by the Ralph review of business taxation. This would provide a
unique opportunity of treating the tax policy affair as the natural experiment for gaining an
understanding of the most probable outcome of the major reformation of tax on the corporate
capital investment in Australia1. There were numerous Ralph Review key proposals which
may probably impact the corporate capital investment. The proposal included the taxation of
co-operatives under the entity approach or using flow through approach for the collective
investment scheme. The flow through of approach of taxation also proposed the exclusion of
certain trusts from the entity taxation and suggested the rationalization of the partnership
taxation and other joint activities.
Sources such as Review of Business Taxation to examine the reformation on trustee
obligation of paying taxes on the trust income. References to “TD 2016/D4 of the ITAA
1997” has been made to obtain evidence regarding the taxation of trust. Furthermore, the
article of Platform for consultation has been referred to understand that implementing tax on
all the cooperatives such as companies would help in removing the complexities that are
related with the companies would help in eliminating the complexities that are related with
the division 9 and offer a tax result which is simpler, more structured and consistent with that
to the other entities2. Legislative sources such as Division 6AA has been identified to exclude
the trust and trusts that are levied for taxation under the new entity system taxation.
1 Morrison, David. "Proposed change to tax treatment of discretionary trusts in Australia:
reductio ad absurdum." Trusts & Trustees 23.10 (2017): 1046-1050.
2 Glover, John. "Tax agents providing trust deeds and/or advising about trusts: unauthorised
legal practice?." Australian Tax Forum. Vol. 33. No. 3. 2018.

3TAXATION OF TRUSTS
Stage 2: Research Paper:
Introduction:
The ralph review’s main objective was to support the basic design relating to the
changes in the corporate tax system. Several of its vital proposal also included the
recommendations for adopting the flow through approach based on which the beneficiary
undertakes the obligation of paying taxes or undertaking the entity approach under which the
trustee holds the obligation of paying the tax on the trust income3. The research would
examine and assess the merits for each of the proposed approach. Further understanding of
relationship between the trustee and the beneficiaries would be made to understand the
taxation of trust. The research paper would consider the tax treatment following the
distribution of income, capital gains and corpus from the trust.
Flow-through taxation:
A specific regime for the collective investment vehicles has been made under the flow
through approach. A collective investment vehicle is referred as the entity which is a unit
trust having base in Australia and has units providing members with the fixed equivalent
beneficial interest in every earnings and possessions of the trust4. A collective investment
vehicle is better referred as the entity that only undertakes the qualified investment business
widely defined under section 102M and 102N of the 1936 Act. It also includes the entity
which has made the irrevocable election to obtain exclusion from the entity tax regimes taxed
under the collective investment vehicle.
Complete Distribution requirements:
The requirements for distribution regarding the operation of flow-through taxation can
be stated as the yearly taxable proceeds of the collective investment vehicle or in relation to
the adjusted accounting profit concept of the available profits. On the other hand, latter
3 Tran-Nam, Binh. "Tax Reform and Tax Simplification: Conceptual and Measurement Issues
and Australian Experiences." The Complexity of Tax Simplification. Palgrave Macmillan,
London, 2016. 11-44.
4 D'Ascenzo, Michael. "The role of the tax administrator in tax policy development." Austl.
Tax F. 32 (2017): 577.

4TAXATION OF TRUSTS
approach can be considered more reliable with the believe of complete distribution of the
collective investment income vehicle5. The recommended approach possesses the advantage
which does not needs the definition of another concept of income under the tax legislation
that is entirely for the purpose of stipulating the yearly distribution of profit from the CIVs.
Consistency with direct investment:
Seeking advice to attain consistency with the direct investment is intricate by the dual
cost base along with the cost base of the CIV assets and the cost base of the member CIV
units.
Arguably, it is essential to make sure that the combination of the dual cost bases and flow
through CIV treatment does not offer more favourable outcome when the membership
interest in the CIV is sold in comparison with the treatment of the sale of an interest in the
partnership or the trade of direct investor. Accordingly, a reduction in the cost base of the
CIV units is required when temporary tax preferred income is distributed. For instances,
when the distribution of profits is freed from the tax through accelerated depreciation
allowances, a reduction in the cost base is required to generate an equivalent tax result for the
member of CIV similarly to the member of the partnership.
When the partner sells an interest under the partnership and member has obtain
benefit from the accelerated depreciation on the partnership assets, the partner that is selling
the interest would be held liable for taxation upon any kind of capital gains that is originating
from the differences between the disposal price and taxation value of the underlying assets6.
The deferral benefit obtained from the depreciation is effectively scraped back when the
interest in partnership is sold. A reduction in the cost base of a member’s interest in the CIV
would help in making sure an equivalent tax consequence when the member sells their
interest in the CIV.
5 Sadiq, Kerrie, and Stephen Marsden. "The small business CGT concessions: Evidence from
the perspective of the tax practitioner." Revenue Law Journal 24.1 (2015): 6743.
6 O’Connell, Ann. "Investing in the Future—Taxation Issues." Bridging the Entrepreneurial
Financing Gap. Routledge, 2017. 178-198.

5TAXATION OF TRUSTS
Legal and equitable relationship between trustee and beneficiaries:
A legal title can be defined as the accountabilities and obligations the owner possess
in preserving, using and regulating the property. Legal title is regarded as the responsibility
and the duty which the owner has in upholding, using and regulating the property. Legal title
is viewed as the authentic possession of the possessions and everything which entails the
bundle of rights which comes from the ownership of land7. As the legal title only places
emphasis on the responsibilities of the possessions by the owner, the equitable title of the
beneficiaries refers to the use as well as enjoyment of the possessions. The equitable title
represents the welfares the beneficiary or the purchaser would acquire for using and enjoying
when one becomes the lawful holder. The equitable possession of a beneficiary is not
regarded as the true ownership.
Alternatively, a person with the equitable title would not contend that a person was
the lawful titleholder of the possessions in the court of law. True possession needs the legal
title that comprises of the control over the property8. More importantly the equitable title can
be considered as more important than the legal title. For instance, an individual that holds the
equitable title is regularly treated as in charge of financing the property. Most importantly the
equitable title provides the right of accessing the property and more significantly the right of
obtaining the formal lawful title of the land.
There are also the similarities among the two types of title holders. The beneficiaries
and the trustee should be viewed as two shares of the similar whole. Both the trustee and the
beneficiaries are granted with the certain rights to the person or entity that their name appears
on the title deed. Both the trustee and the beneficiary are lawfully binding and enforceable in
the law court. The owner should have the complete ownership and usage of the property.
Differences between the fixed trust and discretionary trusts:
Fixed trust is considered as the recognized type of existing trust for the purpose of
estate planning. The fixed trust facilitates the settlor to implement regulation over the money
and possessions for the trust beneficiaries benefit9. The receivers of the fixed trust also given
7 Penner, James. The law of trusts. Oxford University Press, 2016.
8 Hudson, Alastair. Understanding equity & trusts. Routledge, 2016.
9 Watt, Gary. Trusts and equity. Oxford University Press, 2018.

6TAXATION OF TRUSTS
the trust assets on the specific day that are set by the settlor. The fixed trustee holds very less
or no decision for allotting the trust property. The holder of the fixed trust cannot alter the
beneficiaries or the welfares that the holders would be receiving.
Under the fixed trust there are most common type of used trust namely the interest
trust based on the terms on which a person would possess the right to all types of income
throughout their lifetime. Upon the death of individual, the trust property would be usually
allocated to the named capital beneficiaries10. Additional form of fixed trust is based on the
contingency that satisfies specific circumstances, particularly attaining certain age. Once the
stated circumstances are met, the beneficiaries would typically possess the interest in the
capital. The beneficiary under the fixed trust is required to make dispersal to the beneficiaries
under the predetermined manner that are laid down under the trust deed.
A discretionary trust is considered as the fixed trust based on which the settlor do not
sets down the fixed beneficiaries or the amount of trust interest11. Under the discretionary
trust the trustee possess the power of deciding which beneficiaries would obtain the benefit
from the trust. Unlike fixed trust, the discretionary trust permits both types of option,
whichever can be permitted autonomously of others.
A discretionary trust that is well drafted permits the trustee to make addition or
exclusion of the beneficiaries from the class. This provides the trustee with the higher
flexibility of addressing changes in a given circumstance. The trust is discretionary due to the
fact that the trustee possesses the discretion of giving or denying some form of benefits under
the trust. The beneficiaries under the discretionary trust could not force to use any form of
trust possessions for their benefit12. Different from the fixed trust, a discretionary trust
provides the beneficiaries with no kind of optimism for any remaining or title rights to the
trust himself. The recipients or the beneficiaries do not have the interest which can be
10 McDonald, Iain, and Anne Street. Equity & Trusts Concentrate: Law Revision and Study
Guide. Oxford University Press, 2018.
11 Hepburn, Samantha. Principles of Equity & Trusts (Aus) 2/e. Routledge-Cavendish, 2013.
12 Smith, Lionel. "Massively Discretionary Trusts." Current Legal Problems 70.1 (2017): 17-
54.

7TAXATION OF TRUSTS
transported or acquired by the creditors except when the trustee undertakes the decision to
pay or apply for some kind of trust property for the beneficiary’s benefits. Conclusively,
discretionary trust is considered as the most common fixed trust.
Entity Approach:
Early refunds of the extra imputation credits:
The entity approach proposes the application of tax for the co-operatives under the
entity regimes. It states that the co-operative should be included into the entity taxation
regimes and should be taxed similar to other entities. The merits of entity adopting entity
approach is that it provides early refunds for the excess imputation credits. Under the entity
approach the members of the co-operative lower marginal rate are eligible for obtaining the
early repayments of the extra imputation credits through the allocating entity13. The co-
operative businesses that are satisfying the criteria under the “Division 9 of the ITAA 1936”
would be subjected to alternative taxation rules to those that are implementing on the other
co-operative and companies usually. Currently, the taxation co-operatives are permitted to
claim deductions up to their taxable income for a year, for the purpose of distribution to the
members in that year. However, such kind of distribution is not subjected to frankable.
Additional distribution are not subjected to income tax deduction but are considered
frankable.
The review evidently explained that implementing tax on all the co-operative
companies would help in eliminating the complexities related with the division 9 and offer a
tax results which is easy and constant with those that are implemented on the other entities14.
Implementing the entity tax approach with refundable imputation credits would help in
attaining an outcome which is equal to the present treatment of tax for the co-operatives and
their members in respect to the overall tax that is payable. The entity tax approach would lead
to the distribution of assessable income not holding their feature and tax fondness not flowing
13 Harrison, Lister. "Property investment through discretionary trusts." Taxation in
Australia 50.2 (2015): 84.
14 Tan, Lin Mei, Valerie Braithwaite, and Monika Reinhart. "Why do small business
taxpayers stay with their practitioners? Trust, competence and aggressive
advice." International Small Business Journal 34.3 (2016): 329-344.

8TAXATION OF TRUSTS
through. The major differences are that the initial point of taxable income would move
towards the entity, with distribution among the members that that attracts the refundable
imputation credits for the taxes that are paid on the distribution by co-operatives.
The arrangement made under the entity approach is to allow lower marginal tax rate
for the investors. This mainly for the investors of closely held trusts and companies as well as
lower marginal rate memberships of all the co-operatives for in order to get repayments of
extra imputation credits through the allocating entity while making distribution. This
approach would help in enhancing the impact of cash flow for the entity tax regimes on the
co-operative members.
Multiple trust with the common trustee:
By using the entity approach it allows for the separate taxation of the several trusts,
given that under the equity rule there are more greater than one trust with each has common
trustee and each of the trusts are created separately for taxation purpose15. The trustee
regularly holds the different types of property for the number of beneficiaries and purposes.
In addition to this, even though being the portion of identical trust settlement, a trustee may
be obligatory required to hold particular group of assets for the advantage of one group of
beneficiaries, while also they are required for holding additional assets for the diverse set of
beneficiaries. For instance, trustee might be holding shares in favour of the minors that are
children for settlor and rental property for the settlor’s significant other.
Such kind of arrangement involves officially separate trusts, or the preparations which
as the separate subject of equity of law. On noticing that such kind of multiple trusts is
existent, the taxation rules for the entity must be independently applied to each trusts. The
elimination from the entity taxation regimes must be applied to every separate trusts that are
recognized16. A trust must only be omitted from the entity taxation given that either the entire
purpose or all the possessions of the separate trusts falls inside the exclusion from the entity
regimes.
15 McLean, Chris, and Chris Paull. "Alternative assets insights: When is a trust a unit
trust?." Taxation in Australia 51.7 (2017): 392.
16 Bryan, Michael, Vicki Vann, and Susan Barkehall Thomas. Equity and trusts in Australia.
Cambridge University Press, 2017.

9TAXATION OF TRUSTS
Rollover and stamp duty relief upon entity restructuring:
As stated in the entity approach it provides an ongoing relief from the rollovers in the
entities. A transfer of the asset or the transfer of the entire business from the joint venture or
partnership or individual to the entity that are held for taxation like company does not has any
taxation consequences17. However, it should be noted that an individual that has the interest
in the asset or business prior to the transfer has the similar relative interests in the entity that
holds the assets or performs the trade following the transfer. A transitional taxation measures
were declared in the New Taxation System for the fixed and discretionary trusts, given that
there are different forms of taxation of trusts this led to the introduction of new entity based
taxation regimes.
Rollovers in an entity that are taxed like company:
Under the entity approach one of the prime benefit is that a rollover relief are
provided to entities that are restructuring under several circumstances. By permitting the
individuals, partnership or the joint venture for rollover in an entity taxation similar to a
company, where there is no type of changes in the financial possession leading from the
restructuring, then it would permit some rationalisation of the present rollover relief
provisions.
The treatment of distribution of income, capital gains and corpus:
By adopting the entity taxation regime, it would result in taxation of income that are
similar to the present treatment of taxation of co-operatives and the tax preferences are not
flowing through. The main difference is that the preliminary opinion of taxation of taxable
income would move to entity, where making distribution to members would attract
refundable imputation credits for the taxes that are paid on the distributions that are made by
co-operative. Additionally, division 6AA also states that income of the dependent children is
usually held for taxation based on the top marginal rate18. Nevertheless, the division mainly
17 Sharkey, Nolan, and Ian Murray. "Reinventing administrative leadership in Australian
taxation: beware the fine balance of social psychological and rule of law principles." Austl.
Tax F.31 (2016): 63.
18 Siglé, Maarten, et al. "Corporate tax compliance: Is a change towards trust-based tax
strategies justified?." Journal of International Accounting, Auditing and Taxation 32 (2018):
3-16.

10TAXATION OF TRUSTS
provides exemption to particular earnings, money and possessions from the implementation
of higher division’s tax rates.
By adopting the entity approach it reflected that in the current law there must not be
any capital gains tax on making direct transfer of the assets amid the individuals where the
transfer occurs due to the death of one person19. Under the new regimes, there may be a
removal of the capital gains rollover relief inside the current law where the transmissions
made to the entity with some memberships that are not individuals despite the fact that the
present law comprises of certain doubts in this relation.
The provisional rules relating to the treatment of the capital gains of the current assets
in the trusts and projected rules for return of capital by the discretionary assets in the trusts
would signify that the discretionary trust would be able to distribute its provisional assets
under the new system would imposing any liability for taxation on the unrealised gains20. The
capital gains under the entity approach are allocated to the corpus. The money that is
distributed to the beneficiaries preserves its character for the reason that if the trust allocates
the long term capital gains to the beneficiaries then it would be listed as the long term capital
gains on the tax returns.
Conclusion:
On a conclusive note the formation of flow through approach for collective
investment vehicles as the special class of fixed trust are not put for taxation under the entity
regime. The provisional rollover relief would be provided to the existing entities that wish to
rearrange as trusts that qualifies as the collective investment scheme. In the absence of either
the flow through approach or the entity approach, the conversion would lead to liquidation of
the entity and may cause capital gains or other possible tax consequences.
19 Hudson, Alastair. Understanding equity & trusts. Routledge, 2016.
20 Virgo, Graham. The Principles of Equity & Trusts. Oxford University Press, 2018.

11TAXATION OF TRUSTS
References:
Bryan, Michael, Vicki Vann, and Susan Barkehall Thomas. Equity and trusts in Australia.
Cambridge University Press, 2017.
D'Ascenzo, Michael. "The role of the tax administrator in tax policy development." Austl.
Tax F. 32 (2017): 577.
Glover, John. "Tax agents providing trust deeds and/or advising about trusts: unauthorised
legal practice?." Australian Tax Forum. Vol. 33. No. 3. 2018.
Harrison, Lister. "Property investment through discretionary trusts." Taxation in
Australia 50.2 (2015): 84.
Hepburn, Samantha. Principles of Equity & Trusts (Aus) 2/e. Routledge-Cavendish, 2013.
Hudson, Alastair. Understanding equity & trusts. Routledge, 2016.
Hudson, Alastair. Understanding equity & trusts. Routledge, 2016.
McDonald, Iain, and Anne Street. Equity & Trusts Concentrate: Law Revision and Study
Guide. Oxford University Press, 2018.
McLean, Chris, and Chris Paull. "Alternative assets insights: When is a trust a unit
trust?." Taxation in Australia 51.7 (2017): 392.
Morrison, David. "Proposed change to tax treatment of discretionary trusts in Australia:
reductio ad absurdum." Trusts & Trustees 23.10 (2017): 1046-1050.
O’Connell, Ann. "Investing in the Future—Taxation Issues." Bridging the Entrepreneurial
Financing Gap. Routledge, 2017. 178-198.
Penner, James. The law of trusts. Oxford University Press, 2016.
Sadiq, Kerrie, and Stephen Marsden. "The small business CGT concessions: Evidence from
the perspective of the tax practitioner." Revenue Law Journal 24.1 (2015): 6743.
Sharkey, Nolan, and Ian Murray. "Reinventing administrative leadership in Australian
taxation: beware the fine balance of social psychological and rule of law principles." Austl.
Tax F.31 (2016): 63.

12TAXATION OF TRUSTS
Siglé, Maarten, et al. "Corporate tax compliance: Is a change towards trust-based tax
strategies justified?." Journal of International Accounting, Auditing and Taxation 32 (2018):
3-16.
Smith, Lionel. "Massively Discretionary Trusts." Current Legal Problems 70.1 (2017): 17-
54.
Tan, Lin Mei, Valerie Braithwaite, and Monika Reinhart. "Why do small business taxpayers
stay with their practitioners? Trust, competence and aggressive advice." International Small
Business Journal 34.3 (2016): 329-344.
Tran-Nam, Binh. "Tax Reform and Tax Simplification: Conceptual and Measurement Issues
and Australian Experiences." The Complexity of Tax Simplification. Palgrave Macmillan,
London, 2016. 11-44.
Virgo, Graham. The Principles of Equity & Trusts. Oxford University Press, 2018.
Watt, Gary. Trusts and equity. Oxford University Press, 2018.

13TAXATION OF TRUSTS

14TAXATION OF TRUSTS
http://rbt.treasury.gov.au/publications/paper4/part5/section13.htm#Heading3
https://thismatter.com/money/tax/trust-taxation.htm
http://rbt.treasury.gov.au/publications/paper4/part5/section13.htm#Heading3
http://rbt.treasury.gov.au/publications/paper4/download/Section16.pdf
http://rbt.treasury.gov.au/publications/paper4/part6/section16.htm
https://thismatter.com/money/tax/trust-taxation.htm
http://www2.csudh.edu/rmalamud/elder414.pdf
https://www.lexology.com/library/detail.aspx?g=9edda16f-ec3c-4da2-8605-11c54206e8ab
https://www.justia.com/estate-planning/trusts/fixed-and-discretionary-trusts/
https://info.courthousedirect.com/blog/bid/336876/what-s-the-difference-between-legal-title-
and-equitable-title
http://rbt.treasury.gov.au/publications/paper4/download/Section16.pdf