iscover Interaction of trust tax and NALI gives rise to 'tax stacking' risk, warns SMSFA
SuperTreasury should carefully consider how the proposed trust tax rules will interact with other tax rules including those for capital losses and the proposed minimum tax offset to ensure that unrelated gains are not contaminated, says the SMSF Association.
In a recent submission to the government's consultation on the trust tax changes, the SMSF Association has advised the government that the drafting of the provisions must be clear, practicable and stand on their own.
The SMSF Association has raised concerns about how the tax may interact with existing CGT and Non-arm's length income provisions.
"The interaction between the CGT and NALI provisions demonstrates how integrity measures can, in certain circumstances, extend beyond the income giving rise to the concern," the association said.
"Under the current law, a non-arm's length trust distribution may influence the taxation of capital gains that have no connection to the relevant trust arrangement. The SMSF Association has previously raised concerns that this can result in the effective tainting of otherwise unrelated gains."
Similar distortions should be avoided in the design of the minimum tax regime.
Treasury should carefully consider how the proposed rules interact with the CGT method statement, capital losses, carried-forward capital losses, the operation of section 295-550, and the proposed minimum tax offset, the association said.
"Tax outcomes should remain proportionate and confined to the income giving rise to the integrity concern rather than inadvertently contaminating unrelated gains or compliant superannuation fund investments," it said.
The association said drafting of the provisions should be explicit, removing the interpretive and administrative risk arising with regards to NALI.
"This should be supported through clear statements and an express example in the EM involving an SMSF beneficiary. The example should make clear that that the non-arm’s length income provisions are tax integrity and anti-avoidance measures and therefore punitive in their operation," it said.
"A tax offset must be permitted to the extent that the effective rate of tax applied aligns with the applicable rate of tax, avoiding multiple layers of taxation through tax stacking."
The association also raised concerns about the definition provided for fixed trusts, stating that in the current drafting, the term is not defined, and a heavy reliance is placed on the explanatory memorandum for context.
"We do have concerns on the limited guidance and examples provided. Alongside the limited definition, these provisions are challenging for practitioners and trustees alike to interpret and apply reasonably in practice," it said.
"In line with our previous comments, we note that the examples of fixed trusts included in the explanatory memorandum should be included in the primary law, to expand and provide context to the definition of a fixed trust."
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