Taxation of Discretionary Trusts


On 11 October 2000 the then Treasurer announced the release of Exposure Draft legislation to tax certain trusts like companies with effect from 1 July 2001. The exposure draft legislation was prepared following extensive consultation but provided the opportunity for further comment on the operation of the new arrangements.

This legislation was intended to implement the Government’s policy of introducing greater consistency in the taxation of entities, which was announced in A New Tax System. The legislation proposed that that non fixed trusts were to be taxed like companies and was intended to achieve the objective of greater consistency in the taxation of entities while minimising compliance and restructuring costs.

Legislation withdrawn

The Government received a great number of submissions to the exposure draft legislation which raised technical problems particularly in relation to distinguishing the source of different distributions, and valuation and compliance issues. The submissions together with a recommendation to not proceed from the Board of Taxation convinced the Government that the proposed legislation was not workable.

On 27 February 2001 the Treasurer announced that the legislation would be withdrawn and it would not be legislated. The Treasurer also announced it would begin a new round of consultations on principles which can protect legitimate small business and farming arrangements whilst addressing any tax abuse in the trust area. The Board was announced as being part of the new consultation.

Board Report

Following the Treasurer’s press release on 27 February 2001, the Board commenced a review focusing on ‘tax abuse in the trust area’. The Board was able to conclude that no significant change was required to the status quo, therefore the next step of identifying ‘principles which can protect legitimate small business and farming arrangements’ became unnecessary.

The Board prepared its report on the Taxation of Discretionary Trusts and provided it to the Treasurer in November 2002. The report made four recommendations.

Government Response

On 12 December 2002 the then Treasurer announced the release of the Board’s report Taxation of Discretionary Trusts. Upon recommendation from the Board, the Treasurer announced that the Government would legislate to introduce new provisions in place of Section 109UB of the Income Tax Assessment Act 1936 dealing with distributions from trusts.

On 19 February 2004 the Government introduced legislation based on the Boards recommendation in Tax Laws Amendment (2004 Measures No. 1) Bill 2004. The amendments deemed certain transactions undertaken by a trustee of a trust estate to be an assessable dividend in the hands of a shareholder of a private company (or their associate), where:

  • the private company is presently entitled to income of the trust but that income has not been paid; and
  • the trustee distributes the underlying cash to a shareholder (or their associate) of the company in the form of a payment, loan, or forgiven debt.

 Explanatory Memorandum for the Bill explains the changes in more detail.

The Bill received Royal Assent on 20 June 2004. Additional recommendations made by the Board did not require legislation.

For further information about this report please contact the Board of Taxation Secretariat on (02) 6263 4366 or on