House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Paul Keating, M.P.)

Notes on Clauses

TRUST RECOUPMENT TAX ASSESSMENT BILL 1985

Clause 1: Short title

This clause provides for the new Act to be cited as the Trust Recoupment Tax Assessment Act 1985.

Clause 2: Commencement

Under this clause the Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

This clause contains a number of measures to assist in interpretation.

Sub-clause 3(1) defines various expressions used in the Bill. Each expression is to have the given meaning, unless the contrary intention appears:

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"Applied penalty tax" means additional tax payable under Part VII of the Income Tax Assessment Act 1936 in relation to the trust recoupment tax to be assessed under this Bill. Part VII of the Assessment Act is one of the specified provisions of that Act that, by virtue of sub-clause 4(1), is to be applied for the purposes of the assessment and collection of trust recoupment tax. In its application for the purposes of this Bill, Part VII will operate to impose additional tax for failure to furnish requested information or for making a false or misleading statement affecting a person's liability to trust recoupment tax. Such additional tax is referred to in this Bill as "applied penalty tax".

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"Assessment Act" means the Income Tax Assessment Act 1936.

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"Associate", in relation to a person, is defined to have the same meaning as that term has under the definition contained in sub-section 26AAB(14) of the Assessment Act. That definition specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate and a partnership and, in broad terms, refers to those persons who by reason of family or business connections might appropriately be regarded as one with a particular person.

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"Company" is not to include a company in the capacity of a trustee of a trust estate. An effect of the definition is that the legislation will, where there is a corporate trustee, generally apply in the same manner as it applies where the trustee is an individual.

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"Company taxable amount", in relation to a person (i.e., a person who is a party to an election under clause 7), represents the share of the stripped trust income that the person is to be taxed on at the company tax rate by reason of being a corporate beneficiary of the trust or a shareholder in such a company, and means an amount that, by virtue of sub-clause 7(7) or (8), is to be treated as a company taxable amount in relation to the person.

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"Distribution of income", in relation to a company, will mean a distribution of the income of the company by way of a payment of a dividend to its shareholders.

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"Distribution of income", in relation to a trust estate, is being defined to mean a distribution of the income of the trust by way of the payment of income to, or the application of income for the benefit of, beneficiaries of the trust including persons who were capable of becoming beneficiaries by the exercise of a power of appointment.

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"Elected taxable amount", in relation to a person (i.e., a company that is a party to an election under sub-clause 7(1)), represents the share of the stripped trust income that, but for the scheme, that company would have derived as a beneficiary of the trust, and is the amount that, by virtue of sub-clause 7(7), is to be treated as an elected taxable amount in relation to that company. An elected taxable amount is taxed at the rate of 75% but is converted to a company taxable amount which is taxed at the rate of 46% upon the shareholders of the company making a valid election to be assessed on deemed dividends from the company.

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"Eligible beneficiaries class", in relation to a secondary taxable amount (generally the amount of stripped trust income), will, in broad terms, mean the persons who, directly or indirectly, derived a non-arm's length benefit attributable to the stripped trust income and who, by virtue of sub-clause 6(4), are included in the eligible beneficiaries class. These persons will be jointly and severally liable to pay trust recoupment tax on the secondary taxable amount.

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"Late payment tax" means additional tax payable under section 207 of the Assessment Act, as applied by sub-clause 4(1), for late payment of "trust recoupment tax", "applied penalty tax" or "penalty tax", those terms themselves being defined in this sub-clause.

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"Penalty tax" means additional tax payable under clause 12 by way of a penalty that is to be imposed on persons who are liable to trust recoupment tax or income tax as a result of a new generation trust stripping scheme entered into after 28 April 1983.

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"Person" is to include a company and a trustee.

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"Prescribed person" is being defined as a natural person, a body or organisation whose income of the year of income in which the trust strip occurred was exempt from tax under a "relevant exempting provision" (that term being the subject of a further definition), a trustee of a superannuation or similar fund, or a company that in relation to the year of income in which the trust strip occurred qualified as a public company under the Assessment Act by virtue of being a non-profit company, a mutual life assurance company, a government body established for public purposes or a company controlled by such a government body.

The expression is used in clause 7 for the purpose of identifying the persons who are entitled to be parties to an election. For example, the prescribed persons who directly, or through interposed trusts, were the beneficiaries of the stripped trust are the persons who together with non-prescribed corporate beneficiaries of the trust will be entitled under sub-clause 7(1) to elect to be assessed on amounts equal in the aggregate to the stripped income. In the case of a non-prescribed corporate beneficiary, the prescribed persons who directly or indirectly owned that company will be entitled to elect that they be assessed on deemed dividends equal in aggregate to a sufficient distribution of the company's notional share of the stripped income.

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"Primary taxable amount", in relation to a person, represents the amount of the income stripped from the trust of which that person is trustee, and means an amount that, by virtue of sub-clause 5(1), (2) or (3), is to be treated as a primary taxable amount in relation to that person.

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"Primary trust income", in relation to a primary taxable amount applicable to a trustee of a trust estate, will mean that part of the income of the trust estate to which the primary taxable amount is attributable. That is, it represents the amount of the stripped trust's income (for trust law purposes) that was allocated to a beneficiary or beneficiaries who would not have been allocated that income if the tax avoidance scheme had not been entered into.

Under sub-clause 6(4) persons are to be included in an "eligible beneficiaries class" if they derive a benefit that would not have been derived if the "primary trust income" had not been derived. In addition, persons who under clause 7 elect to be assessed on amounts equal in aggregate to the primary taxable amount will be deemed to be presently entitled to shares of the primary trust income and thus those amounts will, for assessment purposes, assume the character of the primary trust income.

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"Property" includes a chose in action, a legal or equitable interest or right in property, and any "right to receive income" that expression itself being defined in the sub-clause.

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"Relevant distribution time", in relation to a taxable amount that exists in relation to a company or trust, is an expression used in clause 7 to specify the time when a notional income distribution by that company or trust is to be taken as having occurred. Where the company or trust existed at the time immediately before the tax avoidance scheme to which the taxable amount relates was entered into, the relevant distribution time will generally be taken to be that time. Where, however, the company or trust did not exist at that time, the relevant distribution time will generally be the time when the company or trust was created (for example, where the creation of the trust was part of the scheme). If the Commissioner of Taxation considers that the relevant distribution time determined in accordance with these rules is inappropriate then the relevant distribution time will be such later time as the Commissioner determines (for example, the end of the year of income in which the trust strip occurred).

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"Relevant exempting provision" is defined to have the same meaning as that expression has in sub-section 121F(1) of the Assessment Act (which is contained in Division 9C of Part III of that Act). Under that definition the expression means specified provisions in the Assessment Act which exempt the income of various authorities, institutions, organisations, associations, societies and funds as well as any provision in another Act which provides that a particular person or body or the income of a particular person or body is not subject to taxation under any law of the Commonwealth. The expression is used in the Bill to identify those bodies that would be exempt from income tax if they were presently entitled to trust income or a dividend were paid to them.

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"Right to receive income" means not only a right of a person to have income that will or may be derived (from property or otherwise) paid to the person, but also a right to have the income applied or accumulated for the benefit of that person. Such rights are included in the definition of "property" for the purposes of the Bill.

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"Scheme" is to be defined in a way that covers the various forms in which tax avoidance arrangements may be found. It is to mean any agreement, arrangement, understanding, promise or undertaking whether it is express or implied and whether or not legally enforceable. Any scheme, plan, proposal, action, course of action or course of conduct is also to be treated as a "scheme" (see also sub-clause 3(2)).

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"Secondary taxable amount", in relation to a person or persons, broadly represents that part of the stripped income on which trust recoupment tax will, in certain circumstances, be recoverable from the beneficiaries group and means an amount that, by virtue of sub-clause 6(1), (2) or (3), is to be treated as a secondary taxable amount in relation to the eligible beneficiaries class in which that person is, or those persons are, included.

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"Taxable amount" will mean a primary taxable amount, a secondary taxable amount, a company taxable amount or an elected taxable amount, those terms being defined earlier in this sub-clause.

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"Trust recoupment tax" is to mean tax assessed under the proposed Act on a taxable amount and imposed by the proposed Trust Recoupment Tax Act 1985.

Sub-clause 3(2) clarifies the meaning of the term "scheme" as defined in sub-clause 3(1) to ensure that the term carries a meaning that includes a unilateral scheme, plan, proposal, action, course of action or course of conduct.

Sub-clause 3(3) is a drafting measure which gives meaning to references in the Bill to the time of entry into a scheme. A unilateral scheme is not technically "entered into" but will be taken to have been entered into at the time when the scheme is commenced to be carried out. For other schemes a reference to the time of entry into the scheme will be taken to be a reference to the time when the scheme is entered into.

Sub-clause 3(4) sets out an objective test for determining whether a scheme is to be treated as a tax avoidance scheme.

In brief, a scheme will be taken to be a tax avoidance scheme if, on the basis of an objective view of the scheme and its surrounding circumstances, it would be concluded that the scheme was, in tax terms, a "blatant" one, that is, it was entered into by a person for the sole or dominant purpose of enabling a person or persons to pay no tax or less tax.

In more detail, regard must be had to the following matters in coming to a conclusion as to whether or not a relevant person had the degree of taxation purpose that must exist for a scheme to be treated as a tax avoidance scheme:

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the manner in which the scheme was entered into or carried out;

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its form and substance;

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the particular time at which the scheme was entered into and the period during which it was carried out;

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the tax result that, but for section 100A (a specific anti-avoidance provision against trust stripping) and Part IVA (the general anti-avoidance provision) of the Assessment Act, would be achieved by the scheme;

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any change resulting from the scheme in the financial position of any person; and

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any other consequences of the scheme for any person.

If, on the basis of the abovementioned matters, it would be concluded that the person or one of the persons who entered into or carried out the scheme, or part of it, did so for the sole or (by reason of sub-clause 3(5)) dominant purpose of securing for any person or persons a reduction in what would otherwise be that person's or those persons' liability to income tax in respect of a year of income then the scheme will be taken to be a tax avoidance scheme. It will be irrelevant whether or not the tax reduction sought related to a particular person or particular persons.

Sub-clause 3(5) contains drafting measures relevant to the definition of "tax avoidance scheme" in sub-clause 3(4).

Paragraph (a) is addressed to the fact that tax avoidance schemes usually involve a number of parties. Accordingly, references to the carrying out of a scheme by a person are to be taken as including references to the carrying out of a scheme by a person together with others.

Paragraph (b) relates to the words at the end of sub-clause 3(4) which refer to a person having acted for "the purpose" of securing a tax reduction. The language refers to a person's sole purpose but, by reason of paragraph (b), the expression is in the case of a scheme with more than one purpose to include also a dominant purpose, i.e., a purpose that outweighs all other purposes put together.

Sub-clause 3(6) is a drafting device to ensure that trust recoupment tax that has been assessed will, for the purposes of the Bill, be included in the expression "payable" where used throughout the Bill notwithstanding that the due date for actual payment has not arrived. The sub-clause will not substantively affect the due date for payment of trust recoupment tax which will be due for payment 30 days after service of a notice of assessment.

Clause 4: Application of Assessment Act

Clause 4 will operate to adapt and apply for the purposes of the trust recoupment tax law, the machinery provisions of the income tax law.

Sub-clause 4(1) applies, with appropriate variations, specified provisions of the Assessment Act and the regulations made under that Act for the purposes of the assessment and collection of trust recoupment tax and penalty tax under the Bill.

The specified provisions relate to definitions (section 6), extension of the legislation to Norfolk Island and other external Territories (section 7A), administration (Part II), non-monetary consideration (section 21), returns and assessments (Part IV), objections and appeals (Part V), collection and recovery of tax (Division 1 of Part VI), penal provisions and prosecutions (Part VII) and miscellaneous provisions (Part VIII).

The application of those provisions to trust recoupment tax will mean, for example, that a person will have the same rights of objection and appeal against an assessment of trust recoupment tax as are available to a taxpayer who is dissatisfied with an income tax assessment. Likewise, the date on which trust recoupment tax will become due and payable will, by virtue of the application of section 204 of the Assessment Act, be the date specified in the notice of the trust recoupment tax assessment as the date upon which tax is due and payable, not being less than 30 days after service of the notice or, if no date is so specified, on the thirtieth day after service. If the tax is not fully paid by the due date, additional tax for late payment at the rate of 20 per cent per annum on the unpaid amount will accrue by virtue of the application of section 207 of the Assessment Act.

Sub-clause 4(2) is a drafting measure which provides that a reference in the Bill to a particular provision of the Assessment Act is, unless the contrary intention appears, to be read as a reference to that provision in its application for the purposes of the trust recoupment tax law.

Sub-clause 4(3) specifically incorporates into this Bill the provisions of section 14 of the Assessment Act under which the Commissioner of Taxation is to make an annual report to the Parliament on the working of the Act.

Sub-clause 4(4) will permit the disclosure, without breach of tax secrecy provisions, of certain information.

Under paragraph (a) information concerning the affairs of any of the trusts involved in the tax avoidance scheme or other persons may be disclosed to the trustee of the stripped trust or to persons included in the eligible beneficiaries class who are liable to pay, or are likely to be liable to pay, trust recoupment tax. Such information may also be disclosed to a person who is, or is likely to become, liable to pay income tax on a share of the stripped income by virtue of being a party to an election under clause 7. The information which the Commissioner of Taxation is authorised to disclose to a person under this paragraph is information that is relevant to an assessment of that person's liability to trust recoupment tax or income tax.

In practice, this provision will mean that a person liable to pay trust recoupment tax or related income tax will be enabled to have full knowledge of the basis on which that liability has been calculated.

Under paragraph (b) the identity of, and details of the liability of, persons liable to pay trust recoupment tax on a secondary taxable amount may be disclosed to a person who is, or is likely to become, jointly and severally liable with those persons to pay that tax.

This information may be required, for example, to enable a person who has paid any trust recoupment tax to institute proceedings pursuant to clause 10 to recover part of the amount paid from the other persons who are jointly and severally liable to pay the tax.

By sub-clause 4(5) the Commissioner of Taxation is to be authorised to amend an assessment made under either the Assessment Act or the new legislation for the purpose of giving effect to specified provisions of the Bill. The specified provisions concern the transfer of liability for trust recoupment tax from the trustee of a stripped trust whose beneficial ownership has changed to the eligible beneficiaries class (sub-clause 6(2)) and the right of the beneficiaries of the stripped trust to elect to be assessed on the stripped income (clause 7).

Sub-clause 4(6) concerns the procedure to be followed for recovering trust recoupment tax where two or more persons in an eligible beneficiaries class are jointly and severally liable to pay the tax. The effect of the sub-clause is to prevent the Commissioner of Taxation from suing a person included in the class for recovery of trust recoupment tax or penalty tax unless that person is the person on whom the notice of assessment was served (see sub-clause 4(9)) or that person has been given 30 days notice in writing by the Commissioner of his intention to commence proceedings for recovery of the tax.

Sub-clause 4(7) will ensure that the obligations of a liquidator to set aside a proportion of a company's assets after payment of secured creditors to meet the company's income tax liabilities also apply in relation to the company's liability to pay trust recoupment tax and related additional tax (such liability will arise where the company is a party to an election under clause 7 of the Bill).

Sub-clause 4(8) will mean that, where a shareholder of a corporate beneficiary of a stripped trust is a party to an election and dies after an assessment of trust recoupment tax is made on him or her or where a person included in the eligible beneficiaries class dies after an assessment of trust recoupment tax has been made in relation to that class, the Commissioner of Taxation will be authorised to collect that trust recoupment tax and related additional tax from the executor or administrator of the deceased person's estate.

Under sub-clause 4(9) a notice of assessment or any other notice in respect of a liability to pay trust recoupment tax, or penalty tax, on a secondary taxable amount will be deemed to be served on each person in the particular beneficiaries class who is jointly and severally liable to pay that tax, provided it is served on one of them.

Sub-clause 4(10) is a measure to ensure that notice of an assessment of trust recoupment tax, or penalty tax, payable on a secondary taxable amount will be validly issued if it identifies only one or some of the persons who are jointly and severally liable to pay that tax.

Clause 5: Primary taxable amounts

Clause 5 is a key provision in the legislation and identifies the new generation trust stripping schemes which the legislation is designed to counter. By this clause (read with clause 8) the trustee of the stripped trust will, in the first instance, be liable to trust recoupment tax on the amount of the stripped income.

Broadly, clause 5 applies where under a tax avoidance scheme entered into on or after 1 July 1980 a beneficiary is given an indefeasible vested interest in, but no present entitlement to, income of a trust estate and as part of the scheme the present value of the ultimate benefit that will be derived by the beneficiary as a consequence of that interest will be less than 50 per cent of the amount of the trust income formally allocated to the beneficiary. In these circumstances, the trustee of that trust estate or, in a case where the stripped income had been distributed to that trust by another trust, the trustee of the head trust, will, in the first instance, be liable to tax on the amount of the stripped income.

The mechanism which clause 5 will employ to create this liability will be by establishing that a "primary taxable amount" is to exist in relation to the trustee of the trust estate in whose income the nominal beneficiary has an indefeasible vested interest. Under sub-clause 5(1) the primary taxable amount in relation to the trustee of the trust estate will be equal to that part of the net income of the trust estate that the trustee would have been assessed on under section 99A of the Assessment Act if the beneficiary had not been deemed to be presently entitled to the income in which he, she or it has as indefeasible vested interest.

By sub-clause 5(2), the primary taxable amount determined under sub-clause 5(1) in relation to a trustee who derived the stripped income as a beneficiary of another trust will, in effect, be transferred successively to the trustee of the head trust.

Where a primary taxable amount exists in relation to a trustee of a trust estate, clause 8 of the Bill will make the trustee liable to pay tax on that amount and the Trust Recoupment Tax Bill 1985 will formally impose trust recoupment tax equal to 60 per cent of the primary taxable amount. However, under clause 7, this trust recoupment tax liability will be eliminated if the bona fide beneficiaries of the stripped trust make an appropriate election to be assessed on shares of the trust income equal in aggregate to the primary taxable amount.

In more detail, under sub-clause 5(1) a primary taxable amount will exist in relation to a trustee of a trust estate in relation to a year of income where the tests set out in paragraphs (a) to (e) are satisfied. These tests require that -

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a beneficiary has an indefeasible vested interest in the income of the trust estate and is deemed to be presently entitled to that income by virtue of sub-section 95A(2) of the Assessment Act (paragraphs (a) and (b)). For the purpose of this test, the possibility that section 100A (a provision designed to counter trust stripping) of the Assessment Act might operate to deem the beneficiary not to be so presently entitled is to be disregarded;

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the indefeasible vested interest in that income was conferred on the beneficiary as a result of a "tax avoidance scheme" (defined in sub-clause 3(4)) entered into on or after 1 July 1980 (paragraph (c));

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under the tax avoidance scheme, the "present value" (defined in sub-clause 5(5)) of the ultimate benefit that will be derived by the beneficiary in respect of his, her or its indefeasible vested interest in the trust income is less than 50 per cent of the amount of that income (paragraph (d)); and

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by reason of the deemed present entitlement of the beneficiary, the trustee is freed from liability to pay tax under section 99 or 99A of the Assessment Act on the whole or part of the net income of the trust (paragraph (e)). The amount of that "untaxed" net income is referred to in sub-clause 5(1) as the "relevant amount" and represents the amount of income in respect of that beneficiary on which tax will be recovered.

Where the above tests are satisfied, paragraphs (f) and (g) specify the consequences that are to follow.

Under paragraph (f) the beneficiary will, for the purpose of ascertaining his, her or its assessable income, be treated as not having been presently entitled to the income in which he, she or it has an indefeasible vested interest. This deeming provision is not to apply, however, for the purposes of sections 99 and 99A of the Assessment Act. This will ensure that paragraph (f) will not operate to render the trustee assessable on the income under section 99 or 99A as would otherwise be the result in respect of trust income to which no beneficiary is presently entitled.

By paragraph (g) a primary taxable amount equal to the relevant amount will be taken to exist in relation to the trustee of the trust estate.

Sub-clause 5(2) deals with schemes under which the income of a family trust is distributed through a chain of trusts until it reaches a trust in whose income a beneficiary is made presently entitled by virtue of sub-section 95A(2) of the Assessment Act. In that situation, sub-clause 5(2) provides that the primary taxable amount applicable to the trustee of the last trust by virtue of sub-clause 5(1) is to be transferred successively to the trustee of the head trust.

Paragraphs (a) to (e) specify the conditions which must be satisfied for this tracing to occur. These are that -

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a primary taxable amount exists, by virtue of sub-clause 5(1) or a previous application of sub-clause 5(2), in relation to a trustee of a trust estate (the "sub-trust") in relation to a tax avoidance scheme (paragraph (a));

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the trustee of the sub-trust was presently entitled to, or deemed to be presently entitled to, income of another trust estate (the "head trust") (paragraph (b)); and

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the present entitlement or deemed present entitlement resulted from the tax avoidance scheme (paragraphs (c), (d) and (e)). An effect of this test is that if the trustee of the sub-trust would have been presently entitled to, or deemed presently entitled to, income of another trust estate irrespective of whether the tax avoidance scheme was entered into, its liability will not be traced back to that other trust.

Where the conditions in paragraphs (a) to (e) are met, that part of the primary taxable amount that is attributable to income of the head trust will, in effect, be transferred from the trustee of the sub-trust to the trustee of the head trust (paragraphs (f) and (g)).

Sub-clause 5(3) applies where 2 or more primary taxable amounts would otherwise exist in relation to a trustee of a trust estate in relation to the same year of income and the same tax avoidance scheme. This could occur, for example, where under a tax avoidance scheme the income of a trust estate is allocated, directly or through a chain of trusts, to 2 or more nominal beneficiaries each of whom is given an indefeasible vested interest in a share of that income.

In those circumstances, the individual primary taxable amounts are to be aggregated. This will mean that the primary taxable amount applicable to a trustee of a trust estate will represent the total income stripped from that trust estate for a particular year of income under a particular tax avoidance scheme.

Sub-clause 5(4) is a measure to assist in the interpretation of paragraphs 5(1)(c) and (2)(e). The sub-clause specifies how much of a beneficiary's interest in the income of a trust estate is to be taken as having arisen out of a tax avoidance scheme in situations where the amount of that interest is not entirely attributable to a tax avoidance scheme. This could occur, for example, where the tax avoidance scheme does not create or change the beneficiary's share (i.e., proportion) of the income but only the amount of that share.

The sub-clause will apply where -

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a tax avoidance scheme is entered into at or after the time when a person or organisation, etc. became a beneficiary of the trust estate; and

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the amount of the beneficiary's indefeasible vested interest in the income of the trust estate is greater than the amount it would have been, or could reasonably be expected to have been, if the tax avoidance scheme had not been entered into.

In those circumstances, the amount of the increase in the indefeasible vested interest of the beneficiary as a result of the tax avoidance scheme will, for the purposes of paragraphs 5(1)(c) and (2)(e), be taken to be the indefeasible vested interest of the beneficiary that has arisen out of the tax avoidance scheme.

Thus a trustee will not become liable to trust recoupment tax in respect of any part of a beneficiary's indefeasible vested interest that is not attributable to a tax avoidance scheme. Likewise, if the amount of a beneficiary's interest is attributable to two or more tax avoidance schemes (for example, where income from several family trusts is channelled under separate schemes to a promoter's trust in whose income the beneficiary has an indefeasible vested interest) the trustee of each family trust will only be liable for tax on that part of the beneficiary's interest that is attributable to the scheme entered into by the family concerned.

Sub-clause 5(5) specifies how the present value of a benefit that has been or will be derived by a beneficiary as a consequence of an indefeasible vested interest in the income of a trust estate is to be ascertained for the purpose of applying the test in paragraph 5(1)(d).

By paragraph (a) the present value of a benefit derived by the beneficiary before the end of the year of income in which the trust income was derived will be taken to be the amount or value of the benefit at the time at which it was derived.

Under paragraph (b) the present value of a benefit that has been or will be derived by the beneficiary after the end of the year of income in which the trust income was derived will be calculated in accordance with the formula specified in that paragraph. That formula is adopted from the standard present value formulae, as adjusted to incorporate an assumed interest rate of 10% per annum.

The application of the formula will mean, for example, that if a beneficiary has an indefeasible vested interest in trust income of, say, $100,000 which is payable to the beneficiary 80 years after the end of the year of income, the amount of $100,000 will be discounted at 10% per annum for 80 years to arrive at its present value of $48. If the beneficiary were expected to derive any benefit from the re-investment by the trustee of the funds representing the $100,000 income, those benefits would also be discounted in accordance with the formulae to arrive at their present values because the test in paragraph 5(1)(d) requires the aggregation of the present values of all the benefits that will be derived by the beneficiary in respect of his, her or its indefeasible vested interest.

Sub-clause 5(6) complements paragraph 5(2)(c) and is the "present entitlement version" of the "indefeasible vested interest" provisions of sub-clause 5(4). The sub-clause specifies how much of a beneficiary's (i.e., a sub-trustee's) present entitlement to a share of the income of a trust estate is to be taken as having arisen out of a tax avoidance scheme in a case where the amount of that present entitlement is not entirely attributable to the tax avoidance scheme, i.e., where the beneficiary would have been, or could reasonably be expected to have been, presently entitled to some share, albeit of a lesser amount, of the trust income even if the tax avoidance scheme had not been entered into.

In those circumstances, sub-clause 5(6) requires a calculation to be made of the increase in the present entitlement of the beneficiary that is attributable to the tax avoidance scheme. For the purposes of paragraph 5(2)(c) the increased amount of the entitlement will be taken to be the present entitlement of the beneficiary that has arisen out of the tax avoidance scheme.

Thus a primary taxable amount applicable to a trustee of a sub-trust will be transferred to the trustee of a head trust to the extent that the primary taxable amount relates to any part of the income of the head trust to which the sub-trustee is presently entitled as a result of the tax avoidance scheme.

Sub-clause 5(7) complements paragraph 5(2)(d) in a way similar to the relationship between sub-clause 5(6) and paragraph 5(2)(c), and applies in situations where an amount of trust income is paid to, or applied for the benefit of, a beneficiary in the capacity of trustee of another trust estate and who, under the normal operation of section 101 of the Assessment Act, would be deemed to be presently entitled to that amount.

The sub-clause deals with cases where some lesser amount of trust income would have been, or could reasonably be expected to have been, paid to or applied for the benefit of the sub-trustee but a greater amount has been paid or applied as a result of a tax avoidance scheme entered into at or after the time when the sub-trustee became a beneficiary of the trust estate.

A notional calculation is to be made of the extent to which the amount actually paid or applied exceeds the amount that would or could reasonably be expected to have been paid or applied to or for the sub-strustee in the absence of the tax avoidance scheme. The increase so calculated will be taken to be the sum that, for the purposes of paragraph 5(2)(d), is to be treated as paid or applied as a result of the tax avoidance scheme.

Sub-clause 5(8) is a measure to ensure that a primary taxable amount can be taken to exist in relation to a trustee of a trust estate notwithstanding that the trust has ceased to exist. By virtue of sub-clause 6(1) the persons who, in effect, benefited from the income stripped from such a trust will become liable for trust recoupment tax on a "secondary taxable amount".

Clause 6: Secondary taxable amounts

Clause 6 sets out the circumstances under which those persons who, in effect, benefited from the income stripped from a trust may become jointly and severally liable for trust recoupment tax. The clause will also identify the persons who will be jointly and severally liable at such a secondary level.

The mechanism by which clause 6 (read with clause 8) will make persons jointly and severally liable at a secondary level will be by providing that, in specified circumstances, "secondary taxable amounts" will exist in relation to the "eligible beneficiaries class".

The circumstances in which secondary taxable amounts will be taken to exist in relation to the eligible beneficiaries class are set out in sub-clauses 6(1) to (3). These are, very broadly, that the trust to which liability to pay trust recoupment tax has been allocated under clause 5 -

(a)

no longer exists (sub-clause 6(1));

(b)

now has different beneficiaries as a consequence of sales of beneficial interests (sub-clause 6(2)); or

(c)

is unlikely to pay all or part of that tax (sub-clause 6(3) - this sub-clause would not apply where an appropriate election is made under clause 7 because an effect of such an election is to extinguish the trustee's liability to pay trust recoupment tax - see notes on clause 7).

Where the circumstances specified in sub-clause 6(1), (2) or (3) exist, the relevant sub-clause provides that a secondary taxable amount will be taken to exist in relation to the eligible beneficiaries class. The secondary taxable amount applicable to that class will be equal to the primary taxable amount (the amount of the stripped trust income) applicable to the stripped trust (where sub-clause 6(1) or (2) applies) or an amount that when taxed at the rate of 60% will attract tax equal to the unpaid trust recoupment tax (where sub-clause 6(3) applies).

The persons who will fall into the eligible beneficiaries class in relation to a stripped trust are described in sub-clauses 6(4) to (6). Broadly, these persons are those beneficiaries of the stripped trust and other participants in the scheme (or their associates) who have, directly or indirectly, derived a benefit that is attributable to the stripped trust income.

Where a secondary taxable amount exists in relation to an eligible beneficiaries class, sub-clause 8(2) of the Bill will make the persons in that class jointly and severally liable to pay the tax which will be imposed on that amount (at a rate of 60%) by the Trust Recoupment Tax Bill 1985. The beneficiaries of the stripped trust will, however, have an opportunity to eliminate that liability, if they have not already had it, by making an appropriate election under clause 7 to be assessed on amounts equal in aggregate to the primary taxable amount.

In more detail, under sub-clause 6(1) a secondary taxable amount will arise where a primary taxable amount is applicable to a trust which has been wound up before an assessment of trust recoupment tax is made. In that case, a secondary taxable amount equal to the primary taxable amount will be taken to exist in relation to the eligible beneficiaries class.

Under sub-clause 6(2) a secondary taxable amount may arise where a primary taxable amount exists in relation to a stripped trust and a beneficial interest in that trust or its holding trust (defined in sub-clause 6(7)) was sold after the relevant tax avoidance scheme was entered into and before an assessment of trust recoupment tax is made.

In those circumstances, a secondary taxable amount will be taken to exist if the Commissioner of Taxation considers that, by reason of the change in beneficial ownership, it would be unreasonable for the stripped trust to be liable to pay the trust recoupment tax. The Commissioner could generally be expected to form such a view where the price received by the former beneficiaries of the stripped trust for their beneficial interests reflected a benefit derived by the trust from the use of funds representing the income that the trustee nominally distributed as part of the tax avoidance scheme and, therefore, the benefit of the stripped income had flowed to these former beneficial owners.

Where the Commissioner exercises this authority, a secondary taxable amount equal to the primary taxable amount will be taken to exist in relation to the eligible beneficiaries class (which will include the former beneficial owners). In addition, the trustee of the stripped trust will be treated as not being liable to pay trust recoupment tax on the primary taxable amount.

Sub-clause 6(3) establishes a secondary taxable amount where trust recoupment tax is payable by the trustee of the stripped trust, but the Commissioner of Taxation considers that a part or all of the tax is unlikely to be paid. Similarly, a secondary taxable amount will be created if the stripped trust is wound up while an assessed liability to trust recoupment tax remains unpaid. These situations could occur, for example, where a trust was stripped of all assets so as to render it unable to pay any income tax liability that might arise if the tax avoidance scheme turned out to be ultimately ineffective.

In both cases, a secondary taxable amount will be taken to exist in relation to the eligible beneficiaries class and will be equal to the unpaid trust recoupment tax (including penalty taxes - see sub-clause 6(9)) multiplied by one and two-thirds. Because secondary taxable amounts are subject to tax at the rate of 60%, the tax payable on a secondary taxable amount created under sub-clause 6(3) will be equal to the unpaid trust recoupment tax payable on the primary taxable amount.

Once sub-clause 6(3) has been applied there will generally be co-existing liabilities for trust recoupment tax at the primary and secondary levels. If a payment of tax is subsequently made at either level, it will be taken into account at the other level under clause 9.

Sub-clauses 6(4) to (6) specify the persons who will fall into the eligible beneficiaries class for the purpose of tracing a stripped trust's liability to trust recoupment tax under sub-clause 6(1), (2) or (3).

Under sub-clause 6(4), the eligible beneficiaries class will comprise each person who has derived or may be expected to derive a benefit that would not have been derived if the primary trust income had not been derived by the trustee of the stripped trust. The term "primary trust income" is defined in sub-clause 3(1) and broadly refers to that part of the trust law income of the stripped trust (usually a head trust) that was formally distributed for assessment purposes under the tax avoidance scheme.

Sub-clause 6(4) has the effect that a person will be included in the eligible beneficiaries class where that person benefited as a result of the derivation of the primary trust income by the trustee of the stripped trust irrespective of whether that benefit was derived directly from the head trust, through an interposed company or trust or in any other way. Examples of the kinds of ways in which a person might have benefited from the stripped income are given earlier in the "main features" part of this explanatory memorandum.

Under sub-clause 6(5) two classes of persons are not to be included in the eligible beneficiaries class notwithstanding that they have derived a benefit attributable to the stripped trust income.

By paragraph (a) the nominal beneficiary (usually a charity) under the tax avoidance scheme who, directly or through interposed trusts, is given an indefeasible vested interest in the stripped income is not to be included in the eligible beneficiaries class.

Paragraph (b) provides that a person who is not an "associate" of the trustee of the stripped trust is not to be included in the eligible beneficiaries class by reason of deriving a benefit from an arm's length transaction.

The term "associate" is defined in sub-clause 3(1) and in relation to a person in the capacity of a trustee means -

•

any person who benefits or is capable of benefiting under the trust estate either directly or through any interposed companies, partnerships or trusts; and

•

persons who are, in the terms of the definition, associates of a person who benefits or is capable of benefiting under the trust.

The exclusion of "associates" means that a beneficiary of the stripped trust who sold his or her interest in the trust in an arm's length transaction would not be excluded from the eligible beneficiaries class by reason of paragraph (b).

Under sub-clause 6(6) the eligible beneficiaries class is frozen at the time the notice of assessment of trust recoupment tax on the secondary taxable amount is served.

This means that if a person included in the class at that time subsequently passes on that benefit to another person, that other person will not thereby become jointly and severally liable for the tax nor will he, she or it be able to be sued under clause 10 for a contribution towards the tax paid by any member of the class.

Sub-clauses 6(7) and (8) define when a trust will be taken to be a "holding trust estate" in relation to another trust estate. Under sub-clause 6(2) the liability of a trust may be traced where there has been a sale of a beneficial interest in a holding trust estate in relation to that trust.

The effect of sub-clauses 6(7) and (8) is that a trust is a holding trust estate in relation to another trust if it has a beneficial interest in that trust either directly or through other trusts in which it has a beneficial interest.

Sub-clause 6(9) is a measure which provides that where the term "trust recoupment tax" is used in clause 6 it will include penalty tax payable under clause 12 in relation to schemes entered into after 28 April 1983 and additional tax for late payment of basic trust recoupment tax or penalty tax, unless the contrary intention appears.

This will mean, for example, that where a trust is unlikely to pay an amount of trust recoupment tax and, by virtue of sub-clause 6(3), its liability is traced to an eligible beneficiaries class, the persons in that class will become jointly and severally liable for the unpaid trust recoupment tax, any unpaid penalty tax and any late payment tax that has already accrued in respect of such tax.

Clause 7: Requests to eliminate trust recoupment tax on certain taxable amounts

The basic purpose of clause 7 is to give the bona fide beneficiaries of a trust whose income has been stripped under a new generation trust stripping scheme the right to eliminate the liability of the trustee of that trust (or, in certain cases, the eligible beneficiaries class) for trust recoupment tax on the stripped income by unanimously requesting that they instead be assessed to pay income tax as though the stripped trust had distributed to them amounts of trust income equal in aggregate to the primary taxable amount (the amount of stripped income).

Such a request will normally need to be made within 30 days of service of a trust recoupment tax assessment on the trustee of the stripped trust or, where applicable, on the eligible beneficiaries class.

Sub-clause 7(1) is the principal election provision and, in effect, confers on the bona fide beneficiaries of a stripped trust the right to request that the stripped income be taxed in their hands. A request under sub-clause 7(1) may be made where -

•

a primary taxable amount exists in relation to a trustee of a trust estate (paragraph (a)); and

•

an eligible person or eligible persons might reasonably be expected to have benefited from a "distribution of income" (defined in sub-clause 3(1)) by the trust if such a distribution had been of an amount equal to the primary taxable amount, had been made at the "relevant distribution time" (normally the time immediately before the tax avoidance scheme was entered into) and had at that time been distributed successively through any interposed non-prescribed trusts (paragraph (b)).

In those circumstances, the eligible person or eligible persons may request that clause 7 apply in relation to the primary taxable amount. By virtue of sub-clause 7(10) "eligible persons" are prescribed persons (broadly, individuals, exempt bodies, superannuation funds and certain public companies) and non-prescribed companies. If a request under sub-clause 7(1) is granted, the consequences specified in sub-clause 7(7) will follow.

Sub-clause 7(2) provides a further right of election in a case where one of the parties to a request under sub-clause 7(1) is a non-prescribed company with the result that, by virtue of sub-clause 7(7), an elected taxable amount (equal to the company's share of the notional income distribution) will be taken to exist in relation to the company. A company will be liable to pay trust recoupment tax on an elected taxable amount at the rate of 75%, representing the combined effect of the 46% company tax and the personal tax at the maximum marginal rate that would have been paid had the company made a sufficient distribution of its notional share of the stripped trust income.

The purpose of sub-clause 7(2) is to give the shareholders of the company the right to request that they be assessed to pay income tax as though the company had paid them dividends equal in aggregate to the amount representing a sufficient distribution of the company's notional share of the stripped trust income and thereby reduce the rate of tax payable by the company from 75% to 46%.

A request under sub-clause 7(2) may be made where -

•

an elected taxable amount exists in relation to a company (paragraph (a)); and

•

a prescribed person or prescribed persons might reasonably be expected to have benefited from a distribution of income by the company (by way of a dividend) if such a distribution had been of an amount equal to 48.6% of the elected taxable amount (i.e., an amount equal to a sufficient distribution of the company's notional share of the stripped income), had been made at the relevant distribution time and had at that time been distributed successively through any interposed non-prescribed companies and trusts (paragraph (b)).

In those circumstances, the prescribed person or prescribed persons may request that clause 7 apply in relation to the elected taxable amount. If the request is granted, the rate of tax payable by the company will be reduced from 75% to 46% and the prescribed persons will be assessed on deemed dividends equal in aggregate to 48.6% of the elected taxable amount (see notes on sub-clause 7(8)).

Sub-clause 7(3) is designed to deal with the situation where a corporate beneficiary is unable to be a party to a valid request under sub-clause 7(1) because it no longer exists or would be unable to pay the tax that would become payable on an elected taxable amount if it were a party to an accepted request. To meet these situations, sub-clause 7(3) enables the prescribed persons who would have benefited, directly or through interposed companies and trusts, from a dividend payment by the company at the time the tax avoidance scheme was entered into to be a party to a request under sub-clause 7(1) in lieu of the company.

Where prescribed persons are substituted for a company, they will be required to pay amounts of trust recoupment tax equal in aggregate to the company tax that would have been payable by the company on its notional share of the stripped trust income as well as being assessed to pay personal income tax on deemed dividends (see notes on sub-clause 7(7)).

Sub-clause 7(4) specifies the manner in which, and the time within which, a request under sub-clause 7(1) or (2) must be made and requires the persons making the request to specify how the notional income distribution referred to in the relevant sub-clause would have been shared between the persons making the request.

By paragraph (a) the request must be in writing signed by each person making the request.

Paragraph (b) applies where a request is made under sub-clause 7(1) and does not involve any prescribed persons being a party to the request in lieu of a company. In such a case, the request must specify amounts in relation to each person making the request equal in aggregate to the primary taxable amount to which the request relates.

Paragraph (c) applies where a request is made under sub-clause 7(1) and does involve prescribed persons being parties to the request in lieu of a company (a "replacement company") or companies. In those circumstances, the request must specify -

•

amounts in relation to each replacement company and in relation to each person making the request otherwise than as an owner of a replacement company such that the amounts specified in aggregate equal the relevant primary taxable amount; and

•

amounts in relation to each person making the request in lieu of a replacement company such that the amounts specified in aggregate equal 48.6% of the amount specified in relation to that company.

By paragraph (d) a request made under sub-clause 7(2) must specify amounts in relation to each person making the request equal in aggregate to 48.6% of the elected taxable amount to which the request relates.

Under paragraph (e) a request must be sent to or lodged with the Commissioner of Taxation within 30 days after service of the trust recoupment tax assessment on the primary taxable amount or elected taxable amount or, in a case where an assessment has been made on a secondary taxable amount by virtue of sub-clause 6(1) or (2), within 30 days after service of the trust recoupment tax assessment on that secondary taxable amount. A request can only be lodged outside these time limits with the approval of the Commissioner.

Sub-clause 7(5) will authorise the Commissioner, in special circumstances, to treat a request under sub-clause 7(1) or (2) as having been validly made notwithstanding that one or more of the persons who would have benefited from the notional income distribution referred to in the relevant sub-clause is not a party to the request or that one or more persons who would not have so benefited is a party to the request.

Before the conditions of sub-clause 7(1) or (2) can be relaxed by the Commissioner the conditions set out in either paragraph 7(5)(a) or (b) or both must be satisfied.

Paragraph (a) applies where the request was not made by all the relevant persons referred to in sub-clause 7(1) or (2) and requires that either of the following conditions must be satisfied -

(a)

the request was unable to be made by all the persons concerned because one or more of the persons has died or disappeared or, in the case of a prescribed company or trust, no longer exists; or

(b)

the Commissioner is satisfied that there are other special circumstances making it unreasonable that all the persons should make the request.

Paragraph (b) applies where a person not otherwise entitled to make a request is a party to the request and stipulates that the Commissioner must consider it appropriate for the person to make the request by reason that an amount would have been included in his or her assessable income but for the tax avoidance scheme. This condition might be satisfied where, in an attempt to avoid the application of Part IVA (the general anti-avoidance provision) of the Assessment Act, a trust was established such that family members were not formally beneficiaries, or capable of becoming beneficiaries by the exercise of a power of appointment, of the trust at the time immediately before the tax avoidance scheme was entered into.

Where the conditions in paragraph (a) are satisfied, the Commissioner may accept a request notwithstanding that it was not made by all the relevant persons and that the persons who have made the request have not specified amounts of deemed trust income that in aggregate equal the primary taxable amount to which the request relates or amounts of deemed dividends that in aggregate equal the amount representing a sufficient distribution of the relevant company's notional share of the stripped trust income.

Where the conditions in paragraph (b) are met, the Commissioner may allow the request to be made by persons other than those who would have shared in the notional income distribution referred to in the relevant sub-clause.

Under sub-clause 7(6) the Commissioner may accept or reject a request having regard to -

•

whether the amounts specified in the request are reasonable having regard to -

(i)

the amount of any assessable income that, but for the scheme, would have been derived by a person who has been permitted to be a party to the request by virtue of paragraph 7(5)(b) (sub-paragraph (a)(i)); and

(ii)

how the notional income distribution referred to in the relevant sub-clause would, in the Commissioner's opinion, have been shared between the persons concerned (sub-paragraph (a)(ii));

•

the likelihood that the electors will pay the tax that would become payable if the request were accepted or would be released from liability to pay that tax under the hardship relief provisions of the income tax law (paragraph (b)); and

•

any other relevant matters (paragraph (c)).

Sub-clause 7(7) is the key operative provision and will specify the consequences which follow where a request under sub-clause 7(1) in relation to a primary taxable amount applicable to a stripped trust is granted by the Commissioner.

Paragraph (a) specifies the consequences in relation to each person making the request other than any persons who, by virtue of sub-clause 7(3), are parties to the request in lieu of a corporate beneficiary of the trust.

Under sub-paragraph (a)(i) there will be included in the assessable income of each prescribed person making the request an amount equal to the amount specified in the request in relation to that person. That amount will be included in the assessable income of the person of the year of income in which the stripped trust income was derived and will be deemed to have been included by reason that the person was a beneficiary not under a legal disability who was presently entitled to a share of that trust income.

The inclusion of an amount in a person's assessable income is, however, subject to the operation of any relevant exempting provision and the interest and dividend withholding tax provisions.

The effect of sub-paragraph (a)(i) is that each prescribed person will be liable to pay income tax on his, her or its deemed share of the trust income according to the income tax rules relevant to that person.

Sub-paragraph (a)(ii) applies to a company (other than a company that is a prescribed person) that is a party to the request. It specifies that an elected taxable amount equal to the amount specified in relation to the company will be taken to exist in relation to the company.

An elected taxable amount is subject to trust recoupment tax at the rate of 75% but, as explained in the notes on sub-clause 7(2), the shareholders of the company have the right to reduce the company's tax rate to 46% if they elect to be assessed on deemed dividends.

Paragraph (b) specifies the consequences in relation to each of the persons making the request in lieu of a company beneficiary of the stripped trust.

Under sub-paragraph (b)(i) a company taxable amount will be taken to exist in relation to each of the persons making the request in lieu of the company. The company taxable amount in relation to each person will be equal to a proportion of the amount specified in the request as the company's share of the notional income distribution by the stripped trust. That proportion will be the person's proportionate share of the notional sufficient distribution by the company of its share of the notional income distribution.

A company taxable amount is subject to trust recoupment tax at the rate of 46%. Accordingly, the effect of sub-paragraph (b)(i) is that the persons making the request in lieu of the company will be liable to amounts of trust recoupment tax which in aggregate equal the amount of company tax that would have been payable by the company on its share of the notional income distribution by the stripped trust.

By sub-paragraph (b)(ii) the company will, for the purposes of the Assessment Act (other than the undistributed profits tax and withholding tax collection provisions), be deemed to have paid to each prescribed person who was a party to the request in lieu of the company, a dividend of an amount equal to the amount specified in the request in relation to the person in relation to the company (i.e., the amount specified as the person's share of the notional sufficient distribution by the company of its share of the notional income distribution by the stripped trust). The dividend will be deemed to have been paid on the last day of the year of income in which the trust derived the income stripped from it.

The effect of a dividend being deemed to have been paid to each prescribed person who made the election is that each elector will be assessed to pay income tax on the deemed dividend applicable to him, her or it, according to the income tax rules relevant to that elector.

By paragraph (c) the trustee of the stripped trust will, where an election under sub-clause 7(1) is granted, be deemed never to have been liable to pay trust recoupment tax on the primary taxable amount.

Paragraph (d) provides that any secondary taxable amount derived from the primary taxable amount will be deemed never to have existed. Accordingly, in a case where, for example, the stripped trust no longer exists and liability to trust recoupment tax has been traced to the eligible beneficiaries class, that liability at the secondary level will also be eliminated upon acceptance of an election under sub-clause 7(1).

Sub-clause 7(8) is the second operative provision and will specify the consequences which follow where a request under sub-clause 7(2) in relation to an elected taxable amount applicable to a company is granted by the Commissioner.

Under paragraph (a) a company taxable amount equal to the elected taxable amount will be taken to exist in relation to the company. That company taxable amount will be subject to trust recoupment tax at the rate of 46%. However, the company's liability for trust recoupment tax on the elected taxable amount (at the rate of 75%) will, by virtue of paragraph (c), be eliminated.

By paragraph (b) the company will, for the purposes of the Assessment Act (other than the undistributed profits tax and withholding tax collection provisions) be deemed to have paid to each prescribed person who was a party to the request a dividend of an amount equal to the amount specified in the request in relation to that person. The dividend is deemed to have been paid on the last day of the year of income in which the stripped trust derived the income that was stripped under the tax avoidance scheme.

The effect of a dividend being deemed to have been paid to each prescribed person who made the election is that each elector will be assessed to pay income tax on the deemed dividend applicable to him, her or it according to the income tax rules relevant to that person.

Sub-clause 7(9) obviates the need for amended elections in situations where, after a request under sub-clause 7(1) in relation to a primary taxable amount or under sub-clause 7(2) in relation to an elected taxable amount is accepted, the taxable amount is varied. This situation could arise, for example, where a mistake of fact or error in calculation was made in determining the net income of the stripped trust and consequently the amount of the primary taxable amount.

In such situations, the amounts to be taxed by virtue of the operation of clause 7, whether they be deemed shares of trust income, deemed dividends, elected taxable amounts or company taxable amounts, will be modified to take account of the increase or decrease in the taxable amount to which the request relates. These adjustments will be made on the basis that the request is to have the effect that it would have had if it had in fact been made in relation to the varied taxable amount (paragraph (c)). For this purpose, the Commissioner of Taxation will be required to determine:

•

the persons who are to be treated as having made a request in relation to the varied taxable amount (paragraph (d)) - as the amount of the relevant notional income distribution will vary as a result of the variation to the taxable amount, these persons may not necessarily coincide with the persons who made the actual request; and

•

the amount of the deemed share of trust income, deemed dividend, elected taxable amount or company taxable amount, as appropriate, applicable to each such person in relation to the varied taxable amount to which the request relates.

A person whose liability to income tax or trust recoupment tax is increased as a result of the Commissioner's determination under sub-clause 7(9) would, if dissatisfied with the determination, have usual rights of objection and reference to an independent Taxation Board of Review.

Sub-clause 7(10) defines a number of terms used in clause 7:

•

"eligible person" will mean a "prescribed person" (defined in sub-clause 3(1)) or a company.

•

"replacement company" is being defined as a company which has been replaced, by virtue of the application of sub-clause 7(3), as a party to a request under sub-clause 7(1) by the prescribed persons who directly or indirectly owned the company.

•

"substitution request" will mean a request made under sub-clause 7(1) in a case where one or more of the parties making the request is, by virtue of the application of sub-clause 7(3), doing so in lieu of a company that would otherwise be entitled to be a party to the request.

Clause 8: Liability to pay trust recoupment tax

Clause 8 formally establishes the liability of a person or the persons included in an eligible beneficiaries class to pay trust recoupment tax.

Under sub-clause 8(1), if a primary taxable amount exists in relation to the trustee of a stripped trust, or an elected taxable amount or a company taxable amount exists in relation to a party to an election under clause 7, the person is liable upon assessment to pay the trust recoupment tax to be imposed on that taxable amount by the Trust Recoupment Tax Bill 1985. The rates of trust recoupment tax are 60% on a primary taxable amount, 75% on an elected taxable amount and 46% on a company taxable amount.

Under sub-clause 8(2), if a secondary taxable amount exists in relation to an eligible beneficiaries class, the persons included in that class are jointly and severally liable upon assessment to pay the trust recoupment tax to be imposed on that amount by the Trust Recoupment Tax Bill 1985. The rate of trust recoupment tax on a secondary taxable amount is 60%.

Clause 9: Reduction of liability where tax paid

The purpose of this clause is to ensure that trust recoupment tax is only collected once in a case where there is a liability for trust recoupment tax at both the primary and secondary levels. That situation arises where the trustee of a stripped trust is unlikely to pay its trust recoupment tax liability and its liability is traced, by virtue of sub-clause 6(3), to the eligible beneficiaries class.

By clause 9, a payment at one level will also reduce the amount of trust recoupment tax payable at the other level.

Sub-clause 9(1) will apply where trust recoupment tax is payable on a secondary taxable amount and a payment is made in reduction of the trust recoupment tax payable on the corresponding primary taxable amount. Where this occurs, the trust recoupment tax payable on the secondary taxable amount will be reduced by the amount of the payment.

Sub-clause 9(2) will apply where trust recoupment tax is payable on a primary taxable amount and a payment is made in reduction of the trust recoupment tax payable on a secondary taxable amount that was traced from that primary taxable amount. In that case, the trust recoupment tax payable on the primary taxable amount will be reduced by the amount of that payment.

Sub-clause 9(3) means that the amount of any reduction of tax authorised by sub-clause 9(1) or (2) is to be applied first against any late payment tax and then against the remaining trust recoupment tax. Any outstanding liability will therefore represent (or include) assessed trust recoupment tax on which late payment tax will continue to accrue.

This application rule is the same as that which applies under clause 11 in relation to payments made directly by a person liable to pay trust recoupment tax.

Sub-clause 9(4) is a drafting measure by which the term "trust recoupment tax" as used in clause 9 is to include late payment tax and penalty tax payable under clause 12.

Clause 10: Right of contribution and apportionment of liability

Clause 10 is set against the background that persons included in an eligible beneficiaries class are jointly and severally liable to pay trust recoupment tax on a secondary taxable amount.

The clause gives a person in the eligible beneficiaries class who is obliged by the Commissioner of Taxation to pay trust recoupment tax two avenues for taking action which will result in other members of the class being required to contribute an appropriate share of the tax.

The first option is for the person to pay the tax and then recover, by action in the courts, an appropriate contribution from other members of the class. Alternatively, the person may, when sued by the Commissioner for the unpaid trust recoupment tax, act to have other members of the class joined as co-defendants to the recovery suit in which case the court will be authorised to allocate the liability between the co-defendants.

By sub-clause 10(1) any person included in an eligible beneficiaries class who has paid any of the tax on a secondary taxable amount applicable to that class will be entitled to seek a contribution from other members of the class.

The person may institute a proceeding for recovery of a contribution from a co-member of the class in any court of competent jurisdiction and it will be for the court to determine the part of the trust recoupment tax paid by the person that it would be just and equitable for the co-member to contribute.

Sub-clause 10(2) applies where a person included in an eligible beneficiaries class is being sued by the Commissioner for recovery of trust recoupment tax payable on a secondary taxable amount.

In that case, the court in which the recovery suit is instituted may, on the application of the person, join one or more other members of the eligible beneficiaries class as co-defendants to the recovery suit.

Where co-members are joined the court will determine the proportion of the unpaid trust recoupment tax that it would be just and equitable for each co-defendant to be liable to pay. That allocation of the liability is to be made having regard to the value of the benefit each person has obtained, or may reasonably be expected to obtain, as a result of the stripped income and any other relevant circumstances.

Sub-clause 10(3) is a drafting measure by which the term "trust recoupment tax" as used in clause 10 is to include late payment tax and penalty tax payable under clause 12.

Clause 11: Application of payments

This clause will provide the basis on which payments made to the Commissioner of Taxation in respect of trust recoupment tax are to be applied in discharge or reduction of that liability.

Under sub-clause 11(1) payments made by a person in respect of a liability to pay trust recoupment tax and late payment tax on that trust recoupment tax, will be applied first against the late payment tax and then against the trust recoupment tax. This will mean that any outstanding liability represents (or includes) trust recoupment tax on which additional tax for late payment will continue to accrue until the balance of the account is fully paid.

Sub-clause 11(2) ensures that payments will be applied in accordance with sub-clause 11(1) notwithstanding any direction of the person making the payment.

By sub-clause 11(3), the term "trust recoupment tax" as used in clause 11 is to include "applied penalty tax" (defined in sub-clause 3(1)) and penalty tax payable under clause 12.

Clause 12: Penalty tax

This clause will impose statutory penalty tax where a new generation trust stripping scheme has been or is entered into after 28 April 1983, the day on which the Government announced its policy on retrospective anti-avoidance legislation. The penalty tax will be imposed irrespective of whether the tax sought to be avoided is to be recovered as trust recoupment tax or as income tax payable as a result of an election under clause 7.

Where trust recoupment tax or income tax is assessed in relation to a scheme entered into after 28 April 1983 and before the commencement of this legislation, the level of penalty tax will be based on an indexation formula designed to ensure that the real value of the tax sought to be avoided will be collected (sub-clauses 12(1) and (2)).

In cases where trust recoupment tax or income tax is assessed in relation to a scheme entered into after the commencement of this legislation (i.e., the date of Royal Assent), the penalty tax will be equal to 200% of the tax sought to be avoided (sub-clauses 12(3) and (4)). This is the level of penalty that is already attracted by schemes to which the general anti-avoidance provisions of Part IVA of the Assessment Act apply.

The Commissioner of Taxation will be authorised to remit the whole or part of the statutory penalty tax (sub-clause 12(9)).

Sub-clause 12(1) will impose penalty tax on a person liable, or persons jointly and severally liable, for trust recoupment tax as a result of a tax avoidance scheme entered into after 28 April 1983 and before the commencement of this legislation.

Paragraphs (a) to (d) set out the conditions necessary for the application of the sub-clause. They are that:

•

trust recoupment tax is assessable to a trustee on a primary taxable amount, to a party to an election on an elected taxable amount or a company taxable amount or to persons included in an eligible beneficiaries class on a secondary taxable amount arising under sub-clause 6(1) or (2) (penalty tax is not imposed on a secondary taxable amount arising under sub-clause 6(3) because that amount takes into account unpaid penalty tax imposed on the related primary taxable amount);

•

the relevant tax avoidance scheme was entered into after 28 April 1983 and before the commencement of this legislation;

•

the assessment of trust recoupment tax is made more than 12 months after the end of the year of income to which the taxable amount relates (i.e., the payment of tax has been deferred for at least one quarter on the basis that the tax sought to be avoided would normally have been due for payment on 31 March following the year of income in which the stripped trust income was derived); and

•

the "index number" (i.e., the consumer price index) in relation to the quarter that precedes the making of the assessment is greater than the index number in relation to the March quarter following the year of income to which the taxable amount relates.

Where those conditions apply, the person will be liable or, in the case of persons included in an eligible beneficiaries class, the persons will be jointly and severally liable, to pay penalty tax. The amount of the penalty tax will be a percentage of the trust recoupment tax assessed, that percentage being the percentage increase in the consumer price index between the March quarter following the year of income to which the taxable amount relates and the quarter preceding the making of the assessment.

Sub-clause 12(2) will impose penalty tax on a person who by virtue of an election under clause 7, is liable to pay income tax as a result of a tax avoidance scheme entered into after 28 April 1983 and before the commencement of this legislation.

Paragraphs (a) to (e) set out the conditions necessary for the application of the sub-clause. These are that:

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in making an assessment, the Commissioner has calculated the income tax assessable to a person in relation to a year of income;

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in making that calculation, a deemed share of trust income or a deemed dividend was included in the person's assessable income by virtue of an election under clause 7 in relation to a tax avoidance scheme entered into after 28 April 1983 and before the commencement of this legislation;

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if the amount(s) had not been included in the person's assessable income, no income tax would have been assessable or the assessed tax would have been less;

•

the assessment is made more than 12 months after the end of the year of income; and

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the index number in relation to the quarter that precedes the making of the assessment is greater than the index number in relation to the March quarter following the year of income.

Where those circumstances apply, the person is liable to pay penalty tax. The amount of the penalty tax will be a percentage of the amount of income tax that would have been avoided but for the inclusion of an amount(s) in assessable income under clause 7, that percentage being the percentage increase in the consumer price index between the March quarter following the year of income and the quarter preceding the making of the assessment.

Sub-clause 12(3) will impose penalty tax on a person liable, or persons jointly and severally liable, for trust recoupment tax as a result of a tax avoidance scheme entered into after the commencement of this legislation. The penalty tax will be equal to double the amount of the assessed trust recoupment tax.

Sub-clause 12(4) will impose penalty tax on a person who, by virtue of an election under clause 7, is liable to pay income tax in relation to a tax avoidance scheme entered into after the commencement of this legislation. The penalty tax will be equal to double the amount of income tax that would have been avoided but for the inclusion of an amount(s) in the person's assessable income under clause 7.

Sub-clause 12(5) will apply if the Australian Statistician publishes a revised Consumer Price Index number for any quarter. For the purpose of calculating penalty tax under sub-clause 12(1) or (2), the index number originally published is to be used and the revised index number is to be disregarded.

Sub-clause 12(6) will apply if the Australian Statistician changes the reference base for the Consumer Price Index. In that event, a calculation of penalty tax under sub-clause 12(1) or (2) made after the change occurs is to be determined by reference only to index numbers published in terms of the new base.

Under sub-clauses 12(7) and (8) the Commissioner will be under an obligation to make an assessment of the additional tax payable by a person or persons under clause 12, but may incorporate notice of the assessment in another notice of assessment, being an assessment of trust recoupment tax or income tax, that is being sent to the person or persons. Generally, it may be anticipated that the assessment of the additional tax will be notified in the assessment of the trust recoupment tax or income tax to which the additional tax relates.

By sub-clause 12(9) the Commissioner may, either before or after making an assessment of additional tax payable by a person or persons under clause 12, remit the whole or any part of the additional tax.

Sub-clause 12(10) defines the term "index number", in relation to a quarter, to mean the All Groups Consumer Price Index number published by the Australian Statistician in respect of the quarter.

Clause 13: Arrangements etc. to avoid operation of Act

This clause will render void as against the Commissioner of Taxation arrangements which have the dominant purpose and the effect of directly or indirectly defeating, evading or avoiding a person's liability to pay trust recoupment tax or income tax payable, by virtue of the operation of clause 7, on a deemed share of trust income or a deemed dividend.

By sub-clause 13(1) a scheme entered into by a person after 28 April 1983 will be void as against the Commissioner in so far as it has the direct or indirect effect of defeating, evading or avoiding any liability of the person to pay trust recoupment tax, where it would be reasonable to conclude that the person entered into the scheme for the dominant purpose of defeating, evading or avoiding his or her liability to pay trust recoupment tax or "future trust recoupment tax". This term is defined in sub-clause 13(7) and refers to trust recoupment tax that the person could reasonably have expected, when entering into the scheme, would become payable in the future.

Where a scheme or part of a scheme is rendered void by sub-clause 13(1), it will be treated as being of no effect in any "prescribed recovery proceedings". By virtue of sub-clause 13(7), this term will refer to proceedings commenced by the Commissioner, a liquidator or a trustee in bankruptcy that are designed to recover the trust recoupment tax.

Sub-clause 13(2) deals specifically with schemes involving the divestment of assets, but does not limit the generality of sub-clause 13(1).

Under this sub-clause, a transfer of property (see sub-clause 13(4)) after 28 April 1983 which has the effect of rendering a person unable to pay trust recoupment tax which that person is liable to pay will, to that extent, be void as against the Commissioner in prescribed recovery proceedings where:

•

having regard to the circumstances surrounding the transfer, the nature of any connection between the transferor and transferee and any other relevant circumstances, it would be reasonable to conclude that the person transferred the property for the dominant purpose of becoming unable to pay trust recoupment tax or future trust recoupment tax; and

•

either the transfer was made by way of gift or, having regard to the abovementioned circumstances, it would be reasonable to conclude that the transferee believed or suspected that the transferor made the transfer for the dominant purpose of becoming unable to pay trust recoupment tax or future trust recoupment tax.

Sub-clauses 13(3) to (7) are drafting measures to assist in the interpretation of sub-clauses 13(1) and (2).

By sub-clause 13(3) a reference to a person's purpose in entering into a scheme or transferring property will, in the case of a scheme or transfer with more than one purpose, be taken as a reference to the dominant purpose, i.e., a purpose that outweights all other purposes put together.

Under sub-clauses 13(4) and (5) a reference to a transfer of property by a person will carry an extended meaning so as to include -

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an execution of a charge;

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the incurring of an obligation; and

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a scheme which diminishes the value of that person's property while "increasing the value of the property of another person" (which, by virtue of sub-clause 13(5), includes that other person becoming the owner of property under the scheme).

In those cases, the person to whom the property was transferred will be taken to be the person in whose favour the charge was executed or the obligation incurred or whose property increased in value, respectively.

Sub-clause 13(6) extends the operation of clause 13 so that it will also nullify for tax purposes schemes which have the dominant purpose and the effect of directly or indirectly defeating, evading or avoiding a person's liability to pay income tax on deemed shares of trust income or deemed dividends arising by virtue of an election under clause 7.

The sub-clause effects that extension by providing that a reference in clause 13 to "trust recoupment tax" is to be taken to include a reference to income tax payable by virtue of the operation of clause 7. Similarly, a reference to "future trust recoupment tax" includes a reference to income tax that the person could reasonably have expected, when entering into the scheme, would become payable in the future by virtue of the operation of clause 7.

Sub-clause 13(7) defines the meaning of a number of terms used in sub-clauses 13(1) and (2):

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"future trust recoupment tax", in relation to a person, will mean trust recoupment tax that the person, when entering into a scheme, could reasonably have expected would become payable in the future;

•

"prescribed recovery proceedings" will mean proceedings designed to recover trust recoupment tax, whether instituted by the Commissioner, a Deputy Commissioner, a trustee in bankruptcy or a liquidator; and

•

"trust recoupment tax" will include penalty tax, applied penalty tax and late payment tax.

Clause 14: Regulations

By this clause, formal authority is given for the making of any regulations necessary for carrying out or giving effect to the proposed Act. A corresponding regulation-making power for purposes of the income tax law is contained in section 266 of the Assessment Act.

TRUST RECOUPMENT TAX BILL 1985

This Bill is a "Rates Bill" which will formally impose the trust recoupment tax, liability for which is to be established by the Trust Recoupment Tax Assessment Bill 1985.

Clause 1: Short title

By this clause the proposed Act is to be cited as the Trust Recoupment Tax Act 1985.

Clause 2: Commencement

This Bill will come into operation at the same time as the Assessment Bill.

Clause 3: Incorporation

As usual in tax matters, the "Rates" legislation is to be read as one with the "Assessment" legislation.

Clause 4: Imposition of tax

By this clause trust recoupment tax will formally be levied on a "taxable amount" as determined by the Trust Recoupment Tax Assessment Bill 1985. This amount is, broadly, the amount of the stripped trust income (primary or secondary taxable amount) or the amount of a corporate beneficiary's notional share of that income (elected or company taxable amount).

Clause 5: Amount of tax

By this clause the rates of trust recoupment tax will be 60 per cent of a primary or secondary taxable amount, 75 per cent of an elected taxable amount and 46 per cent of a company taxable amount.

TRUST RECOUPMENT TAX (CONSEQUENTIAL AMENDMENTS) BILL 1985

As its title implies, this Bill proposes amendments of certain Acts that are consequential upon the principal legislation to impose trust recoupment tax on trustees and certain other persons to recover tax sought to be avoided under new generation trust stripping schemes.

PART 1 - PRELIMINARY

Clause 1: Short title

By this clause the proposed Act is to be cited as the Trust Recoupment Tax (Consequential Amendments) Act 1985.

Clause 2: Commencement

By this clause, the Bill will come into operation at the same time as the principal legislation.

PART II - AMENDMENT OF THE ADMINISTRATIVE DECISIONS (JUDICIAL REVIEW) ACT 1977

Clause 3: Principal Act

This clause facilitates reference to the Administrative Decisions (Judicial Review) Act 1977 which, in this Part, is referred to as "the Principal Act".

Clause 4: Schedule 1

By this clause decisions by the Commissioner of Taxation under the trust recoupment tax legislation are, like other comparable tax decisions, to be excluded from review under the A.D.J.R. legislation. That exclusion reflects the fact that persons who dispute an assessment issued to them under the trust recoupment tax legislation will have rights of objection and appeal modelled on those that apply for income tax purposes.

PART III - AMENDMENT OF THE LOCAL GOVERNMENT (PERSONAL INCOME TAX SHARING) ACT 1976

Clause 5: Principal Act

This clause facilitates reference to the Local Government (Personal Income Tax Sharing) Act 1976 which, in this Part, is referred to as "the Principal Act".

Clause 6: Interpretation

This clause proposes amendments to sub-section 3(1) of the Principal Act which contains a number of definitions of terms used in that Act. The purpose of the amendments is to include net collections of trust recoupment tax within the tax sharing base.

Paragraphs 6(a) and (b) propose an amendment to the definition of "gross personal income tax collections" in sub-section 3(1) of the Principal Act to extend that definition to include collections in respect of liability for trust recoupment tax (including late payment tax and penalty taxes) under the proposed Trust Recoupment Tax Assessment Act 1985.

Paragraphs 6(c) and (d) propose an amendment to the definition of "refund of personal income tax" in sub-section 3(1) to extend that definition to include a refund of trust recoupment tax (including late payment tax and penalty taxes) paid under the proposed Trust Recoupment Tax Assessment Act 1985.

Paragraph 6(e) will insert in sub-section 3(1) a definition of "trust recoupment tax". That term is to mean "basic" trust recoupment tax and related penalty taxes and late payment tax.

PART IV - AMENDMENT OF THE STATES (TAX SHARING AND HEALTH GRANTS) ACT 1981

Clause 7: Principal Act

This clause facilitates reference to the States (Tax Sharing and Health Grants) Act 1981 which, in this Part, is referred to as "the Principal Act".

Clause 8: Schedule 1

Clause 8 proposes to amend Schedule 1 to the Principal Act which contains a list of the taxes that are included in the tax sharing base. By this clause tax collected under the proposed Trust Recoupment Tax Assessment Act 1985 is to be listed in the Schedule and thus included in the tax sharing base.

PART V - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 9: Principal Act

This clause facilitates references to the Taxation Administration Act 1953 which, in this Part, is referred to as "the Principal Act".

Clause 10: Interpretation

This clause proposes a purely technical amendment to paragraph 8J(2)(k) of the Principal Act to extend the list of provisions specified in sub-section 8J(2) to include a reference to paragraph 264(1)(b) of the Income Tax Assessment Act 1936 as that paragraph is applied by sub-section 4(1) of the proposed Trust Recoupment Tax Assessment Act 1985 for the purposes of the assessment and collection of trust recoupment tax.

Clause 11: Penalty taxes to be alternative to prosecution for certain offences

This clause proposes a similar technical amendment to paragraph 8ZE(3)(e) of the Principal Act by including a reference in sub-section 8ZE(3) to sections 222 and 223 of the Income Tax Assessment Act 1936 as those sections are applied by sub-section 4(1) of the proposed Trust Recoupment Tax Assessment Act 1985.

PART VI - AMENDMENT OF THE TAXATION (INTEREST ON OVERPAYMENTS) ACT 1983

Clause 12: Principal Act

This clause facilitates reference to the Taxation (Interest on Overpayments) Act 1983 which, in this Part, is referred to as 'the Principal Act".

Clause 13: Interpretation

This clause proposes to amend sub-section 3(1) of the Principal Act which defines a number of terms used in that Act. The effect of the amendments will be to authorise the payment of interest on amounts of trust recoupment tax refunded by the Commissioner of Taxation following a successful objection or appeal against a trust recoupment tax assessment.

Paragraphs 13(a) and (b) propose to extend the definition of "objection" to include an objection against an assessment of trust recoupment tax made under the proposed Trust Recoupment Tax Assessment Act 1985.

Paragraph 13(c) proposes to extend the definition of "relevant tax" - the term used in the Principal Act to identify the kinds of tax which, if refunded as a result of an objection or appeal, will give rise to an entitlement to interest - to include trust recoupment tax, applied penalty tax or penalty tax as defined in sub-section 3(1) of the proposed Trust Recoupment Tax Assessment Act 1985.