2019 Year-end Resolutions – capital gains tax streaming
The post–Bamford legislative amendments to Subdivisions 115-C and 6E provide some additional options when addressing year-end resolutions for streaming (meaning the allocation of capital gains or franked dividends separate from the rest of the trust income) capital gains from discretionary trusts to beneficiaries.
However, they require some care in their application.
Previously, assessments of capital gains followed the distributions of income for trust purposes to beneficiaries. Now they can be distributed directly to any capital beneficiaries who are specifically entitled to capital gains.
Therefore, there is no longer the requirement for a trust deed to define income to enable “streaming” of capital gains to desired beneficiaries.
However, practitioners now have to consider year-end CGT “steaming” resolutions in respect of deeds which adopt traditional “ordinary concepts” of income and capital, as well as those which have evolved to include “tax concepts”.
In the case of “tax concepts” deeds, the approaches taken in modern deeds vary, but broadly break down into deeds that:
- define “income” for deed purposes as equating with tax “income” in accordance with s95(1); or
- effectively require the trustee to determine in each year what categories of trust receipt will be treated as “income” for deed purposes.
It has always been essential to “read the deed” in each case. That remains the case but in an enhanced form.
In considering the drafting of year-end resolutions, some points to which careful attention should be given include the following:
- For “tax concepts” deeds, check to ensure that the trustee has the power to “stream” distributions of income in the form of capital gains to beneficiaries.
- For “ordinary concepts” deeds, the power to “stream” distributions of capital will usually follow automatically from the standard terms of the deed.
- For “tax concepts” deeds, there may be components of a capital gain that are not included in trust income. If so, those amounts must be separately dealt with under the “capital” provisions of the deed.
- For example, if the deed adopts s95(1) (i.e. net income for tax purposes) as “income” for its purposes, the CGT discount component will not be classified as income – the component of a capital gain that qualifies for the CGT discount is excluded from the part of the capital gain which is taken up as net income for tax purposes.
- Under either an “ordinary concepts” deed or a “tax concepts” deed, where the trustee makes a distribution of capital:
- the new legislative “streaming” provisions will apply; and
- the provisions of the deed which relate to capital distributions must be considered.
- In particular, careful attention should be addressed to ensuring that:
- the intended beneficiaries are made specifically entitled to the capital gain by the distribution resolution; and
- any specific requirements of the deed for distributions of capital to be validly made are complied with.
- Deeds often have specific requirements for distributions of capital. In particular, a deed may require:
- the distribution to be made by deed or other written instrument;
- prior approval in writing from a Guardian named in the deed; or
- notice of the proposed distribution to first be given to an Appointor named in the deed (possibly with a notice period applying) before the distribution can be made.
- In the case of distributions of capital gains, a distribution will be valid for the purposes of being made in favour of a specifically entitled beneficiary if it is “recorded, in its character as referable to the capital gain” within 2 months of the end of the financial year.
- However, this relates only to beneficiaries who are made specifically entitled to a capital gain under Subdivision 115-C. For capital gains that are included in trust income under a “tax concepts” deed and distributed via that mechanism, there is no similar extension of time. For those distributions, the resolution should be passed on or prior to 30 June of the year in which the capital gain is made.
- In trustee companies with more than one director, a distribution resolution that is passed on the voices at a directors meeting on or before 30 June in any year will be valid even if recorded in a minute signed after that date.
- However in trustee companies with a single director, s248B(1) of the Corporations Act 2001 requires resolutions by the director to be recorded in writing before they are effective. In the case of those companies, for a valid distribution resolution to be made, the record in writing should be made no later than 30 June.
Cornwalls will be happy to advise on streaming issues arising out of any trust deed or the drafting of resolutions to achieve desired streaming outcomes.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.
For further information please contact the author or any member of our Tax team