There was some encouraging news yesterday about the difficult area of taxation of trusts. The government has released a consultation paper as part of the first step towards re-writing the trust law provisions still contained in the 1936 Income Tax Assessment Act.

Thrilling reading of course, but the comments I like best so far:

·         “This is not a “crack down” on the use of trusts”

·         “Trusts are a legitimate structure through which Australians should be able to conduct their personal and business affairs”

·         “Tax liabilities should “follow the money” in that they should attach to the entities that receive the economic benefits”

·         “It should be clear whether amounts retain their character and source when the flow –through or are assessed to beneficiaries”

The paper recognises the need to simplify the link between trust law and tax law. I can agree wholeheartedly with the comment that an approach which reduces the current reliance on specific trust deeds and trust concepts as the basis for determining tax outcomes could dramatically reduce compliance costs. At present we have an absurd situation where the tax outcome may depend on the wording of your particular trust deed. Any move to address this is a step forward.

The government has already legislated to permit streaming of franked dividends and capital gains, however, these measure look only to last until 30 June 2012 until the re-write is scheduled to commence for the 2013 year.

History of trusts

The consultation paper also provides an interesting summary on the historical development of trusts.

The origins of the modern trust however, can be traced back to the legal system that evolved in England following its conquest by William the Conqueror in 1066.

William the Conqueror introduced a feudal system of land control into England shortly after his conquest. Broadly, under this system the ‘Crown’ asserted its ownership over all of the land in England and required land owners to pay feudal dues in return for the continued enjoyment of their lands.

Over time the concept of a ‘use’, which eventually developed into the modern trust structure, was developed to circumvent the payment of these dues.

Under a ‘use’ the feoffor (settlor) would instruct the feoffees (trustee) to hold the land for his use and thereafter for the use of those nominated by the feoffor by deed or will (beneficiaries).

Trusts continued to evolve following the creation of the ‘use’ and only became relatively settled with the adoption of common trust law principles at the end of the 19th century.