House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 2 - Extending the tax file number withholding arrangements to closely held trusts, including family trusts

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 ( ITAA 1936), the Income Tax Assessment Act 1997 ( ITAA 1997) and the Taxation Administration Act 1953 ( TAA 1953) to extend the existing arrangements for tax file number (TFN) withholding to cover closely held trusts, including family trusts. The information collected by the Australian Taxation Office (ATO) under these amendments will facilitate data-matching and allow the ATO to check whether the assessable income of beneficiaries of these trusts correctly includes their share of the net income of the trust.

2.2 All references to legislative provisions in this chapter are references to the TAA 1953 unless otherwise stated.

Context of amendments

2.3 In the late 1990s it became apparent that complex chains of trusts were being used to avoid or indefinitely defer tax. In order to address this issue, legislation was passed to require a trustee of a closely held trust to advise the Commissioner of Taxation (Commissioner) of certain details about a trust's ultimate beneficiaries and tax-preferred distributions to beneficiaries. Failure to do this, or there being no ultimate beneficiary, rendered the trustee liable to pay an ultimate beneficiary non-disclosure tax at the top marginal tax rate plus the Medicare levy.

2.4 The purpose of that measure was to allow the Commissioner to check that the assessable income of ultimate beneficiaries correctly included their share of trust income and that the net assets of ultimate beneficiaries reflected their receipt of tax-preferred amounts.

2.5 This measure proved to be very difficult to comply with for some trustees of closely held trusts. Consequently, from the 2008-09 income year, the ultimate beneficiary reporting rules were replaced by the trustee beneficiary reporting rules which now require trustees of closely held trusts to report information to the Commissioner in respect of each beneficiary that is itself a trustee entitled to a share of the trust's net income or to receive tax-preferred amounts.

2.6 However, these new reporting requirements are limited to trustee beneficiaries and do not apply in respect of beneficiaries who are individuals or companies. Additionally, family trusts that have made a family trust election under the trust loss provisions in Schedule 2F to the ITAA 1936 are not subject to the trustee beneficiary reporting rules.

2.7 The current TFN withholding arrangements apply to various entities that pay or distribute income. However, the TFN withholding arrangements do not apply to trusts unless they are unit trusts.

2.8 Consequently, as part of the 2009-10 Budget, the Government announced that, with effect from 1 July 2010, it would extend the current TFN withholding arrangements to cover closely held trusts, including family trusts.

Summary of new law

2.9 This Schedule extends the TFN withholding regime under Subdivision 12-E of Schedule 1 to the TAA 1953 to closely held trusts (including family and related trusts) in respect of eligible beneficiaries to which these amendments apply. Where an eligible beneficiary receives a distribution, or at the end of the income year is presently entitled to income of the trust and the beneficiary has failed to quote their TFN to the trustee of the trust prior to that time, they will be subject to TFN withholding arrangements under these amendments.

2.10 There are four stages to the operation of these amendments where a relevant beneficiary has failed to provide their TFN to the trustee.

•

The first stage imposes a withholding obligation on the trustee where a withholding event under these amendments occurs.

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A withholding event occurs when the trustee of a trust makes a distribution to an eligible beneficiary, or when an eligible beneficiary becomes presently entitled to a share of income of the trust and the beneficiary has failed to quote their TFN to the trustee prior to either the distribution time or the end of the income year.

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When a withholding event occurs the trustee is required to withhold prior to making the distribution or for a present entitlement case, at the end of the income year.

•

The second stage requires the trustee of a relevant trust to report and remit those amounts withheld to the Commissioner.

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The trustee is required to register for pay as you go (PAYG) withholding with the ATO as well as report and remit amounts on an annual basis.

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The trustee is also required, through the trust income tax return, to report amounts distributed to eligible beneficiaries that would have been subject to withholding had the relevant beneficiary failed to quote their TFN to the trustee.

•

The third stage involves the crediting of the amounts withheld by the trustee in respect of a beneficiary on assessment of their income tax liability.

•

The fourth stage involves the imposition of penalties on the trustee for failing to withhold and/or failing to remit the amount withheld to the Commissioner.

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These penalties are the same as those that apply under the current TFN withholding arrangements.

2.11 TFN withholding does not apply where a beneficiary has provided their TFN to the trustee prior to either the time the trustee makes a distribution or at the end of the income year in the case of present entitlement amounts.

2.12 The trustee is required to report the TFNs quoted by beneficiaries to the Commissioner in the approved form. The trustee is only required to report a quoted TFN once (upon validation of it being the correct TFN) and will report the TFNs collected during a quarter in a quarterly report. Where the trustee has no new TFNs to report for a quarter, they are not required to lodge a report for that relevant quarter.

Comparison of key features of new law and current law

Detailed explanation of new law

Scope of these amendments

2.13 The current arrangements for TFN withholding apply to various relationships including employer/employee, investment body/investor and superannuation provider/superannuant. In the context of trusts, TFN withholding in respect of investments applies to trusts (including closely held trusts) that are 'unit trusts' as defined in section 202A of the

2.14 ITAA 1936.

2.15 This Schedule extends the TFN withholding arrangements to most closely held trusts, including family trusts. The scope of these amendments is broadly intended to cover all beneficiaries of those trusts. However, there are certain trusts and certain classes of beneficiaries that are excluded from the operation of this measure.

Trustees and trusts subject to this measure

2.16 These amendments apply to trustees of closely held trusts, including family trusts. The concept of a 'closely held trust' is defined in subsection 102UC(1) of the ITAA 1936 to mean a trust that is not an 'excluded trust' that:

•

has up to 20 beneficiaries who have fixed entitlements to a 75 per cent or greater share of the income, or a 75 per cent or greater share of the capital, of the trust; or

•

is a 'discretionary trust'.

[Schedule 2, item 5, subparagraph 12-175(1)(c)(ii)]

2.17 An 'excluded trust', for the purpose of the definition of 'closely held trust', is defined in subsection 102UC(4) of the ITAA 1936 and includes complying superannuation funds, complying approved deposit funds, pooled development funds, deceased estates and fixed trusts that are unit trusts where exempt entities have fixed entitlements to all the income and capital of the trust (see paragraph (a) of the definition) . [Schedule 2, item 5, subparagraph 12-175(1)(c)(ii)]

2.18 The definition of closely held trusts in section 102UC also explicitly excludes family trusts. 'Family trusts' in that context include those trusts that have made a family trust election and those trusts covered by an interposed entity election that the trust is to be included in the family group of the individual specified in the family trust election. It also includes those owned by the family group of that individual (see paragraphs (c) to (e) of that definition).

2.19 However, for the purposes of these amendments, the use of the term 'closely held trusts' also includes family trusts and the related trusts covered under paragraphs (c) to (e) of the definition in section 102UC of the ITAA 1936 . [Schedule 2, item 5, subparagraph 12-175(1)(c)(ii)]

2.20 For the purposes of this chapter, the use of the term 'closely held trusts' is intended to also cover family trusts as included within the scope of these amendments.

Trustees and trusts excluded from this measure

2.21 These amendments do not apply to trustees of trusts that do not meet the concept of closely held trust as defined under this measure. Additionally, closely held trusts that are not 'resident trust estates' as defined under subsection 95(2) of the ITAA 1936 are excluded from this measure . [Schedule 2, item 5, subparagraph 12-175(1)(c)(i)]

2.22 In the situation where a closely held trust is also a unit trust within the meaning of section 202A of the ITAA 1936, the trust will be subject to the TFN withholding rules both in respect of investments and under these amendments. In that situation the TFN withholding rules in respect of investments will apply in priority to the rules under these amendments . [Schedule 2, item 4, subsection 12-5(2) (item 5 in the table, column headed 'in priority to:')]

Example 2.1

The Newman Trust is a closely held unit trust that is a unit trust within the meaning of section 202A of the ITAA 1936 and has 10 beneficiaries (five of which are individuals and five are companies). Of all the beneficiaries, only Ray, Helen and Lindy Lou Pty Ltd have failed to provide their TFN prior to becoming presently entitled to a share of income of the Newman Trust.

Consequently, the Newman Trust is required to withhold an amount from each share (as if it was a payment) by reason of section 12-145 of the ITAA 1936. As the Newman Trust is subject to the TFN withholding rules applying to investment bodies, it is not also required to withhold under these amendments.

2.23 These amendments also facilitate the exemption of trusts as prescribed under the regulations. This provision will provide flexibility to exclude classes of trusts that may be inadvertently within the scope of this measure . [Schedule 2, item 5, subparagraph 12-175(1)(c)(iii)]

Beneficiaries that are subject to this measure

2.24 Generally, these amendments apply to all beneficiaries of closely held trusts, irrespective of whether they are individuals, companies or trusts. The amendments however, do not apply to excluded beneficiaries (see paragraph 2.25) . [Schedule 2, item 5, paragraph 12-175(1)(d)]

2.25 Additionally, there are special rules that apply under these amendments to beneficiaries (including trustee beneficiaries) who are not liable to pay tax under section 98 of the ITAA 1936. There are also special rules that apply to beneficiaries (including trustee beneficiaries) that are impacted by either the family trust distribution tax or the trustee beneficiary reporting rules (refer respectively to Division 271 of Schedule 2F to the ITAA 1936 and Division 6D of Part III of the ITAA 1936). These rules are discussed in further detail from paragraphs 2.26 to 2.37.

Beneficiaries that are excluded from this measure

2.26 Certain beneficiaries are not within the scope of this measure. These classes of beneficiaries are:

•

non-residents (as under Division 6 of the ITAA 1936, the trustee pays tax on their behalf) [Schedule 2, item 5, subparagraph 12-175(1)(d)(i)];

•

an exempt entity, as defined in section 995-1 of the ITAA 1997 to mean an entity all of whose ordinary or statutory income is exempt from income tax [Schedule 2, item 5, subparagraph 12-175(1)(d)(ii)]; or

•

those under a legal disability (for example, minors and bankrupts) pursuant to section 98 of ITAA 1936 (as the trustee is liable to pay tax on their behalf) [Schedule 2, item 5, subparagraph 12-175(1)(d)(iii)].

The treatment of entities not liable to pay tax in respect of distribution or share under section 98 of the ITAA 1936

2.27 A special rule applies where a trustee is liable to pay tax on behalf of a beneficiary (under section 98 of the ITAA 1936) in respect of a particular share or distribution, where the beneficiary is not under a legal disability.

2.28 As discussed in paragraph 2.25, beneficiaries under a legal disability (pursuant to section 98 of the ITAA 1936) are exempt from this measure. However, under the current law, there are situations where a trustee is liable on the behalf of a beneficiary where they are not under a legal disability but only in respect of a particular share or distribution.

2.29 One such situation arises where a beneficiary receives a vested and indefeasible interest in any of the trust and is deemed to be presently entitled by the operation of subsection 95A(2) of the ITAA 1936. In that situation subsection 98(2) of the ITAA 1936 operates so that the trustee is liable to pay tax in respect of that deemed present entitlement.

2.30 Under these amendments, where the trustee is liable to pay tax in respect of a share or distribution under section 98 of the ITAA 1936, they will not be required to withhold on that particular amount . [Schedule 2, item 5, paragraphs 12-175(2)(b) and 12-180(2)(b)]

2.31 The intention of this exclusion is to cover those beneficiaries who are not under a legal disability, but some portion of their share or distribution is caught under section 98 of the ITAA 1936 and the trustee is liable for tax, but only in respect of that specific amount. Those beneficiaries who are under a legal disability pursuant to section 98 of the ITAA 1936, will continue to be excluded from this measure entirely.

The treatment of entities subject to family trust distribution tax

2.32 Special rules apply under these amendments to trusts where the trustee is liable to pay the family trust distribution tax.

2.33 Where the trust is a family trust and the beneficiary (and/or trustee beneficiary) is within that trust's 'family group', the beneficiary is subject to these amendments in the same way as all other beneficiaries . [Schedule 2, item 5, paragraphs 12-175(2)(d) and 12-180(2)(d)]

2.34 However, where that trust confers present entitlement or makes a distribution of trust income to a beneficiary outside of that 'family group', the trust will be subject to the family trust distribution tax, which is a final tax liability (equivalent to 46.5 per cent). Consequently, where the trustee is liable to pay the family trust distribution tax they will not also be required to withhold an amount in respect of these amendments . [Schedule 2, item 5, paragraphs 12-175(2)(d) and 12-180(2)(d)]

2.35 This rule extends to all beneficiaries (including trustee beneficiaries) who receive distributions from the parent trust but are outside of the family group of the parent trust . [Schedule 2, item 5, paragraphs 12-175(2)(d) and 12-180(2)(d)]

Example 2.2

Stephen, as the trustee of the Gordon Family Trust, has made a family trust election identifying Mr. Gemmell as the nominated individual. The beneficiaries of the trust include Les, Scott, Tom and the trustee of the Schneider Trust. While Scott, Tom and the Schneider Trust are all members of the family group of Mr. Gemmell, Les is not. At the end of the income year, each of the beneficiaries is made presently entitled to income of the Gordon Family Trust. However, Les, Scott and the Schneider Trust have failed to quote their TFN to Stephen prior to the end of the income year.

When Les becomes presently entitled to a share of the income of the trust, Stephen as trustee of the Gordon Family Trust becomes liable to pay the family trust distribution tax. As the imposition of that tax takes precedence over the TFN withholding under these amendments, Stephen is not required to withhold in respect of Les.

However, as Scott and the Schneider Trust are within the family group of Mr. Gemmell, no obligation to pay the family trust distribution tax arises and Stephen will be required to withhold an amount under this measure in respect of Scott and the trustee of the Schneider Trust.

As Tom has quoted his TFN prior to the end of the income year, Stephen will not be required to withhold from Tom.

Treatment of entities subject to the trustee beneficiary reporting rules

2.36 Special rules also apply under these amendments to trustees that are subject to the trustee beneficiary reporting rules under Division 6D of Part III of the ITAA 1936. Division 6D imposes obligations on the trustee of a closely held trust as defined in section 102UC of the ITAA 1936 in respect of a beneficiary that is itself the trustee of a trust (a trustee beneficiary).

2.37 Where a trust is subject to these trustee beneficiary reporting rules, they will not be required to withhold amounts under this measure in respect of the trustee beneficiary . [Schedule 2, item 5, paragraphs 12-175(2)(c) and 12-180(2)(c)]

2.38 Trusts subject to the trustee beneficiary rules in respect of distributions made to trustee beneficiaries are excluded from this measure for two reasons. Firstly, trusts subject to the trustee beneficiary reporting rules will be required to provide a correct trustee beneficiary statement to the Commissioner to which the trustee beneficiary's TFN would be included. Secondly, a failure to provide a correct trustee beneficiary statement (including the trustee beneficiary's TFN) exposes the trustee to the trustee beneficiary non-disclosure tax which is a final tax liability (equivalent to 46.5 per cent) . [Schedule 2, item 5, paragraphs 12-175(2)(c) and 12-180(2)(c)]

Example 2.3

The Spiller Trust is a closely held trust for the purposes of Division 6D of the ITAA 1936. Its beneficiaries include an Australian resident company, Lolly Pty Ltd, and the trustees of the Simon Trust and the McCarthy Trust (which are also both closely held trusts). None of the three beneficiaries have provided their TFNs to the trustee of the Spiller Trust. At the end of the income year, the Spiller Trust determines that each beneficiary's share of present entitlement to the net income of the trust is $100.

As Lolly Pty Ltd is a company and a beneficiary of the Spiller Trust, it remains subject to TFN withholding under these amendments. Consequently, the Spiller Trust is required to withhold from Lolly Pty Ltd's entitlement to the share of net income of the trust.

However, as Spiller Trust is subject to the trustee beneficiary reporting rules and is required to provide a correct trustee beneficiary statement for both the Simon Trust and the McCarthy Trust, the Spiller Trust is not required to withhold under this measure in respect of either trustee beneficiary.

Withholding obligations

2.39 For trustees and beneficiaries subject to this measure, a TFN withholding obligation will arise where either the trustee makes a distribution of an amount that includes ordinary or statutory income to the beneficiary, or at the end of the income year where the beneficiary is presently entitled to a share of the income of the trust and in either case, the beneficiary has failed to quote their TFN to the trustee.

Withholding obligation where the trustee distributes trust income

2.40 A withholding obligation will arise in respect of distributions made where:

•

a trustee makes a distribution to an eligible beneficiary [Schedule 2, item 5, paragraph 12-175(1)(a)];

•

some or all of the distribution is ordinary or statutory income of the trust [Schedule 2, item 5, paragraph 12-175(1)(b)];

•

some or all of the distribution is not in respect of a share of net income to which the beneficiary was presently entitled to and otherwise subject to TFN withholding under this measure [Schedule 2, item 5, subsection 12-175(4)]; and

•

the beneficiary has failed to quote their TFN at the time the distribution is made (the distribution time) [Schedule 2, item 5, subsection 12-175(1)].

2.41 However, this withholding obligation will only arise where the distribution described above is not subject to any of the special rules discussed in paragraphs 2.26 to 2.37 . [Schedule 2, item 5, paragraphs 12-175(2)(b) to (d)]

Example 2.4

The trustee of the Kretschmann Trust (which is a closely held trust under this measure) makes regular distributions throughout the year to its two beneficiaries (Pierce and Regina). Pierce has provided his TFN to the trustee of the Kretschmann Trust prior to the making of these distributions but Regina has not.

As Regina has failed to quote her TFN prior to the trustee making the distribution, a withholding obligation is triggered for the Kretschmann Trust in respect of the distributions made to Regina.

2.42 Where the distribution made is not a payment, the PAYG withholding regime (Part 2-5 of Schedule 1 to the TAA 1953) will apply as if the trustee had paid the amount of the distribution to the beneficiary at the distribution time . [Schedule 2, item 5, subsection 12-175(3)]

2.43 This withholding obligation imposed on the trustee operates independently of the reporting obligations imposed under these amendments (including the requirement to report amounts withheld and to pay the amounts withheld to the Commissioner). The withholding obligation under this measure may arise at any point during the income year (where a distribution is made), whereas these amendments provide for reporting and remittance on an annual basis (discussed further in paragraphs 2.56 and 2.76) . [Schedule 2, item 5, subsections 12-175(1) and (2)]

Withholding obligation where the beneficiary becomes presently entitled to trust income

2.44 Where, at the end of the income year, the beneficiary is presently entitled to a share of trust income, a withholding obligation arises on that share of the net income of the trust, where the beneficiary has failed to quote their TFN, but only to the extent that withholding has not occurred on a distribution of all or part of the amount during the income year . [Schedule 2, item 5, subsections 12-180(1), (2) and (4)]

2.45 However, this withholding obligation will only arise where the share of net income described above is not subject to any of the special rules discussed in paragraphs 2.26 to 2.37 . [Schedule 2, item 5, paragraphs 12-180(2)(b) to (d)]

Example 2.5

The ABC Trust (which is a closely held trust under this measure) has three beneficiaries (Jo, Rhonda and Sydney Pty Ltd). The ABC Trust has not made any distributions to the beneficiaries during the income year.

At the end of the income year, the trustee of the ABC Trust resolves to make each of the three beneficiaries presently entitled to a share of the income of the trust. Jo and Rhonda quoted their TFNs to the trustee of the ABC Trust prior to the end of the income year; however, Sydney Ptd Ltd had failed to do so.

Consequently, the ABC Trust has a withholding obligation in respect of Sydney Pty Ltd's share of net income of the trust.

2.46 Where a trust ends during the income year, the withholding obligation in respect of present entitlement will apply as if the time occurring just before the trust ends, was the end of the income year . [Schedule 2, item 5, subsection 12-180(5)]

2.47 For the purposes of consistency with the TFN withholding framework, the PAYG withholding regime (Part 2-5 of Schedule 1 to the TAA 1953) will continue to apply as if the trustee had paid the share of income to the beneficiary at the end of the income year even though the beneficiary may be merely entitled to that share of the net income . [Schedule 2, item 5, subsection 12-180(3)]

2.48 Consequently, where a withholding obligation arises the trustee will be required to withhold an amount from this deemed payment and must do so at the end of the income year . [Schedule 2, item 9, section 16-5]

Withholding obligations operating together

2.49 Under these amendments, where a beneficiary has an amount withheld on a distribution during the year, the obligation arises at that point of distribution. Consequently, at the end of the income year, where a beneficiary is presently entitled to a share of income that includes distributions made during the income year, the withholding obligation that arises in respect of the present entitlement amount will be to the extent that the amount is in addition to the distributions made during the income year that were subject to a withholding obligation . [Schedule 2, item 5, subsection 12-180(4)]

2.50 This means that amounts withheld from distributions made during the income year will be offset against a withholding obligation that arises at the end of the income year in respect of present entitlement.

Example 2.6

The trustee of the Mahoney Trust (which is a closely held trust under this measure) makes a distribution of ordinary income of $200 to each of its beneficiaries (Kate and Tamzin) during the income year. At the end of the income year, the trustee of the Mahoney Trust determines the income of the trust for the year was $1,000 (and the net income was also $1,000 ) and further determines that each beneficiary is presently entitled to the remaining $600 (apportioned to each beneficiary as an end of year share of net income of $300).

Both Kate and Tamzin have failed to quote their TFNs to the trustee before the end of the income year.

As both Kate and Tamzin failed to provide their TFN by the distribution time, a withholding obligation arose in respect of each $200 distribution. In discharging this obligation, the trustee withheld from these distributions at the distribution time.

The operation of these amendments means that for each beneficiary the $200 distribution can be subtracted from the beneficiary's total share of the net income of the trust (which is $500). This means that for each beneficiary, the withholding obligation in respect of present entitlement will only extend to the remaining portion of the share.

Consequently, as both Kate and Tamzin have failed to quote their TFN by the end of the income year, the trustee has an additional withholding obligation for each beneficiary on their further entitlements of $300 (calculated as: $500 (total share) - $200 (the amount already withheld upon)).

2.51 In summary, and subject to the exceptions explained above, an obligation on a trustee of a closely held trust to withhold under these amendments arises where:

•

the beneficiary receives a distribution from the trustee (which is wholly or partly ordinary or statutory income of the trust); or

•

at the end of the income year, the beneficiary is presently entitled to a share of income of the trust;

and in either case:

•

the beneficiary has not quoted their TFN to the trustee prior to either the making of the distribution or being presently entitled to a share of the income of the trust at the end of the year; and

•

the distribution or share is not subject to any of the special rules under these amendments (not a distribution or share in respect of section 98 of the ITAA 1936 or subject to trustee beneficiary reporting rules or family trust distribution tax).

Amount to withhold

2.52 In accordance with existing subsection 15-10(2) of Schedule 1 the amount required to be withheld under this measure will be worked out under the regulations. Accordingly, the following paragraphs are only indicative of the amounts intended to be withheld for each obligation.

2.53 The withholding rate intended to be applied for both obligations will be established under the regulations but is intended to match the 'top rate'. The top rate is defined under Subregulation 34(4) of the Taxation Administration Regulations 1976 as the sum of the highest rate specified in Part I of Schedule 7 to the Income Tax Rates Act 1986 and the rate of the levy specified in subsection 6(1) of the Medicare Levy Act 1986. This rate is currently applied for TFN withholding in respect of investments and is 46.5 per cent.

The amount to withhold in respect of a distribution of trust income

2.54 Under this measure, where a withholding obligation arises from a distribution made during the income year, the amount to withhold will be quantified based on the distribution as a whole . [Schedule 2, item 5, subsection 12-175(1)]

Amount to be withheld = D × R


Where:

D = the distribution made to the beneficiary; and

R = the rate worked out under the regulations.

Example 2.7

As in Example 2.4 the trustee of the Kretschmann Trust has a withholding obligation in regards to distributions made during the year to the beneficiary Regina.

On 23 September 2011, the trustee distributes $1,000 of trust income to Regina. As a withholding obligation exists, the trustee of the Kretschmann Trust must withhold an amount calculated as 46.5 per cent of the value of the distribution. This amount equates to a withholding of $465 from the distribution.

2.55 The withholding quantum is intended to apply to the full amount of the distribution made during the year in respect of the income for that income year, regardless of whether the distribution forms part of the share of the net income to which the beneficiary becomes presently entitled at the end of that income year.

The amount to withhold in respect of present entitlement to trust income

2.56 Under this measure, where a withholding obligation arises in respect of present entitlement, the amount to withhold will be quantified on the beneficiary's share of the net income of the trust . [Schedule 2, item 5, subsection 12-180(1)]

Amount to be withheld = S × R


Where:

S = the beneficiary's share of the net income of the trust; and

R = the rate worked out under the regulations.

Example 2.8

The Evans Trust (which is a closely held trust under this measure) has three beneficiaries. These beneficiaries are Courtney, Michael and Bennett Pty Ltd. The trustee of the Evans Trust has made no distributions to the beneficiaries during the income year. At the end of the year, the trustee of the Evans Trust makes a determination that each beneficiary is presently entitled to trust income of $1,000. However, both Michael and Bennett Pty Ltd have failed to quote their TFNs to the trustee prior to the determination.

Consequently, upon making Michael and Bennett Pty Ltd presently entitled to a share of the income of the Evans Trust, a withholding obligation arises. The trustee is then required to withhold from Michael and Bennett Pty Ltd, an amount calculated as 46.5 per cent of the corresponding share of the net income of the trust, where the net income is calculated under section 95 of the ITAA 1936.

As Courtney has provided her TFN to the trustee prior to the end of the income year, no withholding obligation has arisen in respect of her share of present entitlement.

Payment of amounts withheld

2.57 Where a withholding obligation arises, the trustee is required to remit the amount withheld to the Commissioner. Under existing law, entities that withhold from payments must remit those amounts withheld to the Commissioner in accordance with the framework in Subdivision 16-B of Schedule 1 to the TAA 1953. This framework stipulates different remittance cycles for different sized withholders.

2.58 These remittance cycles apply weekly, monthly or quarterly for large, medium or small withholders respectively. For each withholder, the date of remittance is tied to the date of the withholding event.

2.59 Under these amendments, trustees that are required to withhold are not required to remit under the weekly/monthly/quarterly cycle. Rather, they are required to remit withheld amounts to the Commissioner in an approved form through the business activity statement (BAS) system on an annual cycle . [Schedule 2, item 11, subsection 16-75(5)]

2.60 This will require the trustee to register for PAYG withholding with the ATO and to pay the amount to the Commissioner by the 28th day of the next month following the day the trustee is required to lodge their annual report for withholding amounts (discussed in paragraph 2.76) . [Schedule 2, item 11, paragraph 16-75(5)(a)]

2.61 The requirement to remit the amount withheld by the end of the 28th day of the month following required lodgment of the annual report is intended to administratively align with the quarterly BAS cycle and to accommodate those entities who are deferred BAS payers. The due date for payment can be longer if the Commissioner allows . [Schedule 2, item 11, paragraph 16-75(5)(b)]

Example 2.9

As in Example 2.8, a withholding obligation has arisen for the Evans Trust in respect to present entitlement of a share of the trust income made to both Michael and Bennett Pty Ltd.

In discharging this obligation the trustee of the Evans Trust withholds the equivalent rate (46.5 per cent) from each entitlement totalling $465 each (calculated as $1,000 × 0.465).

The Evans Trust annual report is due on 30 September 2011, however the trustee lodges the annual report earlier on 28 July 2011. Despite the early lodgment, the Evans Trust is still required to remit the $930 withheld through the relevant BAS by 28 October 2011.

Reporting requirements

2.62 Associated with the withholding obligations introduced under these amendments, the trustee is required to comply with three main reporting obligations to the Commissioner and to their beneficiaries.

First requirement: Reporting of TFNs quoted

2.63 Once a TFN has been quoted to the trustee, the trustee is required to report the beneficiary's TFN to the Commissioner in the approved form if the trustee has not previously reported the TFN.

2.64 Under the current TFN withholding arrangements, TFNs quoted to the withholder are reported to the Commissioner through different mechanisms. In the employer/employee scenario, TFNs are reported using TFN declarations. However, under Regulation 55 of the Income Tax Regulations 1936, TFNs quoted in respect of the investment body/investor scenario are reported through quarterly reports.

2.65 Under these amendments, as the withholding obligation can occur upon the making of a distribution (which can occur at any point in time during the income year), or the determination of present entitlement to a share of income (which generally occurs annually), TFNs quoted in respect of these amendments are to be reported on a quarterly basis. The reporting of these TFNs will be in a form approved by the Commissioner and the report must be provided to the Commissioner within one month after the end of the quarter to which it relates (or within such further time as the Commissioner allows) . [Schedule 2, item 1, subsections 202DP(1) and (2) of the ITAA 1936]

Example 2.10

Tara has recently become a beneficiary of the existing Jackson Trust (which is a closely held trust under this measure). In accordance with these amendments, Tara quotes her TFN to the trustee of the Jackson Trust on 4 July 2011. Upon quotation of Tara's TFN, the trustee becomes obligated to report the TFN in the approved form within one month after 30 September 2011.

Quotation of the TFN

2.66 Under the current TFN withholding arrangements, provisions exist to facilitate the correct quotation of the TFN to the payer, in addition to providing administrative mechanisms to deal with the incorrect quotation of a TFN.

2.67 These amendments will replicate features of the current administrative requirements and facilitate the administrative mechanism to deal with the incorrect quotation of the TFN . [Schedule 2, item 1, sections 202DN, 202DO, 202DP and 202DR of the ITAA 1936]

2.68 Where an incorrect TFN has been quoted and reported to the Commissioner, these amendments facilitate two mechanisms for the Commissioner to resolve this issue. The first mechanism under these amendments provides the Commissioner with the power to correct the incorrectly quoted TFN using the information available and may give the trustee a notice in writing indicating that the TFN quoted is incorrect or otherwise wrong and that the Commissioner has been able to ascertain the correct TFN . [Schedule 2, item 1, subsection 202DR(1) of the ITAA 1936]

2.69 Where the Commissioner is able to successfully correct an incorrectly quoted TFN, the beneficiary will be treated as having quoted their TFN from the day in which they originally quoted their TFN to the trustee . [Schedule 2, item 1, subsections 202DR(2) and (3) of the ITAA 1936]

2.70 The second mechanism under these amendments operates where the Commissioner cannot correct an incorrectly quoted TFN. In this case, the Commissioner must give the trustee written notice and also give a copy of the notice to the beneficiary along with a written statement of reasons indicating this decision . [Schedule 2, item 1, subsections 202DR(4) and (5) of the ITAA 1936]

2.71 The Commissioner would be unable to successfully correct an incorrectly quoted TFN where:

•

the Commissioner is satisfied that the beneficiary's TFN has been cancelled or withdrawn [Schedule 2, item 1, subparagraph 202DR(4)(a)(i) of the ITAA 1936];

•

the Commissioner is satisfied for any reason that the number quoted is not the beneficiary's TFN [Schedule 2, item 1, subparagraph 202DR(4)(a)(ii) of the ITAA 1936]; or

•

the Commissioner is not satisfied that the beneficiary has a TFN [Schedule 2, item 1, paragraph 202DR(4)(b) of the ITAA 1936].

2.72 On and from the day the notice takes effect, the beneficiary is taken not to have quoted their TFN to the trustee. This has the effect that TFN withholding is not required for any withholding obligations that occurred prior to the date of the notice. However, distributions and present entitlement already made will not give rise to a retrospective withholding obligation . [Schedule 2, item 1, subsections 202DR(6) and (7) of the ITAA 1936]

Example 2.11

The Buchanan Trust (which is a closely held trust under this measure) has two beneficiaries, Olga and Andrew. Upon receiving a distribution during the year both Olga and Andrew had quoted their TFNs to the trustee of the Buchanan Trust by the distribution time. However, after reporting those TFNs to the Commissioner in the TFN quarterly report, it turns out that both TFNs quoted were incorrect.

Olga's TFN was incorrect because two of the numbers were accidentally transposed when the number was quoted. Consequently, the Commissioner is able to identify the correct number using other information available and advises the trustee that the TFN has been corrected. In Olga's case, she is treated as if her TFN quoted was correct and no withholding obligation will arise in respect of these amendments.

In respect to Andrew's TFN, upon receiving the TFN report the Commissioner notices that the TFN reported is incorrect and is not satisfied that Andrew actually has a TFN. Consequently, the Commissioner notifies both the trustee and Andrew of this and provides Andrew with a statement of reasons for this decision.

From the date of the Commissioner's notice to Andrew, he is deemed not to have quoted a TFN. This means that any amounts to which Andrew becomes entitled from that date gives rise to a withholding obligation under these amendments until a new (correct) TFN is quoted. However, the distribution already made will not give rise to a retrospective withholding obligation.

Reporting period

2.73 These amendments also provide a mechanism for the Commissioner to notify the trustee of a different reporting period for the purposes of TFN quotation. This gives the Commissioner the administrative flexibility to set a period longer than three months for the trustee to report the quoted TFNs in the appropriate circumstances. The Commissioner may use this power in order to facilitate a smooth administrative process for the reporting of quoted TFNs . [Schedule 2, item 1, subsection 202DP(3) of the ITAA 1936]

Penalties

2.74 Failure to report a quoted TFN to the Commissioner constitutes an offence under section 8C of the TAA 1953 wherein the trustee has failed to comply with a requirement under the taxation law. An offence under section 8C of the TAA 1953 is an offence of absolute liability . [Schedule 2, item 1, note under section 202DP of the ITAA 1936]

2.75 An offence of absolute liability in this context means that where a trustee fails to report a quoted TFN, they will have committed an offence and the defence of mistake is unavailable. There is no requirement to prove fault, and the trustee is punishable on conviction of a fine not exceeding 20 penalty units for their first offence. Subsequent offences will render the trustee punishable on conviction of a greater penalty.

Changes to the definition of 'quoted'

2.76 These amendments also change the definition of 'quote' and 'quoted' under section 995-1 of the ITAA 1997 to facilitate the requirement to quote a TFN under this measure . [Schedule 2, items 26 and 27, definitions of 'quote' and 'quoted' in subsection 995-1(1) of the ITAA 1997]

Second requirement: Reporting to the Commissioner of amounts withheld and amounts distributed

2.77 These amendments also require the trustee of a closely held trust to lodge two different annual reports with the Commissioner. The first report (annual report for withholding amounts) is an annual report which is designed to detail the amounts withheld by the trustee under this measure. The second report (annual report for amounts distributed) is also an annual report and is designed to detail the amounts distributed to beneficiaries, even though the trustee was not required to withhold from those distributions.

2.78 Under the current law, entities that withhold from payments are required to notify the Commissioner of those amounts withheld on or before the day the payment is due (refer to section 16-150). This is normally achieved through the BAS system as part of the remittance obligation.

2.79 In addition to this requirement, the current PAYG withholding framework requires the withholder to provide the Commissioner with an annual report detailing amounts withheld (refer to section 16-153). In the specific case of TFN withholding in respect of investments, investment bodies subject to those obligations are required to lodge an annual investment report, which provides extensive information about the investment, and the amounts withheld (refer to Regulation 56 of the Income Tax Regulations 1936).

Annual report for withholding amounts

2.80 Under these amendments, a trustee is required to lodge an annual report with the Commissioner in the approved form, which reports amounts withheld under this measure . [Schedule 2, item 12, subsection 16-152(1)]

2.81 This report is due not later than three months after the end of the income year or within such longer period as the Commissioner allows . [Schedule 2, item 12, subsection 16-152(2)]

2.82 This report is intended to provide the Commissioner with information regarding amounts that the trustee has withheld from eligible beneficiaries in respect of a withholding obligation from making a distribution or where the beneficiary is presently entitled to a share of income of the trust at the end of the income year.

Annual report for trust distributions

2.83 Under these amendments, a trustee is also required to lodge a report to the Commissioner on the amounts distributed to beneficiaries and amounts payable to all eligible beneficiaries (that is, their share of the net income of the trust). This means that trustees will be required to report amounts distributed or payable to beneficiaries, even though the beneficiary has quoted their TFN and a withholding obligation is not triggered under these amendments . [Schedule 2, item 12, subsection 16-152(3)]

2.84 This report is due on the end of the day on which the trustee lodges the trust's income tax return for the income year, or within such longer period as the Commissioner allows . [Schedule 2, item 12, subsection 16-152(4)]

2.85 The due date for this report will have the effect that where all the beneficiaries of a particular trustee have quoted their TFNs, the trustee will only be required to lodge the report annually with their trust tax return.

Administration provisions for annual reports

2.86 For both of these annual reports, the Commissioner retains the existing discretion under subsection 16-153(6) of Schedule 1 to vary the requirements of the reports and must follow the existing notice requirements under subsection 16-153(7) of Schedule 1 in order to do so . [Schedule 2, item 12, subsection 16-152(5)]

2.87 In addition, for the annual reports, the existing requirements under subsection 16-153(5) of Schedule 1 will apply so that even where the withholding amount is nil, an annual report is required. However, for the annual report of withholding amounts, this will only occur where a withholding obligation arises . [Schedule 2, item 12, subsection 16-152(5)]

Example 2.12

The McGovern Trust (which is a closely held trust under this measure) has only one beneficiary (iClaire Pty Ltd). iClaire Pty Ltd has quoted its TFN to the trustee prior to the distribution time.

As iClaire Pty Ltd has quoted its TFN, no withholding obligation arises in regards to distributions made by the trustee during the income year. As no amounts have been withheld, the trustee of the McGovern Trust is not required to lodge an 'annual report for withholding payments'.

However, as the trustee has made distributions to iClaire Pty Ltd throughout the year, the trustee is required to lodge an annual report with their trust tax return.

Third requirement: Reporting amounts withheld and distributed to beneficiaries

2.88 The third reporting obligation imposed by these amendments is the obligation to notify beneficiaries of amounts withheld by issuing payment summaries on an annual basis.

2.89 Currently, under the PAYG withholding arrangements, withholders are generally required to issue payment summaries within 14 days of the end of the financial year notifying the payee, employee or investor of amounts withheld (refer to section 16-155). A failure to comply with these requirements constitutes an offence of strict liability, which is punishable by a fine not exceeding 20 penalty units (refer to section 8C).

2.90 Under these amendments, trustees are required to issue an annual payment summary to each beneficiary who has had amounts withheld under these amendments . [Schedule 2, items 15 and 17, section 16-156 and subsection 16-170(1AAA)]

2.91 A payment summary is to be provided to the relevant beneficiary in the approved form not later than 14 days after the due date for the lodgment of the annual report for withholding amounts (discussed in paragraph 2.76) or such longer period as allowed by the Commissioner . [Schedule 2, items 15 and 17, subsections 16-156(2) and 16-170(1AAA)]

2.92 Under these amendments, the existing penalty for a failure to provide a payment summary will continue to constitute a strict liability offence [Schedule 2, items 20 and 21, subsections 16-175(1)]. A strict liability offence in this context means that there is no requirement to prove fault, however the defence of mistake is available.

Credit for amounts withheld

2.93 Under the existing TFN withholding arrangements a payee/investor is entitled to a credit equal to the amount that was withheld from their payment/distribution by the withholder (refer to section 18-15). This entitlement arises where the payee/investor lodges a return and receives an assessment for the relevant income year (including an assessment that no income tax is payable for the year). Currently, where the claimant of the credit is a trust, then the current TFN withholding arrangements provide for the credit to flow through to the beneficiary of the trust (refer to section 18-25).

2.94 Under these amendments, when a beneficiary lodges their end of year income tax return, they are entitled to a credit equal to the amounts that have been withheld and remitted by the trustee to the Commissioner in accordance with the existing crediting arrangements.

Penalties

2.95 Under the existing PAYG withholding arrangements, there are specific penalty provisions that relate to TFN withholding. These include the failure to withhold penalty under sections 16-25 and 16-30 of Schedule 1 to the TAA 1953 as well as the penalty for failure to pay within time under section 16-80 of Schedule 1 to the TAA 1953. These penalties apply to entities that are required to both withhold from certain payments and pay the amounts withheld to the Commissioner but fail to do so.

2.96 In addition to the specific PAYG withholding penalties described above, general administrative penalties also exist under Part III of the TAA 1953. These penalties apply for failure to comply with taxation requirements, making intentional errors in reports and the making of false and misleading statements.

2.97 Under these amendments, the existing penalty regime will apply to the withholding obligations and reporting requirements as required. There are no new penalties specific to the operation of these amendments.

Refunding of amounts withheld in error

2.98 Under the current TFN withholding arrangements, those amounts that are withheld by a payer and/or paid to the Commissioner in error can be refunded to the payee, where the payer becomes aware of the error or the payee applies for the refund.

2.99 The application process for the payee requires the payee to provide certain information to the payer in order to have the payer refund the amount to the payee. Similarly, the payer is then required to provide certain information to the Commissioner, in order to recover the amounts refunded to the payee, where the amounts had originally been remitted to the Commissioner.

2.100 Under these amendments, where a beneficiary has amounts withheld and/or paid to the Commissioner in error, they will be able to seek a refund using the current refund arrangements . [Schedule 2, item 23, subparagraph 18-65(3)(d)(v)]

Application and transitional provisions

2.101 These amendments will apply to income of a trust for an income year starting on or after 1 July 2010. For trusts with a substituted accounting period, this means that this measure will apply to them in the first income year starting after 1 July 2010 . [Schedule 2, items 24 and 25]

Consequential amendments

2.102 There are also various other amendments, which clear up assorted headings, notes, and other things that need to be removed or changed due to the creation of the new provisions for the extension of the TFN withholding rules to closely held trusts, including family trusts . [Schedule 2, items 2, 3, 6 to 8, 10, 13, 14, 16, 18, 19 and 22 ]