On Wed 14 Feb 2018, the Board of Taxation released its report Review of the Tax Treatment of Bare Trusts and Similar Arrangements to the public. The Board’s review was completed in June 2017.

The Revenue Minister said the Board of Taxation has identified opportunities to simplify arrangements where the trustee has no or only minor powers of active management. Ms O’Dwyer said the Government will look to progress the recommendations to streamline arrangements for bare trusts as part of the regulatory reform program. Treasury will undertake further consultation on the scope of potential changes, eg in defining the core characteristics of a bare trust for taxation purposes.

The Board had conducted a self-initiated review into the tax arrangements applying to bare trusts and similar arrangements. Bare trusts and similar arrangements are used widely in society by individuals, domestic and multinational businesses, and charities with almost $4.5 trillion in assets held via these arrangements by licensed custodians alone.

The Board considered whether, and how, to legislate in respect of the current widespread practice of disregarding or looking through these trusts for income tax purposes. The practice appears not to be supported by Division 6 of Part III of the Income Tax Assessment Act 1936 for most types of bare trusts, and is only maintained by an ongoing administrative approach from the Commissioner of Taxation that may change should developments in law, such as a court decision, make it no longer tenable.

In all, the Board made 8 recommendations.

RECOMMENDATION 1 – The Board recommends that the Government legislate to provide a look through approach for bare trusts and similar arrangements for certain income tax purposes.

RECOMMENDATION 2 – The Board recommends that a characteristics based approach be used to describe the trusts that will be subject to a look through approach.

RECOMMENDATION 3 – The Board recommends that a similar approach to sections 106-50 of the ITAA97 (CGT transparent, when taxpayer absolutely entitled to an asset, as against the Trustee) and 235-820 of the ITAA97 (look through for Instalment Trusts),be used, for legislating the income tax consequences of the look through approach for qualifying trusts.

RECOMMENDATION 4 – The Board recommends that, subject to further consultation, the core characteristics used to identify qualifying trusts subject to the recommended approach be the following:

  1. the trustee has no, or only minor, active duties or powers;
  2. the beneficiaries are entitled to the benefit of all of the assets and income of the trust; and
  3. each beneficiary can demand the trustee transfer trust assets to that beneficiary or at their direction.

RECOMMENDATION 5 – The Board recommends that, subject to further consultation and consideration, certain features be disregarded when considering whether a trust qualifies for the recommended reform.

RECOMMENDATION 6 – The Board recommends that a legislative instrument making power be included in the legislation.
RECOMMENDATION 7 – The Board recommends that the ATO provide contemporaneous guidance in the form of a Law Companion Guideline.
RECOMMENDATION 8 – The Board recommends that there be exclusions from the look through treatment for certain purposes and that further consultation be undertaken to identify any other purposes that should be excluded.

The Report has a useful summary of the vagaries of the case law that bears on what a ‘bare trust’ is and whether it can be transparent, for various tax purposes. This is at paras 4.4 to 4.17.

[Board of Taxation’s website: bare trust report; Minister’s website: media release; FJM; LTN 30,14/2/18; Tax Month February 2018]


Study questions (answers available)

  1. Did the Board recommend that a look through approach to ‘bare trust’s be legislated?
  2. Is the ‘look through’ approach, for bare trusts’, well supported by the tax provisions for Trusts in Div 6 of Part III of the ITAA36?
  3. Did the Board recommend the legislation based on identifying the characteristics of trust’s eligible for this look through treatment (rather than an undefined term, with case law filling the void or lists of types of trusts that qualify – per para 3.17 of the Report);
  4. Did the Board recommend that trusts that are similar, but not the same as ‘bare trusts’ don’t need to be included in the legislation (for instance, the s106-50(1) provision deeming a person who is absolutely entitled, as against a trustee, to an asset, is the relevant taxpayer, for CGT purposes)?
  5. Did the Board’s recommended ‘characteristics’ include that the beneficiaries are entitled to all the assets and can demand a transfer of trust property (but not of any particular asset)?






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