Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 11 - Family trust distribution tax
Overview of family trust distribution tax
11.1 Division 271 imposes a special tax in the circumstances where:
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- a trustee of a trust has made a family trust election under section 272-80; or
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- the partners in a partnership, a company or the trustee of a trust have made an interposed entity election under section 272-85 to be included in a family group in relation to a family trust;
and the trust, partnership or company distributes income or capital other than to the test individual or members of the test individual's family group [section 271-5] . The terms 'family trust election', 'interposed entity election', 'test individual' and 'family group' are explained in Chapter 5.
11.2 This tax need not ever be paid by any trust or interposed entity and in that sense is optional. The tax only becomes payable if a trust or interposed entity makes a distribution or confers a present entitlement that is inconsistent with its election to be treated as a family trust or member of the family group of a family trust.
When will the family trust distribution tax be payable?
11.3 The proposed legislation will impose a liability for tax under the proposed Family Trust Distribution Tax (Primary Liability) Act 1997 on certain conferrals of present entitlements to, or distributions of, income or capital made by the trustee of a family trust or an interposed entity that has made an interposed entity election in relation to a family trust (such a trust or entity is called an 'electing entity' below). The tax is called the family trust distribution tax. [F13] [Section 271-10]
11.4 The tax will be payable where a distribution is made by an electing entity to another person who is neither the individual specified in the family trust election nor a member of the individual's family group in relation to the distribution, as defined in section 272-90. The tax will also be payable where an electing entity confers on any of these persons a present entitlement to a distribution of income or capital of the entity. The tax will be payable at the top marginal rate of tax applying to individuals plus Medicare levy (currently 48.5%) on the amount or value of any such distributions or conferrals made by an electing entity at any time after the election made by the entity becomes effective. [Sections 271-15, 271-20, 271-25 and 271-30]
What is a distribution of income or capital?
11.5 The term 'distribution of income or capital' has been defined broadly - see definitions in Subdivision 272-B discussed in paragraphs 13.51 to 13.61.
When is a person presently entitled to income or capital?
11.6 The term present entitlement has its ordinary meaning. A person is presently entitled to a distribution when the person has a present legal right to demand and receive the distribution. For example, in the case of a partnership, a partner would be presently entitled to a distribution of income or capital when the profits of the partnership are divided among the partners or when the partner becomes entitled to withdraw capital from the partnership. Also, an electing entity can confer a present entitlement without there necessarily being a decision to that effect. For example, where a person becomes presently entitled to a distribution under the terms of a trust deed, the trust confers a present entitlement on that person even though the trustee has not made any decision.
What if a distribution is made in satisfaction of a present entitlement?
11.7 Where an electing entity has been subject to the family trust distribution tax because it has conferred a present entitlement to a distribution of income or capital, family trust distributiontax will not be payable on the income or capital when it is actually distributed. [Section 271-35]
What if the individual or family member is a trustee or a trust
11.8 A conferral or distribution to the specified individual or a member of the family group could attract the tax if the distribution is made to the individual or member in their capacity as a trustee or where the member is a trust. However, the liability for the tax will not arise where the individual or member of the individual's family group gets the conferral or distribution in a capacity as trustee or as a trust that is a member of the test individual's family group. This would be the case, for example, where the individual or member, as trustee, has made an interposed entity election under section 272-85 or is trustee of a fund that is in the family group under subsection 272-90(6) because it is listed in the gift deductibility provisions of the income tax law.
Who is liable to pay the family trust distribution tax?
11.9 The liability for tax falls on the persons set out in Table 11.1.
| Electing entity | Who has the liability for the tax? |
|---|---|
| Trust | If the trustee is an individual - the trustee |
| If trustee is company - the trustee together with the directors of the company (jointly and severally liable) | |
| Partnership | The partners |
| If a partner is company - the directors of the company | |
| (All jointly and severally liable) | |
| Company | The company and directors of the company |
| (jointly and severally liable) | |
| [Sections 271-15, 271-20, 271-25 and 271-30] | |
Exclusion of directors from liability to pay tax
11.10 Section 271-40 applies to excuse a director of a company from the liability to pay the family trust distribution tax in circumstances where it would be unreasonable that the director be liable for the tax. The provision applies to a director who would otherwise be one of those persons who would be jointly and severally liable to pay the family trust distribution tax. [Subsection 271-40(1)]
11.11 A director will be not be included in those persons who are jointly and severally liable to pay the tax if:
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- the director did not take part in any way in any decision to make the conferral or distribution; and
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- if the director was aware of the proposal to make a decision or knew that it had been made, he or she had taken reasonable steps to prevent the making of the decision or its implementation. [Subsection 271-40(2)]
11.12 This provision ensures that a director will not be liable for the tax where the director was unaware of a decision to make the conferral or distribution. If the director had no knowledge of the proposed resolution or had no reason to suspect that a resolution would be passed that would authorise the distribution then this section would apply to excuse the director from the liability for the tax. Note that the provision will not apply where there was no decision , e.g. where a present entitlement is conferred by the terms of a trust deed.
11.13 A director will also not be liable for the tax if the director voted against or otherwise disagreed with a decision to make the conferral or distribution and took reasonable steps to prevent the distribution being made. [Subsection 271-40(3)]
Payment of family trust distribution tax
11.14 The date on which the family trust distribution tax is due and payable depends on when the conferral or distribution was made:
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- if the conferral or distribution was made before the day on which the election was made, the tax is due and payable at the end of 21 days after the day on which the election was made;
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- if the conferral or distribution was made at any other time, i.e. on the day the election was made or after that date, the tax is due and payable at the end of 21 days after that date. [Subsection 271-75(1)]
11.15 If there are special circumstances why a taxpayer cannot pay the tax within the specified time the Commissioner may allow an extension for payment as would be reasonable. [Subsection 271-75(1)]
11.16 A discretionary trust receives a distribution from a trust that has made a family trust election under section 272-80. The trustee of the discretionary trust lodges an interposed entity election under section 272-85 in order to become a member of the family group in relation to the family trust. The election is lodged with its return of income for the 1997-98 year of income on 31 October 1998. The election specifies that it is to take effect from 1 January 1998. The discretionary trust distributes income outside the family group on 31 July 1998. The trustee of the discretionary trust will be liable for the family trust distribution tax on the amount of the distribution at the end of 21 days after lodging its return of income (the day the election is made), i.e. the end of 21 November 1998. If the discretionary trust makes any further distributions outside the family group after 31 October 1998 the tax is to be paid at the end of 21 days after the making of the distribution.
Additional tax for late payment
11.17 The Bill imposes additional tax which is a penalty tax on overdue amounts of family trust distribution tax. If any amount of tax is outstanding at the end of 60 days after the due date for payment, additional tax will be imposed at the rate of 16% per annum on the unpaid amount. The interest will be calculated as from the end of the 60 day period. [Subsection 271-80(1)]
11.18 The Commissioner has the discretion to remit the additional tax, in whole or in part under certain circumstances. These circumstances are as follows:
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- where the circumstances that contributed to the delay in payment were not due to or caused by an act or omission of the person or persons liable to pay the tax and the persons have taken reasonable steps to mitigate the effects of the circumstances; or
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- where the Commissioner considers it fair and reasonable to remit in circumstances where the delay in payment was due to or caused by an act or omission and a person or persons liable for the tax have taken reasonable steps to mitigate the effect of those circumstances; or
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- where there are special circumstances and the Commissioner considers it fair and reasonable to remit. [Subsections 271-80(2), (3), (4) and (5)]
11.19 The effect of subsection 271-80(6) is to ensure that additional tax continues to accrue in respect of the unpaid tax notwithstanding that judgment for payment of the unpaid tax has been given by, or entered in, a court. Where, in such a case, the judgment debt itself carries interest, the additional tax otherwise payable is to be reduced by the amount of interest that relates to the unpaid family trust distribution tax.
11.20 The Commissioner can sue for any unpaid family trust distribution tax or unpaid additional tax payable under section 271-80 in a court of competent jurisdiction. [Section 271-85]
Notice of liability
11.21 The Commissioner is authorised to serve a notice on a person or persons, by post or otherwise, that specifies that they are liable to pay an amount of family trust distribution tax as has been ascertained by the Commissioner and also the day on which the tax is due and payable. [Subsection 271-90(1)]
11.22 A person's liability to the family trust distribution tax and the due date for payment are not dependent on or affected by the serving of a notice in respect of an amount. This will mean, for example, that a liability for the tax will exist on the amount or value of a distribution made to a person or persons regardless of whether the person making the distribution has received the notice. [Subsection 271-90(3)]
11.23 The Commissioner is authorised to amend a notice at any time. An amended notice is a notice for the purposes of this section. If more than one notice has been issued then the later notice prevails over an earlier notice where there is an inconsistency. [Subsections 271-90(4) and (5)]
11.24 Any person or persons may write to the Commissioner requesting that they be served with a notice in respect of circumstances under which the family trust distribution tax may become payable. This request must be made only in respect of circumstances that have actually occurred rather than hypothetical circumstances that may occur. [Subsection 271-95(1)]
11.25 The Commissioner must comply with the request if it is lodged within the 21 day period specified under subsection 271-75(1), i.e. before the date when the tax becomes due and payable. The Commissioner may, in circumstances where it would be fair and reasonable to do so, extend this period. However, the Bill provides a mechanism for the Commissioner to get further information to allow the notice to be given. If the information is not provided, the Commissioner does not need to issue the notice. [Subsection 271-95(2), (4) and (5)]
11.26 The notice system provides a mechanism through which a taxpayer may object or appeal against a decision of the Commissioner that family trust distribution tax is payable [subsection 271-90(6)] . For example, a trustee could think that the tax may be payable on a distribution but may seek the Commissioner's opinion on that matter by asking the Commissioner to issue a notice. If the trustee does not agree with the Commissioner's opinion, they could object against it in the normal manner for objecting against taxation decisions.
11.27 A notice served under section 271-90 or another document that is signed by the Commissioner and appears to be a copy of a notice of this kind is conclusive evidence that the notice was duly served and that the amount of family trust distribution tax as shown in the notice became due and payable by the person or persons on whom it was served on the date specified in the notice. [Subsection 271-100(1)]
11.28 This section does not apply in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the review. [Subsection 271-100(2)]
Income tax exemption for taxed distributions
11.29 An entity that makes a conferral or distribution subject to family trust distribution tax under the Family Trust Distribution Tax (Primary Liability) Act 1997 , and the person receiving the distribution, are not required to include the relevant part of the conferral or distribution in their assessable income. The amount not included in the assessable income will depend on the extent to which the tax is paid. [Section 271-105]
11.30 A consequence of this approach is that any losses or outgoings incurred in deriving the distribution that will be exempted from tax will not be deductible to the person to whom the distribution is made.
How is the exempt amount calculated?
11.31 A formula is used to determine the amount which is not included in assessable income, as follows:
(Tax payment amount / Tax payable) * Original assessable amount
The tax payment amount is the amount of a particular payment of the tax, or the amount by which the tax payable is reduced under the Family Trust Distribution Tax (Secondary Liability) Act 1997 . [F14]
The tax payable is the amount of family trust distribution tax payable under the Family Trust Distribution Tax (Primary Liability) Act 1997 .
The original assessable amount is the amount of the distribution that is included in assessable income.
11.32 The trustee of a trust becomes liable to $487 family trust distribution tax when a person (Jill), who is not a member of the family group, becomes presently entitled to $1,000 net income of the trust. Under section 97, the $1,000 is included in Jill's assessable income. The trustee pays the tax in two instalments, $200 on day 1 and $287 on day 2.
11.33 On day 1, the amount that needs to be included in Jill's assessable income is reduced by $410.68 (i.e. ($200 (tax payment amount) divided by $487 (tax payable)) multiplied by $1,000 (original assessable amount)). On day 2, when the second instalment is paid, the amount that needs to be included in Jill's assessable income is reduced by a further $589.32 (i.e. ($287 (tax payment amount) divided by $487 (tax payable)) multiplied by $1,000 (original assessable amount)).
What if an exempt distribution is a dividend?
11.34 If the distribution not included in assessable income is a dividend from a company, the grossed-up amount of the dividend is not included in the assessable income of the person to whom the distribution was made and any franking credits associated with the dividend do not, therefore, flow to the recipient of the dividend.
Consequential amendments to other provisions
11.35 A number of consequential amendments are made to other provisions in the income tax law and other Acts to deal with the effect of family trust distribution tax. These are discussed in Chapter 14.
What is the Family Trust Distribution Tax (Primary Liability) Act 1997?
11.36 The Family Trust Distribution Tax (Primary Liability) Act 1997 mentioned in this Chapter and Chapter 12 will be the imposition Act that imposes family trust distribution tax [clause 3 of the Family Trust Distribution Tax (Primary Liability) Bill 1997] . The tax will be imposed at the highest marginal rate applying to individuals plus Medicare levy, on an amount or value of income or capital (currently 48.5%) [clause 4 of the Family Trust Distribution Tax (Primary Liability) Bill 1997] . The circumstances in which this tax would be imposed are discussed in the preceding paragraphs of this Chapter and in Chapter 12.