House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 12 - Provisions relating to non-resident entities

Overview

12.1 Provisions are included in the Bill to ensure that the trust loss measures cannot be avoided where non-resident entities are concerned. These provisions do not need to be considered by resident taxpayers who are not connected to a non-resident entity. The provisions discussed in this Chapter are sections 266-55, 266-60, 266-175 to 266-185, 267-80 to 267-90, 271-45 to 271-70 and subsections 271-75(2) and (3), 271-90(2) and 271-95(3).

12.2 The Bill contains information gathering powers of an anti-avoidance nature to enable the collection of information about certain non-resident entities. These powers will allow the following to be administered by the Commissioner:

•

the proposed condition in section 266-45 (i.e. the alternative condition for ordinary fixed trusts that fail the 50% stake test because they are held 50% or more by non-fixed trusts) - see paragraphs 6.18 to 6.24;

•

the family trust tracing rule in subsection 272-30(2) (i.e. the rule that treats the trustee of a family trust as an individual holding a fixed entitlement for its own benefit) - see paragraph 13.42; and

•

the payment of family trust distribution tax in relation to non-resident family trusts or non-resident entities that have made an interposed entity election.

12.3 The Bill also includes rules so that, under specified conditions, the Commissioner can recover from resident persons unpaid family trust distribution tax that should have been paid by non-resident persons.

What is a non-resident entity?

12. 4 For the purposes of the explanation in this Chapter, the term non-resident entity means:

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a non-resident company;

•

a partnership where a partner is a non-resident; and

•

a trust where either a trustee is a non-resident or the central management and control of the trust is outside Australia.

Information-gathering powers

Why are information-gathering powers necessary?

12.5 Information-gathering powers are needed to ensure that the trust loss measures are being complied with where a non-resident entity is taking advantage of the family trust rules or is required to meet certain tests.

12.6 In the case of the application of the alternative condition for ordinary fixed trusts (section 266-45), the Commissioner will need to know whether any non-resident non-fixed trust that holds a direct or indirect fixed entitlement in the fixed trust is complying with the tests that need to be met under subsection 266-45(5).

12.7 In a case where a non-resident trust elects to be a family trust, the Commissioner will need to know whether the trust is meeting the distribution requirements for family trusts (i.e. that any distributions or conferrals of present entitlement other than to members of the family group are taxed). This is important to the application of the concessional tracing rules for family trusts which may apply where a non-resident family trust holds a direct or indirect fixed entitlement in a resident trust.

12.8 For the administration of the family trust distribution tax system, the Commissioner may require information about conferrals of present entitlements to, or distributions of, income or capital by a non-resident family trust or a non-resident entity that has made an interposed entity election in relation to a family trust. This is because the Commissioner will need to know whether any family trust distribution tax is payable by the non-resident family trust or non-resident entity that has made the interposed entity election.

Information notice - fixed trusts held by non-fixed trusts

12.9 The trustee of a fixed trust may need to provide certain information to the Commissioner where the fixed trust has satisfied the alternative condition (set out in section 266-45) that applies to ordinary fixed trusts held 50% or more by non-fixed trusts. If the fixed trust does not provide the information requested by the Commissioner, it will be taken never to have met the condition. [Sections 266-55 and 266-60]

12.10 This information is needed for the purposes of determining whether the requirements of subsection 266-45(5) are satisfied in relation to any non-fixed trust that holds a direct or indirect fixed entitlement in the fixed trust. Under subsection 266-45(5) every non-fixed trust (that is not a family trust or other excepted trust) that holds a fixed entitlement, directly or indirectly, in the fixed trust is required to satisfy the relevant tests that apply to non-fixed trusts if they stood in place of the loss trust.

When can a notice be given?

12.11 The Commissioner can give a notice under the above sections if, in an income year, a fixed trust is:

•

able to deduct a tax loss or debt deduction; or

•

not required to work out its net income and tax loss under Division 268;

only because it met the conditions set out in subsections 266-45(2) to (5). Also, the non-fixed trust must be non-resident at the time the Commissioner gives the notice. [Subsections 266-55(2) to (4)] .

12.12 The Commissioner must give the notice to the trustee of the fixed trust before the later of:

•

5 years after the income year in which the fixed trust deducted the tax loss or debt deduction or did not work out its net income and tax loss under Division 268; and

•

the end of the period in which the trustee of the fixed trust is required to keep records under section 262A in relation to the income year mentioned above. [Subsection 266-55(5)]

What information can be requested?

12.13 The notice must set out information that the Commissioner requires. This information need not be within the knowledge of the trustee of the fixed trust at the time the notice is given. [Subsections 266-60(1) and (2)]

12.14Under the notice the Commissioner would seek information on transactions or acts and other matters that would enable him or her to determine whether a non-fixed trust has satisfied the conditions set out in subsection 266-45(5). These are the conditions that need to be satisfied by a non-fixed trust before a prior or current year loss or debt deduction can be deducted. This would include information on distributions of income or capital made by the non-fixed trust, any changes in control of the non-fixed trust and also whether there has been any changes in individuals who hold fixed entitlements in the non-fixed trust. As part of this information-gathering process the Commissioner may request a copy of the trust deed of the non-fixed trust or other relevant documents relating to the non-fixed trust.

12.15 The notice must specify a time within which the trustee is to provide the Commissioner with the information. The Commissioner must allow a period of at least 21 days commencing on the date the notice was given [subsection 266-60(3)] . The Commissioner can extend the time for compliance with the notice.

What are the consequences of not giving the information?

12.16 If the trustee does not comply with the request mentioned in paragraph 12.13, the fixed trust will be taken not to have satisfied the conditions set out in section 266-45 and thus:

•

a deduction for the tax loss or debt deduction will not be allowable to the trust in relation to that year of income; or

•

the trust will be required to work out its net income and tax loss for the income year under Division 268. [Subsection 266-60(4)]

12.17 If the trust is required to work out its net income and tax loss under Division 268, the income year is split up into such periods as would result in the highest possible net income for the income year [subsection 266-60(5)] For this purpose a period could have a minimum length of one day.

No offences or penalties

12.18 The mere fact that a trustee of a fixed trust fails to provide the Commissioner with the required information so that the consequences of section 266-60 apply, does not mean that the trustee will be taken to have committed an offence or be liable to any penalty under Part VII for claiming a tax loss or debt deduction or for not working out the trust's net income and tax loss under Division 268 on lodging the return. Whether the provisions of Part VII apply would require a separate finding by the Commissioner. [Subsection 266-60(6)]

Information notice - family trust holding a fixed entitlement, directly or indirectly, in a trust

12.19 A trust in which individuals hold fixed entitlements may be able to pass the 50% stake test contained in Divisions 266 or 267 because of interests held by a non-resident family trust (under subsection 272-30(2) a family trust is treated as an individual holding fixed entitlements for its own benefit). The Commissioner may require the trust to give information about conferrals of present entitlements to, or distributions of, income or capital by the non-resident family trust. If this information is not given the trust will be taken not to have satisfied the 50% stake requirements. [Sections 266-175 to 266-185 and 267-80 to 267-90]

12.20 The information will allow the Commissioner to determine whether any family trust distribution tax is payable in respect of conferrals of present entitlement or distributions made by the non-resident family trust.

When can a notice be given?

12.21 The Commissioner can give a notice under the above sections if, in an income year, a resident trust has satisfied the condition in sections 266-40, 266-45, 266-90, 266-125, 266-165, 267-40 or 267-70. These conditions must have been met only because a non-resident family trust that holds a fixed entitlement, directly or indirectly, in the trust is treated, under subsection 272-30(2), as an individual holding the fixed entitlement for its own benefit. [Subsections 266-180(2) and (3) and 267-85(2) and (3)]

12.22 The Commissioner must give the notice to the trustee of the resident trust before the later of:

•

5 years after the income year in which the trust deducted the tax loss or debt deduction or did not work out its net income and tax loss under Division 268; and

•

the end of the period in which the trustee of the trust is required to keep records under section 262A in relation to the income year mentioned above. [Subsections 266-180(5) and 267-85(5)]

What information can be requested?

12.23 Under the notice the Commissioner can require the trustee to provide information in respect of conferrals of present entitlements to, or distributions of, income or capital by the non-resident family trust. These must be conferrals or distributions made since the start of the test period mentioned in the sections discussed in paragraph 12.21. This information need not be within the knowledge of the trustee at the time the notice is given. [Subsections 266-185(1) and (2) and 267-90(1) and (2)]

12.24 The notice must specify a time within which the trustee is to provide the Commissioner with the information. The Commissioner must allow a period of at least 21 days commencing on the date that the notice was given [subsections 266-185(3) and 267-90(3)] . The Commissioner can extend the time for compliance with the notice.

What are the consequences of not giving the information?

12.25 If the trustee does not comply with the request mentioned in paragraph 12.23, the trust will be taken not to have satisfied the conditions in sections 266-40, 266-45, 266-90, 266-125, 266-165, 267-40 or 267-70 and thus:

•

the deduction for the tax loss or debt deduction is not allowable to the trust in relation to that year of income; or

•

the trust is required to work out its net income and tax loss for the income year under Division 268. [Subsections 266-185(4) and 267-90(4)]

12.26 Where the trust is required to work out its net income and tax loss under Division 268, the income year is split up into such periods as would result in the highest possible net income for the income year. [Subsections 266-185(5) and 267-90(5)]

Example

12.27 The fixed entitlements to income and capital in a resident fixed trust with a prior year loss are held, throughout a test period, as follows:

•

30% by Jill (a natural person);

•

25% by a non-resident discretionary trust that has elected to be a family trust; and

•

45% by a resident discretionary trust that has not elected to be a family trust.

12.28 The fixed trust passes the 50% stake test and is able to deduct the loss because 55% of the fixed entitlements in the trust are held, throughout the test period, by Jill and the trustee of the non-resident family trust. Under subsection 272-30(2), the trustee is treated as an individual holding the fixed entitlements for its own benefit. The fixed trust is able to deduct its loss only because of the interest held by the non-resident family trust. This is because, if the trustee of the non-resident family trust was not treated as an individual under subsection 272-30(2), the fixed trust would have failed the 50% stake test.

12.29 In this case, the Commissioner can use his or her information-gathering power to request information about the non-resident family trust from the trustee of the fixed trust. The information requested would include data about the distributions made by the non-resident family trust. This would be used to determine whether any family trust distribution tax was payable in respect of distributions made by the non-resident family trust.

No offences or penalties

12.30 Sections 266-185(6) and 267-90(6) operate in the same way as section 266-60(6) (see paragraph 12.18 above).

Information notice - information about non-resident family trusts or entities that have made an interposed entity election

12.31 Family trust distribution tax imposed by the Family Trust Distribution Tax (Primary Liability) Act 1997 may be payable in certain circumstances by a resident entity (i.e. resident family trust or resident entity that has made an interposed entity election). This would be where the entity has conferred a present entitlement to, or made distributions of, income or capital to a non-resident entity (including a family trust) that is in the same family group. The liability for the tax will arise where the resident entity fails to provide certain information about conferrals of present entitlements or distributions made by the non-resident entity. [Sections 271-45 to 271-55]

12.32 The information will allow the Commissioner to determine what family trust distribution tax is payable by the non-resident entities that are part of a family group.

When can a notice be given?

12.33 The Commissioner may give a notice to:

•

a resident family trust that has conferred a present entitlement to, or made a distribution of, income or capital to a non-resident entity that has made an interposed entity election in relation to the individual specified in the family trust election [subsections 271-45(2) and (3)] ;

•

a resident entity that has made an interposed entity election in relation to a family trust and has conferred a present entitlement to, or made a distribution of, income or capital to a non-resident entity that is either:

-

a non-resident family trust in relation to which the resident entity has made the interposed entity election; or

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a non-resident entity that has made an interposed entity election and so is part of the same family group as the resident entity. [Subsections 271-50(2) and (3)]

12.34 The Commissioner must give the notice to the resident entity (i.e. trustee, partners or company) before the later of:

•

5 years after the income year in which the present entitlement was conferred or distribution made by the resident entity; and

•

the end of the period in which the trustee, partners or company is required to keep records under section 262A in relation to the income year mentioned above. [Subsections 271-45(4) and 271-50(4)]

What information can be requested?

12.35 Under the notice the Commissioner can require the resident entity(trust, partnership or company) to provide information in respect of certain conferrals of present entitlements or distributions since the time the resident entity conferred the present entitlement or made the distribution to the non-resident entity. These are conferrals or distributions made by:

•

the non-resident entity; or

•

any other non-resident entity which has made a family trust or interposed entity election in respect of the family group of the individual specified in the family trust election. [Subsections 271-55(1) and (2)]

12.36 This information need not be within the knowledge of the resident entity at the time the notice is given. [Subsection 271-55(3)] This means that the trustee, partners or company may need to take steps to obtain the information requested in the notice.

12.37 The notice must specify a time within which the entity is to provide the Commissioner with the information. The Commissioner must allow a period of at least 21 days commencing on the date that the notice was given [subsection 271-55(4)] . The Commissioner can extend the time for compliance with the notice.

What are the consequences of not giving the information?

12.38 If the trustee does not comply with the notice mentioned in paragraph 12.35, family trust distribution tax is payable by the resident entity in respect of its conferrals of present entitlements or distributions to the non-resident entity. The persons on whom the liability for the tax falls depends on whether the resident entity is a trust, partnership or company. Those persons are the same as those in the table at paragraph 11.9 depending on whether the entity is a trust, partnership or company. [Subsections 271-55(5) to (7)]

12.39 The tax is due and payable at the end of 21 days after the period specified in the notice or the later time that the Commissioner allows for compliance with the notice. [Subsection 271-75(2)]

Example

12.40 Company A is a resident that has made an interposed entity election in respect of a non-resident family trust of which Bill is the specified individual. Company B is a non-resident company that is part of the same family group. In the income year Company A has paid dividends to the family trust. The Commissioner gives Company A a notice under section 271-50 to obtain information to be supplied by the company on conferrals of present entitlements or distributions of income or capital by Bill's family trust and also dividends paid by Company B. This information will allow the Commissioner to determine whether any family trust distribution tax is payable by the family trust and Company B.

12.41 If Company A does not respond to the notice within the time specified on the notice or such later time as the Commissioner allows, the company and its directors at the time the dividend was paid to the family trust will be jointly and severally liable to pay family trust distribution tax on the net amount of the dividend paid by Company A to the trust.

Recoupment of family trust distribution tax payable by non-resident entities

Why are recoupment provisions required?

12.42 Special rules have been included to provide that family trust distribution tax imposed by the Family Trust Distribution Tax (Secondary Liability) Act 1997 is payable in specified circumstances. The circumstances arise where a non-resident entity becomes liable for family trust distribution tax under the Family Trust Distribution Tax (Primary Liability) Act 1997 and the Commissioner is unable to recover the tax because of territorial limitations. [Sections 271-60 and 271-65]

When tax consequences may result

12.43 A resident entity (and relevant company directors) is liable to pay family trust distribution tax when the following conditions are met:

•

a non-resident entity has made a family trust election or an interposed entity election;

•

the non-resident entity has conferred a present entitlement to, or made a distribution of, income or capital;

•

family trust distribution tax has become payable on the amount or value of the conferral or distribution;

•

the tax remains unpaid after the tax has become due and payable by the non-resident entity - as specified under section 271-75 the tax generally becomes due and payable at the end of 21 days after the conferral or distribution was made;

•

the Commissioner has made a determination in writing that the whole or part of the tax that has become due and payable by the non-resident entityis unlikely to be paid.

[Subsections 271-60(1) and 271-65(1) and (2)]

Tax consequences

12.44 The liability for the family trust distribution tax will fall on a resident trust, partnership or company as follows:

•

any trust that has satisfied the conditions in sections 266-40, 266-45, 266-90, 266-125, 266-165, 267-40 or 267-70 only because the non-resident entity is a family trust that holds a fixed entitlement, directly or indirectly, in the trust and is treated, under subsection 272-30(2), as an individual holding the fixed entitlement for its own benefit [subsections 271-60(4)] ;

•

any trust, partnership or company that has:

-

made a family trust or interposed entity election that relates to the same specified individual as the election made by the non-resident entity; and

-

conferred a present entitlement to, or made a distribution of, income or capital to the non-resident entity or any other non-resident entity that is part of the same family group when the conferral or distribution took place. [Subsections 271-65(5) and (6)]

Persons on whom tax consequences may fall

12.45 The person or persons on whom liability for the tax falls depends on whether the resident entity is a trust, partnership or company. Those persons are the same as those in the table at paragraph 11.9 depending on whether the entity is a trust, partnership or company. [Subsections 271-60(2) and (3) and 271-65(3) and (4)]

12.46 The Commissioner must give a notice to the persons liable to pay tax under the Family Trust Distribution Tax (Secondary Liability) Act 1997 [subsection 271-90(2)] . The tax becomes payable at the end of 21 days after the day on which the notice is given [subsection 271-75(3)] . Also, a person may request that such a notice be given to them by the Commissioner. [Subsections 271-95(1) and (3)]

Example

12.47Company A is a non-resident that has made an interposed entity election in respect of a resident family trust of which Jill is the specified individual. The family trust has made distributions of income to Company A. During the income year Company A has paid dividends to individuals who are outside the family group and thus there is a liability to pay family trust distribution tax imposed by the Family Trust Distribution Tax (Primary Liability) Act 1997 . Thisinformation was obtained by the Commissioner from the trustee under section 271-55.

12.48 Under section 271-75 the tax is due and payable at the end of 21 days after the dividends were paid. The due date has passed and the tax has not been paid. Given the circumstances surrounding the non-payment of the tax the Commissioner makes a determination that the tax is unlikely to be paid. Under section 271-65 the trustee of Jill's family trust will be liable for the family trust distribution tax imposed by the Family Trust Distribution Tax (Secondary Liability) Act 1997 . The trustee of the family trust and, if the trustee is a company, the directors of the company, will be jointly and severally liable to pay the tax.

12.49 If resident entities that had made an interposed entity election in respect of the family trust had also made distributions etc to Company A, the liability for the family trust distribution tax would also fall on those entities. The person (or persons) liable for the tax are those specified in subsections 271-65(3) and (4)).

Reduction of liability where tax paid

12.50 The liability for family trust distribution tax will be reduced as follows:

•

if the non-resident entity later pays the tax (i.e. the primary tax ) the tax payable by the connected resident entity (the secondary tax ) at the time the payment is made is reduced by the amount of the primary tax paid;

•

if the resident entity pays the tax (the secondary tax ) the liability to the tax payable by the non-resident entity (the primary tax ) is similarly reduced. [Section 271-70]

What is the Family Trust Distribution Tax (Secondary Liability) Act 1997?

12.51 The Family Trust Distribution Tax (Secondary Liability) Act 1997 mentioned in this Chapter will be the imposition Act that imposes family trust distribution tax under sections 271-60 and 271-65 [clause 3 of the Family Trust Distribution Tax (Secondary Liability) Bill 1997] . The tax will equal the full amount of unpaid family trust distribution tax imposed under the Family Trust Distribution Tax (Primary Liability) Act 1997 [clause 4 of the Family Trust Distribution Tax (Secondary Liability) Bill 1997] . The circumstances in which this tax would be imposed are discussed in the preceding paragraphs of this Chapter.