Advisers should think before acting on new CGT ruling

Advisers should think all issues through carefully before acting on the Australian Taxation Office’s (ATO) new ruling that will affect the way capital gains made by trusts are treated for income tax purposes, according to GMK Centric taxation director Eugene Berkovic.

The ATO’s new position follows a full Federal Court decision, Bamford v Federal Commissioner of Taxation. The case held that as long as the trust deed defines income to be that amount calculated under the tax legislation, a trust can distribute a capital gain in the same way as it would distribute income.

While agreeing that this new approach offers affected taxpayers more flexibility to maximise tax advantages, Berkovic said they should be aware that the ATO has specifically stated that trust deeds cannot be amended to take advantage of this ruling.

Berkovic also noted that the ATO is still to announce its treatment of taxpayers should the decision be reversed at High Court level “whether or not they may be hit with retrospective taxes”.

Meanwhile, the time lag between when the decision was made in early June and the ATO’s response in August, means that trusts that may be affected may not have dealt with this issue as part of their year-end decision making, Berkovic said.

Prior to the new ruling, the ATO held that, because capital gains are not ordinarily considered ‘income’, they could not be treated as such, which caused significant complications when distributing capital gains to beneficiaries of a trust, a GMK statement said.