Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 8 - Family trust and interposed entity elections
Outline of chapter
8.1 Schedule 8 to this Bill contains modifications to the law that allow trustees to make family trust elections and interposed entity elections at any time, in relation to earlier income years.
8.2 All references to legislative provisions in this chapter are references to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.
Context of amendments
8.3 Under the current legislation a family trust election cannot be made unless the trust both passes the family control test and specifies an individual whose family group is the subject of the election. A company, trust or partnership is required to make an interposed entity election before it can be included as part of a family group. An interposed entity election is relevant where members of the individual's family do not have fixed entitlements to all of the income and capital of the interposed entity. An entity only needs to make a family trust election or an interposed entity election once. A family trust election must be made by the trustee in the trust's income tax return for the income year from which the election is to take effect. Once made and lodged the election remains in place and carries forward unless it can be revoked (only where a fixed trust has met certain conditions) or the entity ceases to exist.
8.4 Schedule 8 modifies the rules for making family trust elections and interposed entity elections in response to concerns that the requirements to make a valid family trust election are too inflexible. The amendments aim to provide greater flexibility and remove the possibility of any ongoing uncertainty surrounding when family trust elections and/or interposed entity elections can be made.
Summary of new law
8.5 Schedule 8 to this Bill contains rules that reduce compliance costs and uncertainty for trustees by allowing them to make family trust elections and/or interposed entity elections at any time in relation to an earlier income year, provided certain conditions are met.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| Entities may make written family trust elections and interposed entity elections at any time in relation to an earlier income year. | Family trust elections can only be made for the earliest year for which a tax return has not yet been lodged. The election cannot be made for the specified income year if it is made after the entity's return for that year has been furnished. |
Detailed explanation of new law
8.6 Schedule 8 to this Bill contains rules that provide greater flexibility and remove ongoing uncertainty by allowing entities to make family trust elections and interposed entity elections at any time, in relation to earlier income years. Family trust elections and interposed entity elections allow entities to access certain concessions available under the company and trust loss provisions and the imputation rules.
8.7 Current subsection 272-80(2) of Schedule 2F outlines the conditions for making a family trust election. The subsection states that a trust must make a family trust election in its income tax return for the specified year. Where the trustee is not required to furnish a return for that year, the family trust election must be written in an approved form; and be submitted within two months after the end of the income year specified.
8.8 Current subsection 272-80(2) is repealed so that the only condition on making a family trust election is that it must be in writing and in the approved form. The approved form is defined in section 388-50 of Schedule 1 to the Taxation Administration Act 1953. [Schedule 8, item 1, subsection 272-80(2)]
8.9 The opportunity to elect an earlier income year is only available to entities that have acted as if they were a family entity. Entities will satisfy this requirement if at all times from the beginning of the specified income year until 30 June of the preceding income year in which the election is made:
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- the entity passes the family control test; and
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- any conferral of present entitlement or any actual distributions of income or capital of the trust made by the trustee during that period have been made to the individual specified in the election or to members of that individual's family group.
[Schedule 8, item 2, subsection 272-80(4A)]
8.10 Broadly, a trust passes the family control test where the individual specified in the family trust election or interposed entity election (or a member of their family) satisfies certain requirements that include the individual having control of the trust such as the beneficial enjoyment or control of the capital or income of the trust or being able to appoint or remove the trustee. A trust is only a family trust for that part of an income year for which the family control test is satisfied.
8.11 A company or partnership that is the subject of an interposed entity election passes the family control test if a group consisting of the individual (or member of the individual's family) specified in the family trust election in relation to the interposed entity election have fixed entitlements to more than 50 per cent of the income or capital of the company or partnership.
8.12 A company, trust or partnership is required to make an interposed entity election if it is to be included as part of a family group specified under a family trust election. Under the current law these elections must be included in the entity's tax return for the income year from which the elections are to have effect.
8.13 This Schedule amends the law in the same way as it does for family trust elections and allows an entity to specify an earlier income year than the one in which the election is made if:
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- the entity passes the family control test for the whole part of that earlier year; and
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- any conferral of present entitlement or any actual distributions of income or capital of the trust made by the trustee during that period have been made to the individual specified in the election or to members of that individual's family group.
[Schedule 8, item 4, subsection 272-85(4A)]
8.14 An interposed entity election can be made at any time in relation to an earlier income year so long as it is in writing and in the approved form. [Schedule 8, item 3, subsection 272-85(2)]
Application and transitional provisions
8.15 The amendments apply to family trust elections and interposed entity elections specifying the income year in which this Act receives Royal Assent or a later income year.