Early Stage Venture Capital Investors using Bare Trusts benefit from the Board of Taxation’s Report on Bare Trusts
The Board of Taxation recently released its Review of the Tax Treatment of Bare Trusts and Similar Arrangements report, with key recommendations to eliminate the existing uncertainties for investors. The report has been positively received by the Federal Government with the Hon Kelly O’Dwyer, the Minister for Revenue and Financial Services, and Treasury thanking the Board for the report and announcing the Government will look to progress the recommendations to streamline arrangements for bare trusts as part of its regulatory reform program.
This is excellent news for the early stage venture capital investment community and, if properly implemented, will provide certainty for the underlying tax treatment for investors in early stage innovation companies involving bare trust structures.
A bare trust can be described as a simple trust where the beneficiary has the absolute right to the capital and assets within the trust, as well as the income generated from these assets. With no clear definition of “bare trust” most of these types of trust arrangements in the market end up falling under the broad definition of “trust estate” under Australian Tax law. Industry’s widespread practice of disregarding or “looking through” these trusts for income tax purposes is obtained only by an ongoing administrative approach relying upon the discretion of the Australian Taxation Office (ATO) and that may change and make it no longer tenable.
Early stage innovation and venture capital investors require certainty and consistency around the tax treatment of such arrangements. The review of their tax treatment is welcome news and removes reliance upon the discretion of the Tax Office.
The recommended reform is to be achieved through a characteristics-based approach where those trusts displaying the nominated characteristics would qualify for look through treatment. The nominated characteristics will be developed through a consultation process, and the Board of Taxation considers that the following characteristics should be the core characteristics for the purposes of the recommended reform:
(a) the trustee has no, or only minor, active duties or powers;
(b) the beneficiaries are entitled to the benefit of all of the assets and income of the trust; and
(c) each beneficiary can demand the trustee transfer trust assets to that beneficiary or at their direction.
Stakeholders (incl. early stage investors, custodians and nominees, unincorporated joint ventures, managed investment scheme participants and platforms) should consider participating in the consultation process. ESIC Hub will be participating on behalf of its early stage innovation community to ensure the intended reforms achieve the desired outcomes for the features of their proposed products and structures for early stage and venture capital investors.
Taxation Board’s Report – http://taxboard.gov.au/
Hon Kelly O’Dwyer Media Release – http://kmo.ministers.treasury.
Australian Taxation Office – www.ato.gov.au
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