Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon. J. Kerin, M.P.)Chapter 18 Exemption of amounts paid out of attributed income
Overview
Enables certain resident trust to obtain a tax exemption for distributions received from a CFC up to the amount of the CFC's income attributed to them under the accruals tax measures. The trusts affected are corporate unit trusts, public trading trusts and superannuation trusts that are taxed as separate taxpayers.
Summary of proposed amendments
18.1. The proposed amendment to the Principal Act will enable certain trusts to obtain an exemption for distributions received from a CFC up to the amount of the CFC's income attributed to them under the accruals tax measures.
18.2. Generally, a distribution made to a taxpayer out of the income of a CFC that has previously been attributed to the taxpayer is exempt from tax. Under the current law, however, some trusts cannot obtain the exemption. The trusts affected are:
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- trusts that are taxed in the same way as companies, that is, corporate unit trusts and public trading trusts; and
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- superannuation trust that are taxed as separate taxpayers.
18.3. In order to ensure equity in the taxation treatment of distributions from CFCs, these trusts will now be able to obtain the exemption.
Background to the legislation
18.4. Section 23AI of the Act exempts from income tax certain attribution account payments made to a taxpayer by an attribution account entity.
18.5. Attribution accounts are used to establish a link between:
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- income that has been attributed to a taxpayer from a CFC under the accruals tax measures; and
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- income actually distributed to that taxpayer by the CFC.
18.6. The ways in which attributed income is actually distributed to the taxpayer are referred to as attribution account payments. The entity that makes the payment is called an attribution account entity.
18.7. Some attribution account payments are exempt from tax (section 23AI). Broadly, these attribution account payments include:
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- a dividend;
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- a share of partnership net income;
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- a share of the net income of a trust estate; and
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- a distribution from a trust estate.
18.8. These amounts are exempt because they relate to amounts previously attributed to the taxpayer.
Taxpayers who are unable to use the exemption for a distribution
18.9. The current law excludes a taxpayer who is the trustee of a trust from claiming the exemption under subparagraph 23AI(1)(a)(i). The exclusion of trustees of a trust was made because the intention of the law was to restrict access to the exemption to those taxpayers who were actually liable to tax as beneficiaries on the income already attributed from the CFC to the trust.
18.10. However, some trusts are taxed as separate taxpayers. For these trusts the attributable income of a CFC would be taxed to the trustee of the trust. Under the current law these trusts do not qualify for the exemption. To ensure equity in the taxation treatment of distributions from attributed income the amendment will enable these trusts to be exempt from tax on distributions from the CFC up to the amount of the attributed income.
Explanation of the proposed amendments
General effect of the amendment
18.11. The amendment varies the definition of trust to extend the exemption from tax of certain attribution account payments to those trusts that are taxed as separate taxpayers.
Trusts that are taxed separately
18.12. Subsection 371(7) lists the trusts that are taxed as separate taxpayers. The types of trusts affected include an Australian trust that is:
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- a corporate unit trust;
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- a public trading trust; or
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- an eligible entity within the meaning of Part IX of the Act, that is :
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- an eligible approved deposit fund;
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- an eligible superannuation fund; or
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- a unit trust that is a pooled superannuation trust.
18.13. These are the trusts which are currently unable to obtain the exemption under section 23AI of the Act.
Definition of a trust for the purposes of 23AI
18.14. The amendment will vary the definition of trust in subsection 23AI(3). The proposed definition of 'trust' in subsection 23AI(3) does not include those trusts that are taxed as separate taxpayers. As a result, subparagraph 23AI(1)(a)(i), which excludes 'trustees of a trust' from claiming the exemption, will no longer exclude trusts that are taxed as separate taxpayers. Consequently, those trust will be able to claim the exemption.
Commencement date
18.15. The amendment will enable these trust to benefit from the exemption from the time the accruals tax measures took effect. The accruals tax measures commenced generally from the 1990-91 income year.
Clauses involved in the proposed amendments
Clause 14: amends subsection 23AI(3) of the Act by changing the definition of 'trust'.
Subclause 85(4) : will provide that the amendment will apply from the commencement of the accruals tax measures which is generally the 1990-91 income year.